R4 Flashcards
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows: Cash $ 2,000 Equipment (adjusted basis) 2,000 Capital - Stone 3,000 Capital - Frazier 1,000 The fair market value of the equipment was $3,000. Frazier's outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? a. $500 b. $0 c. $300 d. $250
C. I chose B. It’s important to realize that Frazier didn’t actually receive the building and the amounts here are on the partnerships books. It’s important to realize that the cash and equipment and all of those are already factored into his $1200 basis in the partnerhsip
The outside basis and the inside basis are going to be different, do let it confuse you
On June 30, Year 8, Berk retired from his partnership. At that time, his capital account was $50,000 and his share of the partnership's liabilities was $30,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, Year 8. Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of: Year 8 Year 9 a. --;$40,000 b. $13,333; $26,667 c. $40,000; -- d. $20,000; $20,000
A. I didn’t know so I guessed. Its important to realize that the amount of his “distribution” doesn’t actually break down the release of debt into installments. I think that’s me overthinking it too much. It’s relieved immediately and the payments are distributed seperately.
Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson’s basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson’s basis in the land?
a. $63,000 b. $70,000 c. $60,000 d. $58,000
C. I chose D. It’s important to realize that this is a LIQUIDATING distribution, so you zero out to get out.
The at-risk limitation provisions of the Internal Revenue Code may limit:
I.A partner’s deduction for his or her distributive share of partnership losses.
II.A partnership’s net operating loss carryover.
a. Neither I nor II.
b. Both I and II.
c. II only.
d. I only.
C. I chose B. It does not include II because any unused loss can be carried forward and used in a future year when basis becomes available; therefore, the at-risk limitation does not limit a partner’s net operating loss carryover.
Reid, Welsh, and May are equal partners in the RWM partnership. Reid’s basis in the partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest?
a. $1,000 b. $0 c. $13,000 d. $15,000
A. I chose C. It’s important to remember that when it comes to liquidation in a partnership, the cash is reduced first and any excess amount of cash is realized as a boot and therefore is a gain. The land doesn’t have a basis.
The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang’s partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?
a. $0 gain or loss. b. $1,000 ordinary gain and $1,000 capital loss. c. $0 ordinary gain and $1,000 capital loss. d. $1,000 ordinary gain and $0 capital loss.
B. I knew there was a $1,000 ordinary gain, but I wasn’t sure about the capital gain amount. Reduce the basis in the following order: 1. Cash 2. Hot assets 3. Cancellation of debt 4. Land
In a partnership, what is the order that the assets received for a sale of the partnership need to be deducted from the partners basis to determine any gain/loss?
- Cash
- Hot assets (inventory, income” receivables, “recpature income”
- Cancellation of debt
- Land
Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale’s basis?
a. $18,500 b. $21,500 c. $16,500 d. $17,500
A. I chose C. I was thrown off by the $4,000. It’s important to note that the $4,000 was the reduction of debt in total of the partnership, so only $2,000 was subtracted from his basis.
On June 1, Year 1, Don Kerr received a 10% interest in the capital of Rev Company, a partnership, for services rendered. Rev’s net assets on June 1, Year 1, had a basis of $35,000 and a fair market value of $50,000. What income must Kerr include in his Year 1 tax return for the partnership interest transferred to him by the other partners?
a. $3,500 ordinary income. b. $3,500 capital gain. c. $5,000 capital gain. d. $5,000 ordinary income.
D. I chose A. It’s important to realize that this is for SERVICES RENDERED. AKA FMV!!
Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership, while Benz, Clark, and Day each owns a 20% interest. All use a calendar year. At November 1 of the current year, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business. Which one of the following statements is correct for tax purposes?
a. Informing Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day. b. Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day. c. Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form. d. Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS.
B. I chose C. Partnership Abel & Benz is considered to be a continuation of partnership Abel, Benz, Clark, and Day as Abel (40%) and Benz (20%) constitute more than 50% of the old partnership.
It wouldn’t be a termination needing formal dissolution with the IRS bc it didn’t fall into either of these categories.
1. stops doing business.
2. 50% or more of the total interest in the partnership capital and profits changes hands by sale of exchange within 12 consecutive months.
3. Only one partner remains which makes it a sole proprietorship.
The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31 of the current year: Adjusted basis per books ;Market value ASSETS Cash $ 102,000 $ 102,000 Unrealized accounts receivable − 420,000 Total $ 102,000 $ 522,000 LIABILITY AND CAPITAL Note payable 60,000 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 Totals $ 102,000 $ 522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1 of the following year. In addition, Dole assumed Carr's share of the partnership's liability. What was the total amount realized by Carr on the sale of his partnership interest? a. $140,000 b. $174,000 c. $134,000 d. $154,000
B. I guessed. it doesn’t ask for the GAIN realized. It asks for the amount realized. This is important, bc this is just the 20,000 + cash received.
Which of the following should be used in computing the basis of a partner’s interest acquired from another partner?
Cash paid by transferee
to transferor Transferee’s share of
partnership liabilities
a. Yes; No
b. Yes; Yes
c. No; No
d. No; Yes
B. I chose D. It’s important to realize that the transferee is the new partner and the cash paid to the transferor is included in the amount that they are paying for the interest in the partnership
On January 1 of the current year, Kane was a 25% equal partner in Maze general partnership, which had partnership liabilities of $300,000. On January 2, a new partner was admitted and Kane’s interest was reduced to 20%. On April 1, Maze repaid a $100,000 general partnership loan. Ignoring any income, loss, or distributions for the current year, what was the net effect of the two transactions on Kane’s tax basis in Maze partnership interest?
a. Decrease of $75,000. b. Increase of $15,000. c. Decrease of $35,000. d. Has no effect.
C. I guessed on this. It’s important to edit the amount that Kane owed of the $300,000 after the new partner was added to the partnership.
Basic Partnership, a cash-basis calendar year entity, began business on February 1, Year 1. Basic incurred and paid the following in Year 1:
Filing fees incident to the creation of the partnership $ 3,600
Accounting fees to prepare the representations in offering materials 12,000
Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the Year 1 partnership return?
a. $3,600
b. $11,000
c. $2,860
d. $220
A. I chose C. This is wrong because it’s important to realize that the first $5,000 is deducted without any strings attached. After that the amount over the $5,000 is AMORTIZED, so that takes into consideration how many months you accrued these expenses over.
Peters has a one-third interest in the Spano Partnership. During 20X1, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 20X1 operating loss of $70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment?
I.The guaranteed payment increases Peters’ tax basis in Spano by $16,000.
II.The guaranteed payment increases Peters’ ordinary income by $16,000.
a. Neither I nor II.
b. II only.
c. I only.
d. Both I and II.
B. I chose D. The guaranteed payment increases Peters’ ordinary income by $16,000 but does not affect Peters’ tax basis because guaranteed payments are not undistributed earnings (they are distributed to the partner).
Rule: Guaranteed payments are reasonable compensation paid to a partner for services rendered without regard to the partner’s ratio of income. They are allowable tax deductions to the partnership and ordinary income to the partner receiving them.
Note: A guaranteed payment will not increase a partner’s basis in the partnership because the payment has been distributed to the partner.
In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is:
a. A tax year of one or more partners with a more than 50% interest in profits and capital. b. A tax year that results in the greatest aggregate deferral of income. c. A tax year of a principal partner having a 10% or greater interest. d. A calendar year.
A. I chose D.
Rule: Per IRC Section 706(b), a partnership tax year must have the same taxable year as the common taxable year of the partners that, in the aggregate, have interest greater than 50%, which is determined based on the “testing day,” the first day of the partnership’s tax year (not considering the majority interest rule). Note: After a change is made to the “majority-interest” tax year end, the partnership does not have to change to another tax year for two years following the year of change. Exceptions to the rule exist. (1) If there is no “majority-interest” tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5% or more of the income or capital of the partnership). (2) If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted.
George and Martha are equal partners in G&M Partnership. At the beginning of the current tax year, the adjusted basis of George’s partnership interest was $32,500, which included his share of $40,000 of partnership liabilities. During the tax year, the following information applied to G&M:
Operating loss $ 30,000
Interest and dividend income 8,000
Partnership liabilities at end of year 24,000
What was the basis of George’s partnership interest at year end?
a. $21,500
b. $29,500
c. $43,500
d. $13,500
D. I guessed A on this.
A partner’s share of operating losses reduces that partner’s basis. Likewise, a reduction in a partner’s share of liabilities reduces basis. A partner’s basis will increase by that partner’s share of income such as dividends and interest.
Initial basis in partnership interest $ 32,500
Equal share of interest and dividends 4,000
Equal share of operating loss (15,000)
Share of decreased partnership liabilities at year end (8,000)
Basis of George’s partnership interest at year end $ 13,500
Mom and Pop Partnership had the following results during the taxable year: Income from operations $100,000 loss Capital gain from sale of land 25,000 Charitable contributions 10,000 Junior, a 50% partner, had an adjusted basis of $40,000 at December 31, without regard to the current year income or loss items. In preparing his individual income tax return, Junior should report which of the following amounts? Ordinary Loss Capital Gain Charitable Contributions a. $47,500 $12,500 $5,000 b. $50,000 $12,500 $5,000 c. $40,000 $12,500 $5,000 d. $32,500 $0 $0
A. I chose C. It’s important to note that charitable contributions are deducted from the basis and flowed through the to taxpayers individual tax return.
The deduction of the ordinary loss is limited to Junior’s basis and any at risk amounts. Junior’s basis is calculated as $40,000 + $12,500 capital gain - $5,000 charitable contributions = $47,500; thus the ordinary loss deducted on his return would be limited to $47,500.
Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers?
a. $90,000 b. $50,000 c. $60,000 d. $150,000
B. I guessed on this. It’s an easy question, just don’t overthink it. The land and the equipment are nontaxable to the individual bc this exchange happened in the formation of a partnership.
Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple’s basis for the machine?
a. $2,000 b. $8,000 c. $5,000 d. $10,000
C. I chose B. It’s important to realize that the liability isn’t included in the basis for the machine.
For a partnership, the basis is the carry basis + any gain recognized by the incoming partner if a special election is made.
This differs from the rules of a corporation bc a corporations says that the machines basis would be the greater of: 1) The NBV + any gain recognzied by the transferor/shareholder OR 2) Debt assumed by the corporation
PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, Year 1, PDK had the following income and expense items: Revenues $ 120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000 What would PDK report as nonseparately stated income for Year 1 tax purposes? a. $51,000 b. $35,000 c. $30,000 d. $43,000
B. I guessed bc none of my answers were matching up. It’s important to realize that charitable contributions and the gain on sale of equipment are separately reported items. Rent expense is included in the nonseparately reported items.
