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Chapter 20 Forming and Operating Partnerships

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Question;Chapter 20;Forming and Operating Partnerships;True / False Questions;1. Income;earned by flow-through entities is usually taxed once at the entity level.;True False;2. Partnerships;tax rules incorporate both the entity and aggregate approaches.;True False;3. The term;outside basis" refers to the partnership's basis in its assets;whereas, the term "inside basis" refers an individual partner's basis;in her partnership interest.;True False;4. A;partnership can elect to amortize organization and startup costs, however;syndication costs are not deductible.;True False;5. Nonrecourse;debt is generally allocated according to the profit-sharing ratios of the;partnership.;True False;6. Partners;must generally treat the value of profits interests they receive in exchange;for services as ordinary income.;True False;7. A;purchased partnership interest has a holding period beginning on the date of;purchase regardless of the type of property held by the partnership.;True False;8. Tax;elections are rarely made at the partnership level.;True False;9. The least;aggregate deferral test uses the profit percentage of each partner to determine;the minimum amount of tax deferral for the partner group as a whole.;True False;10. A;partnership with a C corporation partner must always use the accrual method as;its accounting method.;True False;11. The;character of each separately-stated item is determined at the partner level.;True False;12. Guaranteed;payments are included in the calculation of a partnership's ordinary business;income (loss) and are also treated as separately-stated items.;True False;13. A general;partner's share of ordinary business income is similar to investment income;thus, a general partner only includes their guaranteed payments as;self-employment income.;True False;14. Partnerships;can use special allocations to shift built-in gains and built-in losses on;contributed property from a partner who contributed the property to other;partners.;True False;15. A;partnership can request a five month extension by filing Form 7004 prior to the;original due date of the partnership return.;True False;16. A;partner's outside basis must first be decreased by any negative basis;adjustments and then increased by any positive basis adjustments.;True False;17. Actual or;deemed cash distributions in excess of a partner's outside basis are generally;taxable as capital gains.;True False;18. Adjustments;to a partner's outside basis are made annually to prevent double taxation on;the sale of a partnership interest or at the time of a partnership;distribution.;True False;19. Partners;adjust their outside basis by adding non-deductible expenses and subtracting;any tax-exempt income to avoid being double taxed.;True False;20. An;additional allocation of partnership debt or relief of partnership debt is;considered to be a deemed cash contribution or cash distribution respectively.;True False;21. Any losses;that exceed the tax basis of a partner are suspended and carried forward for 20;years.;True False;22. The main;difference between a partner's tax basis and at-risk amount is that qualified;nonrecourse financing is not included in the at-risk amount.;True False;23. A partner;can apply any passive activity losses against any passive activity income for;the year.;True False;24. If a;partner participates in partnership activities on a regular, continuous, and;substantial basis, then the partnership's activities with respect to this;individual partner are not considered passive.;True False;25. A;partner's tax basis or at-risk amount can be increased by making capital;contributions, by paying off partnership debt, or by increasing the;profitability of the partnership.;True False;Multiple Choice Questions;26. Which of;the following entities is not considered a flow-through entity?;A. C;corporation;B. S;corporation;C. Limited;Liability Company (LLC);D. Partnership;27. Which of;the following statements exemplifies the entity theory of partnership taxation?;A. Partnerships;are taxable entities.;B. Partnerships;determine the character of separately stated items at the partnership level.;C. Partnerships;make the majority of the tax elections.;D. Both;partnerships are taxable entities and partnerships make the majority of the tax;elections are correct;E. Both;partnerships determine the character of separately stated items at the;partnership level and partnerships make the majority of the tax elections are;correct;28. Gerald;received a 33% capital and profit (loss) interest in XYZ Limited Partnership;(LP). In exchange for this interest, Gerald contributed a building with a FMV;of $30,000. His adjusted basis in the building was $15,000. In addition, the;building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed;at the time the property was contributed. What is Gerald's outside basis;immediately after his contribution?;A. $6,000;B. $9,000;C. $21,000;D. $24,000;29. Sue and;Andrew form SA general partnership. Each person receives an equal interest in;the newly created partnership. Sue contributes $10,000 of cash and land with a;FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment;with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the;equipment is $8,000, and his basis in the building is $20,000. How much gain;must the SA general partnership recognize on the transfer of these assets from;Sue and Andrew?;A. $0;B. $4,000;C. $48,000;D. $52,000;30. Erica and;Brett decide to form their new motorcycle business as a LLC. Each will receive;an equal profits (loss) interest by contributing cash, property, or both. In;addition to the members' contributions, their LLC will obtain a $50,000;nonrecourse loan from First Bank at the time it is formed. Brett contributes;cash of $5,000 and a building he bought as a storefront for the motorcycles.;The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured;by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's;outside tax basis in his LLC interest?;A. $37,500;B. $40,000;C. $42,500;D. $45,000;31. Under;general circumstances, debt is allocated from the partnership to each partner;in the following manner;A. Recourse;- profit sharing ratios, nonrecourse - profit sharing ratios;B. Recourse;- capital ratios, nonrecourse - capital ratios;C. Recourse;- to partners with the ultimate responsibility for paying the debt, nonrecourse;- profit sharing ratios;D. Recourse;- profit sharing ratios, nonrecourse - to partners with the ultimate;responsibility for paying the debt;32. Which of;the following statements is true when property is contributed in exchange for a;partnership interest?;A. Any;contributed property in a partnership has a carryover basis, and the character;of the property is determined by the way the contributing partner used the;property.;B. The;partnership's inside basis is typically increased by any gain the partner;recognizes from the property contribution.;C. The;holding period for a partner's partnership interest depends upon the type of;assets a partner contributes.;D. Services;are not allowed to be contributed to a partnership in return for a partnership;interest.;E. All of these;are true.;33. In X1;Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam;and Jason realized they needed an advertising expert to assist in their;business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital;interest in their partnership for contributing his expert services. Cory agreed;to this arrangement and received his capital interest in X2. If the value of;the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest;which of the following tax consequences does not occur in X2?;A. Cory;reports $60,000 of ordinary income in X2;B. Adam;Jason and Cory receive an ordinary deduction of $20,000 in X2;C. Adam and;Jason receive an ordinary deduction of $30,000 in X2;D. Cory;reports $60,000 of ordinary income in X2, and Adam and Jason receive an;ordinary deduction of $30,000 in X2;34. Tom is;talking to his friend Bob, who has an interest in Freedom, LLC, about;purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000.;This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b);capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what;would Tom's outside basis be in Freedom, LLC?;A. $10,000;B. $14,500;C. $17,000;D. $19,500;35. Which of;the following statements regarding capital and profit interests received for;services contributed to a partnership is false?;A. The;holding period of a capital or profits interest begins on the date the interest;is received;B. Partners;receiving capital interests must recognize the liquidation value of their;capital interests as capital gain;C. Partners;receiving only profits interests generally don't recognize income when the;profits interest is received;D. Partners;receiving only profits interests include their share of partnership debt in the;tax basis of their partnership interest;36. Partnerships;must maintain their capital accounts according to which of the following rules?;A. GAAP;B. 704(b);C. Tax;D. All of;these;E. Only GAAP;and 704(b);37. Zinc, LP;was formed on August 1, 20X9. When the partnership was formed, Al contributed;$10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition;Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000;along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad;contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave;contributed a machine, secured by $35,000 of debt, with a FMV of $15,000 and a;tax basis of $10,000. What is the total inside basis of all the assets;contributed to Zinc, LP?;A. $140,000;B. $165,000;C. $175,000;D. $200,000;38. Which of;the following does not represent a tax election available to either partners or;partnerships?;A. Electing;to change an accounting method;B. Electing;to amortize organization costs;C. Electing;to expense a portion of syndication costs;D. Electing;to immediately expense depreciable property under Section 179;39. In what;order should the tests to determine a partnership's year end be applied?;A. majority;interest taxable year - least aggregate deferral - principal partners test.;B. principal;partners test - majority interest taxable year - least aggregate deferral.;C. principal;partners test - least aggregate deferral - majority interest taxable year.;D. majority;interest taxable year - principal partners test - least aggregate deferral.;E. None of;these.;40. Sarah;Sue, and AS Inc. formed a partnership on May 1, 20X9 called SSAS, LP. Now that;the partnership is formed, they must determine its appropriate year-end. Sarah;has a 30% profits and capital interest while Sue has a 35% profits and capital;interest. Both Sarah and Sue have calendar year-ends. AS Inc. holds the;remaining profits and capital interest in the LP, and it has a September 30;year-end. What tax year-end must SSAS, LP use for 20X9 and which test or rule;requires this year-end?;A. 9/30;majority interest taxable year;B. 12/31;majority interest taxable year;C. 12/31;principal partners test;D. 12/31;least aggregate deferral test;41. XYZ, LLC;has several individual and corporate members. Abe and Joe, individuals with;4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a;corporation with a 6/30 year end, owns a 4% profits and capital interest while;DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital;interest. Finally, thirty other calendar year-end individual partners (each;with less than a 2% profits and capital interest) own the remaining 45% of the;profits and capital interests in XYZ. What tax year-end should XYZ use and;which test or rule requires this year-end?;A. 4/30;principal partners test;B. 4/30;least aggregate deferral test;C. 12/31;principal partners test;D. 12/31;least aggregate deferral test;42. This year;HPLC, LLC was formed by H Inc., P Inc., L Inc., and C Inc. Each member had an;equal share in the LLC's capital. H Inc., P Inc., and L Inc. each had a 30%;profits interest in the LLC with C Inc. having a 10% profits interest. The;members had the following tax year-ends: H Inc. [1/31], P Inc. [5/31], L Inc.;[7/31], and C Inc. [10/31]. What tax year-end must the LLC use?;A. 1/31;B. 5/31;C. 7/31;D. 10/31;43. Which of;the following statements regarding the process for determining a partnership's;tax year-end is true?;A. Only the;partners' profits interests are relevant when determining if a partnership has;a majority interest taxable year.;B. Under the;principal partners test, a principal partner is defined as a partner having an;interest of 3% or more in the profits or capital of the partnership.;C. The least;aggregate deferral test utilizes the partners' capital interests to measure the;amount of aggregate deferral.;D. A;partnership is required to use a calendar year-end if it has a corporate;partner.;E. None of;these is true.;44. A;partnership may use the cash method despite having a corporate partner when the;partnership's average gross receipts for the prior three taxable years don't;exceed _________.;A. $500,000;B. $1,000,000;C. $5,000,000;D. Partnerships;may never use the cash method if they have corporate partners;45. TQK, LLC;provides consulting services and was formed on 1/31/X5. Aaron and ABC, Inc.;each hold a 50% capital and profits interest in TQK. If TQK averaged $7,000,000;in annual gross receipts over the last three years, what accounting method can;TQK use for X9?;A. Accrual;method;B. Cash;method;C. Hybrid;method;D. Either;accrual method or cash method;46. How does a;partnership make a tax election for the current year?;A. Partnerships;make certain elections automatically by simply filing their returns.;B. Partnerships;make certain tax elections by filing a separate form with the IRS.;C. Partnerships;do not need to file anything to make a tax election.;D. Partnerships;do not make tax elections. Partners must make tax elections separately.;E. Partnerships;make certain elections automatically by simply filing their returns, and;partnerships make certain tax elections by filing a separate form with the IRS.;47. What is;the rationale for the specific rules partnerships must follow in determining a;partnership's taxable year-end?;A. To;increase the amount of aggregate tax deferral partners receive;B. To;minimize the amount of aggregate tax deferral partners receive;C. To align;the year-end of the partnership with the year-end of a majority of the partners;D. To spread;the workload of CPAs more evenly over the year;E. To;minimize the amount of aggregate tax deferral partners receive and to align the;year-end of the partnership with the year-end of a majority of the partners;48. On;12/31/X4, Zoom, LLC reported a $60,000 loss on its books. The items included in;the loss computation were $30,000 in sales revenue, $15,000 in qualifying;dividends, $22,000 in cost of goods sold, $50,000 charitable contribution;$20,000 in employee wages, and $13,000 of rent expense. How much ordinary;business income (loss) will Zoom report on its X4 return?;A. ($8,000);B. ($25,000);C. ($60,000);D. ($95,000);49. Which of;the following would not be classified as a separately-stated item?;A. Short-term;capital gains;B. Charitable;contributions;C. MACRS;depreciation expense;D. Guaranteed;payments;50. Tim, a;real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail;lumber store form a partnership called HKT, LP. HKT is in the home building;business. Tim recently purchased his interest in HKT while the other partners;purchased their interest several years ago. During X3, HKT reports a $12,000;gain from the sale of a stock in a wholesale lumber company it purchased in X1;for investment purposes. Which of the following statements best represents how;their portion of the gain should be reported to the partner?;A. Tim -;Short-term capital gain;B. Ken -;Ordinary Income;C. Hardware;Inc. - Long-term capital gain;D. All of;these accurately report the gain to the partner;E. None of;these accurately report the gain to the partner;51. Kim;received a 1/3 profits and capital interest in Bright Line, LLC in exchange for;legal services she provided. In addition to her share of partnership profits or;losses, she receives a $30,000 guaranteed payment each year for ongoing;services she provides to the LLC. For X4, Bright Line reported the following;revenues and expenses: Sales - $150,000, Cost of Goods Sold - $90,000;Depreciation Expense - $45,000, Long-Term Capital Gains - $15,000, Qualifying;Dividends - $6,000, and Municipal Bond Interest - $3,000. How much ordinary;business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for;X4?;A. ($15,000);B. $6,000;C. $9,000;D. $15,000;E. None of;these will be reported as ordinary business income (loss) on Schedule K-1.;52. A;partner's self-employment earnings (loss) may be affected by her share of;ordinary business income (loss) and any guaranteed payments she receives. The;impact of these amounts typically depends on the status of the partner. Which;of the following statements correctly describes the effect these items have on;the partner's self-employment earnings (loss)?;A. General;partner - only guaranteed payments affect self-employment earnings (loss);B. General;partner - ordinary business income (loss) and guaranteed payments affect;self-employment earnings (loss);C. Limited;partner - only guaranteed payments affect self-employment earnings (loss);D. Limited;partner - only ordinary business income (loss) affects self-employment income;(loss);E. Both general;partner - ordinary business income (loss) and guaranteed payments affect;self-employment earnings (loss) and limited partner - only guaranteed payments;affect self-employment earnings (loss) are correct;53. Under;proposed rules issued by the IRS, in which of the following situations should;an LLC member be treated as a general partner for self-employment tax purposes?;A. The;member is not personally liable for any of the LLC debt.;B. The;member has authority to contract on behalf of the LLC.;C. The;member spends 450 hours participating in the management of the LLC's trade or;business during the taxable year.;D. The;member is listed on the LLC's letterhead.;54. Which of;the following items are subject to the Medicare contribution tax when an;individual partner is a material participant in the partnership?;A. Partner's;distributive share of dividends;B. Partner's;distributive share of interest;C. Partner's;distributive share of ordinary business income;D. Both;partner's distributive share of dividends and of interest are correct;55. Which of;the following items are subject to the Medicare contribution tax when a partner;is a not a material participant in the partnership?;A. Partner's;distributive share of dividends;B. Partner's;distributive share of interest;C. Partner's;distributive share of ordinary business income;D. All of;these are correct.;56. Which;requirement must be satisfied in order to specially allocate partnership income;or losses to partners?;A. Special;allocations must have economic effect;B. At least;one partner must agree to the special allocations;C. Special;allocations must be insignificant;D. Special;allocations must reduce the combined tax liability of all the partners;57. Frank and;Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank;contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted;basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000;worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy;Socks sells the land Bob contributed for $60,000. How much gain (loss) related;to this transaction will Bob report on his X4 return?;A. $10,000;B. $15,000;C. $25,000;D. $35,000;58. When must;a partnership file its return?;A. By the;15th day of the 4th month after the partnership's tax year end;B. By the;sixth month after the original due date if an extension is filed;C. By the;15th day of the 3rd month after the partnership's tax year end;D. By the;15th day of the 4th month after the partnership's tax year end and by the sixth;month after the original due date if an extension is filed;E. By the;sixth month after the original due date if an extension is filed and by the;15th day of the 3rd month after the partnership's tax year end;59. What form;does a partnership use when filing an annual informational return?;A. Form 1040;B. Form 1041;C. Form 1065;D. Form 1120;60. Which of;the following does not adjust a partner's basis?;A. Ordinary;business income (loss);B. Change in;amount of partnership debt;C. Tax-exempt;income;D. All of;these adjust a partner's basis;61. What is;the correct order for applying the following three items to adjust a partner's;tax basis in his partnership interest: (1) Increase for share of ordinary;business income, (2) Decrease for share of separately stated loss items, and;(3) Decrease for distributions?;A. 1, 3, 2;B. 1, 2, 3;C. 3, 1, 2;D. 2, 3, 1;62. Which of;the following statements regarding a partner's basis adjustments is true?;A. A;partner's basis may never be reduced below zero.;B. A partner;must adjust his basis for ordinary income (loss) but not for separately-stated;items.;C. A;partnership fine or penalty does not affect a partner's basis.;D. Relief of;partnership debt increases a partner's tax basis.;63. Which of;the following statements regarding the rationale for adjusting a partner's;basis is false?;A. To;prevent partners from being double taxed when they sell their partnership;interests;B. To ensure;that partnership tax-exempt income is not ultimately taxed;C. To;prevent partners from being double taxed when they receive cash distributions;D. To ensure;that partnership non-deductible expenses are never deductible;E. None of;these rationales are false;64. If;partnership debt is reduced and a partner is deemed to receive a cash;distribution, what impact does the deemed distribution have on the partner if;it is in excess of her tax basis?;A. The;partner will treat the distribution in excess of her basis as ordinary income;B. The;partner will treat the distribution in excess of her basis as capital gain;C. The;partner will not ever be taxed on the distribution in excess of her basis;D. The;partner will not be taxed on the distribution in excess of her basis until she;sells her partnership interest;65. Jerry, a;partner with 30% capital and profit interest, received his Schedule K-1 from;Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his;partnership interest was $50,000. His current year Schedule K-1 reported an;ordinary loss of $15,000, long-term capital gain of $3,000, qualifying;dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash;contribution, and a reduction of $4,000 in his share of partnership debt. What;is Jerry's adjusted basis in his partnership interest at the end of the year?;A. $35,000;B. $40,000;C. $45,500;D. $49,500;66. Styling;Shoes, LLC filed its 20X8 Form 1065 on March 15, 20X9. Styling had three;members with the following ownership interests and tax basis at the beginning;of the 20X8: (1) Jane, a member with a 25% profits and capital interest and a;$5,000 outside basis, (2) Joe, a member with a 45% profits and capital interest;and a $10,000 outside basis, and (3) Jack, a member with a 30% profits and;capital interest and a $2,000 outside basis. The following items were reported;on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231;gain of $15,000, charitable contributions of $25,000, and tax-exempt income of;$3,000. In addition, Styling received an additional bank loan of $12,000 during;20X8. What is Jane's tax basis after adjustment for her share of these items?;A. $28,250;B. $31,250;C. $33,500;D. $57,250;67. Hilary had;an outside basis in LTL, General Partnership of $10,000 at the beginning of the;year. LTL reported the following items on Hilary's K-1 for the year: ordinary business;income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a;cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's;adjusted basis at the end of the year?;A. ($12,000);B. ($9,000);C. $0;D. $15,000;E. $18,000;68. How does;additional debt or relief of debt affect a partner's basis?;A. Debt has;no effect on a partner's basis;B. Relief of;debt increases a partner's basis;C. Both;additional debt and relief of debt increase a partner's basis;D. Additional;debt increases a partner's basis;69. Does;adjusting a partner's basis for tax-exempt income prevent double taxation?;A. Yes, if;this basis adjustment is not made the partner will be taxed once when the;income is allocated to him and a second time when he sells his partnership;interest;B. Yes, if;this basis adjustment is not made the partner will be taxed on the tax-exempt;income twice when he sells his partnership interest because he was not taxed on;this income when it was earned;C. No;making this adjustment to the partner's basis prevents the tax-exempt income;from being converted to taxable income;D. No, the;partner should not adjust his tax basis by his share of tax-exempt income;70. In what;order are the loss limitations for partnerships applied?;A. Tax Basis;- At-Risk Amount - Passive Activity Loss;B. Passive;Activity Loss - Tax Basis - At-Risk Amount;C. At-Risk;Amount - Passive Activity Loss - Tax Basis;D. At-Risk;Amount - Tax Basis - Passive Activity Loss;71. Which of;the following items will affect a partner's tax basis?;A. Share of;ordinary business income (loss);B. Share of;nonrecourse debt;C. Share of;recourse debt;D. Share of;qualified nonrecourse debt;E. All of;these will affect a partner's tax basis;72. On January;1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in;exchange for $2,000 in cash and real property with a $3,000 tax basis secured;by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9;calendar year. How much loss can Gerald deduct, and how much loss must he;suspend if he only applies the tax basis loss limitation?;A. $0;$4,000;B. $0;$7,500;C. $0;$15,000;D. $4,000;$0;E. None of;these;73. What type;of debt is not included in calculating a partner's at-risk amount?;A. Recourse;debt;B. Qualified;nonrecourse debt;C. Nonrecourse;debt;D. All of;these types of debt are included in the at-risk amount;74. Jay has a;tax basis of $14,000 in his partnership interest at the beginning of the;partnership tax year. The following amounts of partnership debt were allocated;to Jay and are included in his beginning of the year tax basis: (1) recourse;debt - $3,000, (2) qualified nonrecourse debt - $1,000, and (3) nonrecourse;debt - $500. If Jay is allocated a $15,000 loss for the current year, how much;of the loss will be suspended under the tax basis and at-risk limitations?;A. $500;$1,000;B. $1,000;$500;C. $0, $0;D. $14,000;$1,000;75. Which;person would generally be treated as a material participant in an activity?;A. A;participant in a rental activity;B. A limited;partner;C. A LLC;member not involved with management of the LLC;D. A general;partner;76. If a;taxpayer sells a passive activity with suspended passive activity losses from;prior years, what type of income can be offset by the suspended passive losses;in the year of sale?;A. Passive;activity income;B. Portfolio;income;C. Active;business income;D. Any of;these types of income can be offset.;E. None of;these. The suspended losses disappear when the passive activity is sold.;77. John, a;limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business;loss from the partnership. Before the loss allocation, his tax basis is $20,000;and at-risk amount is $10,000. John also has ordinary business income of;$20,000 from Sweet Pea, LP as a general partner and ordinary business income of;$5,000 from Red Tomato, as a limited partner. How much of the $30,000 loss from;Candy Apple can John deduct currently?;A. $5,000;B. $10,000;C. $25,000;D. $30,000;78. Which of;the following statements regarding partnerships losses suspended by the tax;basis limitation is true?;A. Partnership;losses must be used only in the year the losses are created;B. Partnership;losses may be carried back 2 years and carried forward 5 years;C. Partnership;losses may be carried forward indefinitely;D. Partnership;losses may be carried back 2 years and carried forward 20 years;79. Which of;the following would not be classified as a material participant in an activity?;A. An;individual who participates more than 100 hours a year and the person's;participation is not less than any other individual's participation;B. An;individual who participated in the activity for at least one of the preceding;five taxable years;C. An;individual who participates in an activity regularly, continuously, and;substantially;D. An;individual who participates in an activity for more than 500 hours a year;Essay Questions;80. What is;the difference between the aggregate and entity theory of partnership taxation?;Provide two examples of how partnership tax rules reflect the aggregate theory;and two examples of how they reflect the entity theory.;81. On March 15;20X9, Troy, Peter, and Sarah formed Picture Perfect general partnership. This;partnership was created to sell a variety of cameras, picture frames, and other;photography accessories. When it was formed, the partners received equal;profits and capital interests and the following items were contributed by each;partner;? Troy - cash of $3,000, inventory with a FMV and tax basis;of $5,000, and a building with a FMV of $22,000 and adjusted basis of $10,000.;Additionally, the building was secured by a $10,000 nonrecourse mortgage.;? Peter - cash of $5,000, accounts payable of $12,000;(recourse debt for which each partner becomes equally responsible), and land;with a FMV of $27,000 and tax basis of $20,000.;? Sarah - cash of $2,000, accounts receivable with a FMV and;tax basis of $1,000, and equipment with a FMV of $40,000 and adjusted basis of;$3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by;the equipment.;What is each partner's outside basis and how much gain;(loss) must the partners recognize in 20X9 when Picture Perfect was formed?;82. J&J;LLC was in its third year of operations when J&J decided to expand the;number of members from two, A & B, with equal profits and capital interests;to three members, A, B, and C. The third member, C, will contribute her;financial expertise to the LLC in exchange for a 1/3 capital interest in;J&J. Given the balance sheet below reflecting the financial position of;J&J on the date member C is admitted, what are the tax consequences to;members A, B, and C, and to J&J when C receives her capital interest? If;instead, member C receives a 1/3 profit interest, what would be the tax;consequences to members A, B, and C, and to J&J?;83. On April;18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC;to Richard for $120,000. Prior to selling his interest, Robert had a basis in;Fruit Wonder of $80,000. Robert's basis included $5,000 of recourse debt and;$15,000 of nonrecourse debt that had been allocated to him. Immediately after;the purchase, what is Richard's tax basis in Fruit Wonder?;84. On March;15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership.;This partnership was created to sell a variety of cameras, picture frames, and;other photography accessories. The following items were contributed by each;partner in exchange for a 1/3 capital and profits interest;? Troy - cash of $3,000, inventory with a FMV and tax basis;$5,000, and a building with a FMV of $8,000 and adjusted basis of $10,000.;Additionally, the building is secured by a $10,000 mortgage.;? Peter - cash of $5,000, accounts payable with a FMV and;tax basis of $19,000, and land with a FMV and tax basis of $20,000.;? Sarah - cash of $2,000, accounts receivable with a FMV and;tax basis of $1,000, and equipment with a FMV of $26,000 and adjusted basis of;4,000. Also, the equipment is secured by a $23,000 note payable.;What is the partnership's inside basis in each asset? How;much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's;balance sheet reflecting the partners' capital accounts on both a tax basis and;704(b)/FMV basis.;85. In each of;the independent scenarios below, how does the partner or partnership determine;its holding period in the property received?;a. A partner contributes property in exchange for a;partnership interest;b. The partners

 

Paper#38069 | Written in 18-Jul-2015

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