STUDY UNIT ELEVEN PARTNERSHIPS AND EXEMPT ORGANIZATIONS Flashcards
Hart’s adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property:
Cash $ 5,000
Land Adjusted basis 7,000 Fair market value 10,000
What was the amount of Hart’s basis in the land?
A $0
B $10,000
C $4,000
D $7,000
C $4,000
This answer is correct.
The basis of property distributed to a partner (not in liquidation of the interest) is the property’s adjusted basis to the partnership immediately before the distribution. It, however, cannot exceed the adjusted basis of the partner’s interest in the partnership less any money received in the same distribution.
Basis of partnership interest
$9,000
Less cash received
(5,000)
Basis in distributed property
$4,000
The individual partner, rather than the partnership, makes which of the following elections?
A Nonrecognition treatment for involuntary conversion gains.
B Code section 179 deductions for tangible personal property.
C Whether to take a deduction or credit for taxes paid to foreign countries.
D Election to expense and amortize organizational costs.
C Whether to take a deduction or credit for taxes paid to foreign countries
This answer is correct.
A partner makes certain elections for his or her distributive share, e.g., deduction (credit) for foreign tax expense of the partnership or the order of reducing tax attributes upon forgiveness of partnership debt. Partnership-level election examples are accounting methods, tax year, inventory methods, start-up/organizational costs, installment sales, Sec. 179, involuntary conversion gains, and depreciation methods.
When a partner’s share of partnership liabilities increases, the partner’s basis in the partnership
A Decreases by the partner’s share of the increase.
B Is not affected.
C Decreases, but not below zero.
D Increases by the partner’s share of the increase.
D Increases by the partner’s share of the increase
This answer is correct.
A partner’s share of a partnership liability is treated as if the partner contributed an equivalent amount of money to the partnership. The deemed contribution increases the partner’s basis in his or her partnership interest.
White has a one-third interest in the profits and losses of Rapid Partnership. Rapid’s ordinary income for the 2014 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his 2014 tax return? A $3,000 B $13,000 C $10,000 D $11,000
B $13,000
This answer is correct.
Initially, White will include $3,000 as ordinary income. Further, since partnership items flow through to the partner, White receives one-third of the gross income, or $11,000 ($30,000 + $3,000 = $33,000 ÷ 3) and one-third of the deductions, or $1,000 ($3,000 ÷ 3). Therefore, the amount White must include as taxable income from Rapid is $13,000 ($3,000 + $11,000 – $1,000).
Which of the following entities must pay taxes for federal income tax purposes? A Joint venture. B Limited partnership. C General partnership. D C corporation.
D C corporation.
This answer is correct.
Corporate taxable income computations generally parallel those for individuals. General tax is determined by applying applicable tax rates to taxable income. Shareholders are then subject to federal income tax on distributions out of corporate earnings and profits. In addition to regular income tax, a C corporation may also be subject to the AMT. Partnerships and joint ventures are all pass-through entities, which are taxed at the individual level, not the partnership level.
Bob acquired a 50% interest in a partnership by contributing depreciable property that had an adjusted basis of $15,000 and a fair market value of $45,000. The property was subject to a liability of $32,000, which the partnership assumed for legitimate business purposes. What is the partnership’s basis in the property for depreciation?
A. $15,000
B. $13,000
C. $0
D. $16,000
D. $16,000
Answer (D) is correct.
The partnership’s basis for contributed property is the adjusted basis of such property to the contributing partner at the time of contribution, provided it is not an investment partnership plus any gain recognized by the partner. Bob is required to recognize $1,000 ($15,000 – $32,000 + 50% × $32,000) upon contribution of the asset in order to bring his basis in the partnership up to zero
(11.1.20)
Partnership Q, an electing large partnership, reported the following items in the current year: Income from sales $300,000 Tax-exempt interest 500 Charitable contributions 1,500 Depreciation 2,500 Sec. 1231 loss on sale of equipment 1,250 Other business expenses 150,000 What is Partnership Q’s ordinary income?
A. $146,250
B. $144,750
C. $147,500
D. $145,250
B. $144,750
Answer (B) is correct.
For an electing large partnership, the law reduces the number of items that must be separately reported to the partners. While tax-exempt interest must be separately stated, all the other items are considered in the determination of ordinary income. For charitable contributions, the deduction is calculated similarly to the method for corporate donors, with the deduction limited to 10% of the taxable income of the partnership. Since the $1,500 is below the 10% threshold, the entire amount qualifies for a deduction. Therefore, the total amount of ordinary income equals $144,750.
(11.7.148)
Carol sold 50% of her business to her mother. The resulting partnership had income of $200,000. Capital is a material income-producing factor. Carol performed services worth $90,000, which is reasonable compensation, and her mother performed no services. What is the maximum amount of income Carol’s mother can report from the partnership for the tax year?
A. $45,000
B. $110,000
C. $100,000
D. $55,000
D. $55,000
Answer (D) is correct.
The value of Carol’s services ($90,000) must be subtracted from income as guaranteed payments before determining the amount Carol’s mother reports. Carol’s mother reports $55,000 [($200,000 – $90,000) × 50%].
(11.2.62)
Cobb, Danver, and Evans each owned a one-third interest in the capital and profits of their calendar-year partnership. On September 18, 2015, Cobb and Danver sold their partnership interests to Frank and immediately withdrew from all participation in the partnership. On March 15, 2016, Cobb and Danver received full payment from Frank for the sale of their partnership interests. For tax purposes, the partnership
A. Terminated on December 31, 2015.
B. Terminated on March 15, 2016.
C. Terminated on September 18, 2015.
D. Did not terminate.
C. Terminated on September 18, 2015.
Answer (C) is correct.
A partnership terminates for tax purposes only if (1) no part of any business, financial operation, or venture of the partnership continues to be carried on by its partners in a partnership, or (2) within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. On September 18, 2015, the partnership ceased to operate as a partnership because only one “partner” remained and over 50% of the partnership interest was sold.
(11.6.141)
