Section 5E - Partnership Flashcards
Which of the following elections are made at the partner level?
Taxable year and accounting method
Cost or percentage depletion for oil and gas wells
Cost recovery methods and assumptions
Treatment of research and development costs
Cost or percentage depletion for oil and gas wells
There are three elections that are made at THE partner level:
Cost or percentage depletion for ___
Reduction of basis of depreciable property when excluding income from ____
Take a deduction or credit for __taxes paid
oil and gas wells
discharge of indebtedness
foreign
Elections made by the partnership:
a. Taxable year and accounting ___
b. Cost recovery ___and assumptions
c. Treatment of research and ___
d. ____of organization costs and start-up costs
method
methods
development costs
Amortization
The general rule is that when a partner contributes “property” to a partnership, no gain or loss is ___
The exception to the general rule is that when a partner contributes “services” to a partnership, the partner will recognize ordinary compensation income on the fair market value of the ___.
The basis of contributed property is the same ____in the hands of the partnership as it was in the hands of the partner who contributed it.
recognized.
services rendered
basis
As to the contribution of personal assets (nonbusiness property) to the partnership, however, the partnership basis will be the lesser of:
the adjusted basis of the ___
the ___at the time the property was contributed to the partnership.
contributing partner
fair market value
Except for triggering recognition of limited losses, no gain or loss is recognized by either the partner or the partnership when a partner increases an investment through the contribution of property. T/F
Income must be recognized by a partner who receives a \_\_\_in the partnership in exchange for services rendered.
The fair market value of the capital interest received shall be considered as ___
The fair market value of services contributed to a partnership by one of the partners is taxable to \_\_\_
A built-in gain or loss on the date of contribution must be allocated to the ___when the property is subsequently disposed of by the partnership in a taxable transaction.
True
capital interest (interest in partnership)
compensation (ordinary income)
that partner.
contributing partner
A partner’s basis is increased by the investment of property or cash. T/F
The increase in a partner’s basis for contributed property is limited to the ___in that property,
In addition, the basis of a partner’s interest is increased by the distributive share of the following partnership items:
(a) ___income
(b) Tax-__income
(c) __depletion deductions
True basis Taxable exempt Excess
A partner’s basis is decreased by the partner’s ___of money and by the adjusted basis of all other property distributed to the partner.
partner’s basis is further decreased by nondeductible __
Losses and negative adjustments in excess of a partner’s basis are accounted for as “\_\_\_.” Such losses can offset future taxable income or can be claimed when basis is restored, for example, by a partner’s contribution of money or property.
withdrawals /distribution
partnership expenditures
limited losses
D owned a 25% interest in the ABCD partnership. ABCD had operating income of $60,000 before guaranteed payments to partners. The only guaranteed payment made during the year was $10,000 to D. ABCD also had a net capital gain of $10,000. D should report income from the partnership of:
$25k
D should report 25% of ABCD operating income after deducting the guaranteed payment (($60,000 - $10,000) × 25% = $12,500). D reports the $10,000 guaranteed payment and 25% of the $10,000 net capital gain ($25,000 = $12,500 + $10,000 + (0.25 × $10,000)).
Partnership Deduction
Included as allowable deductions are ___payments to the partners for salaries and interest.
Income from cancellation of debt elections is determined at the Partner or Partnership level
guaranteed
Partner
At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if:
the fair market value of the contributed property exceeds its adjusted basis.
the property is encumbered by a mortgage with a balance of $100,000.
Neither
General rule: No gain or loss is recognized, either by the partnership or the partner, when property is contributed in exchange for a partnership interest.
The personal service partnership of Allen, Baker & Carr had the following cash-basis balance sheet at December 31, Year 1:
Adjusted Basis Market Assets per Books Value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 Totals $102,000 $522,000
Liability and Capital
Note payable $60,000 $ 60,000
Allen, capital 14,000 154,000
Baker, capital 14,000 154,000
Carr, capital 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, Year 2. 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?
$174k
When a partner sells his interest in a partnership and he is relieved from his share of partnership liabilities, then the amount realized is the amount of cash received plus his share of liabilities. Carr’s amount realized will be $174,000, computed as follows:
Amount realized: Cash received $154,000
+ Liability relief ($60,000 ÷ 3) 20,000
= Total amount realized $174,000
Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom’s basis in Ace?
$0
Carryover basis $16,000
Less: 75% x $24,000
The portion of the recourse
debt assumed by the other partners - 18,000
Strom has a recognized gain of $ 2,000
========
and Strom has a 0 basis in Ace
Carryover Basis $16,000
Add gain on transfer 2,000
Total 18,000
Less liability assumed (18,000)
Ending Basis $ 0
========
Contributions from a partner to a partnership are generally tax-free T/f (
What is the tax consequence to a partner who contributes services in exchange for a partnership interest?
Taxable to partner
Ordinary income
Fair market value used in determining extent of income
True
All 3
Curry’s adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What was the amount of Curry’s basis in the land?
Any time a partner receives a noncash, nonliquidating distribution (in this case it is land), there is no gain or loss recognized by the partnership or the partner. The basis Curry has in the partnership interest is assigned to the land up to his total basis. So $5,000 is assigned as the basis of the land, leaving Curry’s basis in the partnership at zero.
Any time a partner receives a noncash, nonliquidating distribution (in this case it is land), there is ___or __recognized by the partnership or the partner
no gain or loss
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?
$60k
The basis of property distributed by a partnership to a partner in liquidation of the partner’s interest is equal to the adjusted basis of the partner’s interest in the partnership reduced by any money distributed in the same transaction. In this case:
Olson’s basis in partnership interest $70,000
Cash liquidating distribution (10,000)
——–
Basis in property liquidating distribution (land) $60,000
The basis of property distributed by a partnership to a partner in liquidation is equal to the partner’s interest in the partnership reduced by any money distributed in the same transaction. T/F
True af
When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership:
increases by the partner’s share of the increase.
decreases by the partner’s share of the increase.
decreases, but not to less than zero.
is not affected.
increases by the partner’s share of the increase.
Example: AB Partnership borrows $12,000. Able is a 40% partner. Bob is a 60% partner.
Able’s partner’s basis increases by ($12,000 x 40%) = $4,800
Bob’s partner’s basis increases by ($12,000 x 60%) = $7,200
If the partners have a different profit ratio than loss ratio and the liability is a recourse liability, the partners share the liability based on the __ratio, but…
If the partners have a different profit ratio than loss ratio and the liability is a nonrecourse liability, the partners share the liability based on the __ratio.
loss
Profit
In the current year, when Hoben’s tax basis in Lynz Partnership interest was $10,000, Hoben received a liquidating distribution as follows:
Adjusted Fair Market
Tax Basis Value
---------- ----------- Marketable securities $ 5,000 $ 5,000 Land 25,000 27,000 Lynz had no appreciated inventory, unrealized receivables, or properties that had been contributed by its partners. What was Hoben's recognized gain on the distribution?
the partner’s adjusted basis is allocated to all other properties received based on their relative fair market values, as shown below:
Hoben’s tax basis prior to liquidating distribution $10,000
Less: Adj. basis allocated to the marketable
securities ($5,000 / $32,000) x $10,000 (1,563)
Less: Adj. basis allocated to the land
($27,000 / $32,000) x $10,000 (8,437)
——–
Hoben’s tax basis after liquidating distribution $ 0
The only way a capital gain is recognized in a proportionate liquidating distribution from a partnership is if the cash received by the partner is ___the partner’s adjusted basis in his partnership interest.
After the adjusted basis of a partner’s interest in a partnership has been reduced by the cash, then the basis is reduced by any ___and ___. In this case, none were distributed.
greater than
unrealized receivables & Inventory
When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a 1/3rd interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership’s profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?
Each partner reports a capital gain of $33,333.
The entire gain of $100,000 must be specifically allocated to Acre.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
FMV of land on date of contribution $100,000
Less: Adjusted basis of land to Acre (60,000)
———
Precontribution gain to be allocated to
Acre upon subsequent sale of land $ 40,000
=========
Amount realized upon subsequent sale of
land contributed by Acre $160,000
Less: Adjusted basis of land to AQR partnership (60,000)
———
Realized gain $100,000
Less: Precontribution gain recognized by Acre (40,000)
———
Remaining gain to be recognized equally
by all 3 partners $ 60,000
========
A built-in gain or loss on the date of contribution must be allocated to the contributing partner when the property is subsequently disposed of by the partnership in a taxable transaction.
When two or more partnerships merge, the resulting partnership is a continuation of the partnership whose members own more than _______ of the capital and profits in the resulting partnership.
. If this test cannot be satisfied, the resulting partnership will be a continuation of the partnership providing the _____ of assets to the resulting partnership.
If neither of these tests can be satisfied, all of the merged partnerships will be ___and a ___partnership will result.
50%
greatest dollar value
terminated and a new partnership
Anderson’s basis in the SBF Partnership is $80,000. Anderson received a nonliquidating distribution of $50,000 cash, and land with an adjusted basis of $40,000 and a fair market value of $50,000. What is Anderson’s basis in the land?
The basis of property received in a nonliquidating distribution will ordinarily be the same as the basis in the hands of the partnership less cash distributed.
In this case, Anderson’s basis in the land is limited to $30,000 as follows:
Basis in partnership interest $80,000 Cash received (50,000) Remaining basis in partnership interest $30,000
Payments for interest in the partnership (IRC Section 736(b) payments) are payments made for a partner’s interest in partnership ___.
These payments are for the interest in ___properties and are considered as a ___by the partnership.
property
capital gain or loss
distribution
You are a partner in HiJack Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or substantially appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is accurate?
- You report the entire amount as a capital gain since your adjusted basis in the partnership is zero.
- You report $5,000 as ordinary income from the sale of the partnership’s depreciable property.
- You report the remaining $6,000 gain as capital gain.
2 & 3 are right, but 1 is wrong.
The $5,000 is reported under the ordinary income rules for depreciation recapture. The additional payment of $6,000 is a capital gain and reportable in the current year.
The general rule for computing gross income for a partnership is that any item of gross income that receives _____on an individual’s return must be excluded from ____and shown as a separate item on Schedule K of IRS Form 1065.
One exception is ___payments, which are both deductible by the partnership and included as a separately stated item on IRS Form 1065, Schedule K-1, Partner’s Share of Income, Deductions, Credits, Etc.
special consideration , ordinary gain or loss
guaranteed
NONSEPARATE ITEMS (ignore knowing the separate items) know this and you’ll know what to exclude
gross receipts or sales less cost of goods sold plus other partnership income, less salaries and wages, repairs and maintenance, bad debts, rent, taxes and licenses, interest expense, depreciation, retirement plans, and guaranteed payment other deductions.
yep
Adams, a general contractor, Brinks, an architect, and Carson, an interior decorator, formed the Dex Home Improvement General Partnership by contributing the assets as follows:
Fair % of Partner Share
Adjusted Market in Capital
Asset Basis Value Profits and Losses
--------- -------- ------- ------------------
Adams Cash $40,000 $40,000 50%
Brinks Land $12,000 $21,000 20%
Carson Inventory $24,000 $24,000 30% The land was a capital asset to Brinks, subject to a $5,000 mortgage, which was assumed by the partnership.
Carson’s initial basis in Dex is:
When a general partnership is formed and one of the partners contributes property to the partnership which is subject to a mortgage, the other partners increase their basis by the portion of the mortgage assumed.
Carryover Basis of the Inventory $24,000
ADD: 30% x $5,000 Mortgage Assumed by the Partnership 1,500
——-
Carson’s Initial Basis $25,500(answer)
=======
Baker acquired a 50% interest in Kode Partnership by contributing $20,000 cash and a building with an adjusted basis of $26,000 and a fair market value of $42,000. The building was subject to a $10,000 mortgage which was assumed by Kode. The other partners contributed cash only. What is the basis of Baker’s interest in Kode?
$41k
Cash $20,000
Add carryover basis
in the building 26,000
-------
$46,000
Less 1/2 of the mortgage
assumed by the other
partners - 5,000
-------
Bakers OUTSIDE basis $41,000
in Kode partnership =======
Peters has a 1/3rd interest in the Spano Partnership. During Year 7, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a Year 7 operating loss of $70,000 before the guaranteed payment. What are the net effects of the guaranteed payment?
The guaranteed payment increases Peters’ tax basis in Spano by $16,000.
The guaranteed payment increases Peters’ ordinary income by $16,000.
II only
The guaranteed payment is treated much like self-employment income. It is declared as ordinary income, and subject to self-employment taxes. Since this income is not reinvested in the company, it does not increase the investment basis.
The “hot assets” of a partnership include the ___.
unrealized receivables and inventory
Freeman, a single individual, reported the following income in the current year:
Guaranteed payment from services rendered to a partnership: $50,000
Ordinary income from an S corporation: $20,000
What amount of Freeman’s income is subject to self-employment tax?
$50K
A shareholder will report his share of the ordinary income from an S corporation whether it is distributed or not, and this income is not subject to self-employment tax at the shareholder level.
When ownership has changed during the year, each owner must recognize a pro rata share of the income or loss allocated on a ___
daily basis
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
The adjusted basis of a partnership interest includes any cash paid plus the new partner’s share of any partnership liabilities.
Both
Michael’s adjusted basis in the MW Partnership was $20,000 at the time he received the following nonliquidating distribution:
Cash of $5,000
Equipment with an adjusted basis to the partnership of $8,000 and a fair market value of $10,000.
What is the gain/loss Michael will recognize on this transaction?
$0
The general rule for gain or loss recognition for nonliquidating partnership distributions is no gain or loss is recognized by the partner or the partnership in a nonliquidating distribution of cash or property.
Partnership P has an operating loss of $10,000 for the year. Partner A had a 50% interest in the partnership, with a basis of $5,000 at the beginning of the year. P distributed $2,000 to A during the year. What amount of loss is deductible by A?
$3k
Deductibility of losses for a general partnership is limited to the partner’s basis in the partnership
Deductibility of losses for a general partnership is limited to the partner’s ____in the partnership
If a partner sells the entire interest in the partnership, profits and losses _____________ must be considered.
basis
up to the date of sale
As a general partner in Greenland Associates, an individual’s share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?
$35K
A partner reports his distributive share of partnership income whether it is received or not. A guaranteed payment is considered income to the partner receiving it. Therefore, ordinary income and guaranteed payments are included in the individual’s income.
Ordinary business income $25,000
Guaranteed payment 10,000
Interest in Greenland $35,000
Cash distributions from the partnership have no bearing on the income reported by the partner. The cash distribution will decrease the partner’s basis in the partnership interest.
Cash distributions from the partnership have no bearing on the ___reported by the partner.
income
f property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership, all of the following will apply except: T/F
the contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution.
gain or loss is calculated as if the property was sold for the lesser of its basis or FMV at the date of distribution.
the contributing partner’s gain recognized is limited to the gain that would be recognized by the partnership.
the basis in the property and partnership interests will be adjusted for the gain or loss recognized.
True
False
True
True
