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CHAPTER 14 DISCUSSION QUESTIONS AND PROBLEMS

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CHAPTER 14;DISCUSSION QUESTIONS AND PROBLEMS;Discussion Questions;1. Discuss the formation of a partnership. Is any gain or loss recognized? Explain?;2. What entity forms are considered partnerships for federal income tax purposes?;3. How does taxation for the corporate form and the partnership form differ?;4. What is the concept of basis? In your discussion, differentiate between outside basis and inside basis.;5. Elaborate on the term basis-in ? basis-out. What does that phrase mean in the context of a partnership formation?;6. How can two partners, each with a 50% interest in a partnership, have different amounts of outside basis at the formation of a partnership? Shouldn?t the two partners contribute the same amount to have the same interest?;7. When a partnership receives an asset from a partner, does the partnership ever recognize a gain? What is the basis of the asset in the hands of the partnership after contribution?;8. Discuss the concept of steps into the shoes. Does how this concept pertains to the partnership, the partners, or both?;9. Why would smaller partnerships (and other businesses for that matter) use only the tax basis of accounting, which does not follow GAAP?;10. How is depreciation calculated by the partnership when a partner contributes a business asset?;11. Discuss the concepts of ordinary income and separately stated items concerning partnerships. When must a partnership item of income or loss be separately stated and why?;12. Can a partner have a salary from a partnership? Why? What is a guaranteed payment?;13. Are guaranteed payments treated as an ordinary income items or as separately stated items?;14. Is the Section 179 expense deduction allowed for partnerships? If so, is Section 179 an ordinary income item or a separately stated item? Why?;15. If a partner owns a 20% interest, does that necessarily mean that he or she will receive 20% of the net income from the partnership? Explain?;16. Is partnership income considered self-employment income? If so, how is it calculated?;17. Why must some income and gain items be separately stated in a partnership?;18. Explain why nontaxable income and nondeductible expenses increase or reduce outside basis?;19. When is it mandatory that a partner calculate his or her partner interest basis (outside basis)? What items affect the outside basis of a partner?;20. How does a partner?s share of partnership liabilities affect his or hers outside basis?;21. The general rule is that partners do not recognize any gain when he or she receives a distribution. In what circumstances might a partner recognize a gain on a current distribution?;22. Define precontribution gain? What causes a partner to recognize it?;23. Describe the rules concerning the basis of property distributed to a partner. How does the concept of ?basis-in, basis-out? apply to partnership distributions?;24. How can a partnership interest be disposed of? Which disposal method is more likely to produce a gain or loss? How is the gain or loss calculated?;25. How is the outside basis of a partner allocated to assets in a liquidation of the partnership interest? Include in your answer the effects of distributing cash, ordinary assets, ?1231 assets, and capital assets.;Multiple Choice;26. Carmin performs services in exchange for a 25% interest in Real Estate Rental Partnership. The services were worth $15,000. The tax implications to Carmin are;a. No taxable income and a partnership interest with a basis of $0.;b. No taxable income and a partnership interest with a basis of $15,000.;c. $15,000 of taxable income and a partnership interest with a basis of $0.;d. $15,000 of taxable income and a partnership interest with a basis of $15,000.;27. Billy contributes land with an FMV of $7,000 and a basis of $3,000 to a partnership in return for a 5% partnership interest in ABCD partnership. Billy?s basis in the partnership is;a. $0.;b. $3,000.;c. $7,000.;d. Cannot be determined.;28. Billy contributes land with a FMV of $7,000 and a basis of $3,000 to a partnership in return for a 5% partnership interest in ABCD partnership. ABCD?s basis in the land is;a. $0.;b. $3,000.;c. $7,000.;d. Cannot be determined.;29. Jake has a Schedule C with the following assets;Basis FMV;Cash $4,500 $4,500;A/R 0 10,000;Building 95,000 155,000;Jake contributes these assets to form AJ?s Partnership and receives a 50% interest. His basis in the partnership interest is;a. $ 0.;b. $ 99,500.;c. $159,500.;d. $169,500.;30. Jake has a Schedule C with the following assets;Basis FMV;Cash $4,500 $4,500;A/R 0 10,000;Building 95,000 155,000;Jake contributes these assets to form AJ?s Partnership and receive a 50% interest. AJ?s basis in the assets is;a. Cash $4,500, A/R $0, building $155,000.;b. Cash $4,500, A/R $10,000, building $155,000.;c. Cash $4,500, A/R $0, building $95,000.;d. Cash $4,500, A/R $10,000, building $95,000.;31. Allie contributed the following business assets to ASW Partnership on August 1, 2006;Basis FMV Date Purchased by Allie;Building $175,000 $300,000 07/01/93;Inventory $ 50,000 $ 100,000 05/08/03;What is the holding period for the building and the inventory to ASW Partnership?;a. Building ? long-term capital or Section 1231 asset.;b. Building ? short-term ordinary asset.;c. Inventory ? short-term ordinary asset.;d. Both a. and c.;32. Allie contributed the following business assets to ASW Partnership on August 1, 2006;Basis FMV Date Purchased by Allie;Building $175,000 $300,000 07/01/93;Inventory $ 50,000 $100,000 05/08/03;What is the basis in the inventory and the building to ASW?;a. Building $0, Inventory $ 0.;b. Building $175,000, Inventory $ 50,000.;c. Building $175,000, Inventory $100,000.;d. Building $300,000, Inventory $100,000.;33. All of the following are considered ordinary items to a partnership except;a. Gross Profit.;b. Salary and Wages.;c. Taxes and Licenses.;d. Capital Gains and Losses.;34. Styron is a partner in Styron, Lee, & Jane partnership. Styron owned 25% from January 1, 2006 to June 30, 2006, when he bought Lee?s 25% interest. He owed 50% for the rest of the year. The partnership had ordinary income of $88,000 and $12,000 in long-term capital gains. Barring any special allocations in a partnership agreement, Styron?s share of ordinary income for the year is;a. $ 11,000.;b. $ 33,000.;c. $ 88,000.;d. $100,000.;35. All of the following are considered separately stated items to a partnership except;a. Charitable contributions.;b. Section 179 expense.;c. Depreciation..;d. Capital gains and losses.;36. All of the below items from a partnership go into the calculation of a partners self-employment income except;a. Share of ordinary income.;b. Dividend income.;c. Guaranteed payment.;d. Section 179 expense.;37. A partner?s share of income and separately stated items is reported to the partner via what form;a. Form 1065.;b. Form 1040 - Schedule SE.;c. Form 1065, Schedule K-1.;d. Form 1065, Schedule D.;38. Retish is a 10% partner in a partnership. The partnership pays Retish a guaranteed payment of $45,000 per year. If the partnership?s ordinary income is $38,000 before considering the guaranteed payment, the partnership will report ordinary income of how much?;a. $ ($7,000).;b. $ 0.;c. $ 33,500.;d. $ 38,000.;39. The calculation of a partner?s basis in his partnership interest is mandatory in which of the following situations;a. In a partnership loss year.;b. At the liquidation or disposition of a partner?s interest.;c. When the partner receives nonliquidating distributions.;d. All of the above.;40. Julianna and Dennis are equal partners in a partnership. When forming the partnership, Dennis contributed a building with an FMV of $250,000 and a basis of $150,000. During the first year of operations, the partnership earned $70,000 in ordinary income and tax-exempt interest of $1,200. Assuming no special allocations, Dennis?s basis in the partnership interest at the end of the year is;a. $ 0.;b. $150,000.;c. $185,600.;d. $221,200.;41. All of the following items affect the basis of a partnership interest except;a. Cash or property contributed.;b. Guaranteed payments.;c. Partnership income or loss items.;d. A partner?s share of recourse liabilities.;42. Partner Beth has a basis of $10,000 in a partnership at the beginning of the year. She receives $6,000 in cash distributions, her distributive share of income is $5,000, and she receives a land distribution with a basis of $8,000 (FMV $20,000). What is Beth?s partnership interest basis at the end of the year?;a. $ 0.;b. $ 1,000.;c. $ 9,000.;d. $10,000.;43. Molly, a 30% partner in XYZ partnership, has a basis of $55,000 in her partnership interest. Molly receives a cash distribution of $54,000 at year-end. The distribution has what tax effect on Molly;a. No gain or loss is recognized and she has a $55,000 basis in her partnership interest.;b. No gain or loss is recognized and she has a $1,000 basis in her partnership interest.;c. She has a recognized gain of $37,500 and a basis of $0 in her partnership interest.;d. She has a recognized gain of $55,000 and a basis of $0 in her partnership interest.;44. A partner recognizes a gain on a current distribution in which of the following situations?;a. When a partner receives a property distribution with a basis in excess of her or his basis.;b. When money or marketable securities are distributed in excess of the partner?s basis.;c. When the current distribution triggers a precontribution gain.;d.. Both b. and c.;45. Wendy contributes land to a partnership with a basis of $24,000 and an FMV of $36,000 in 2004. In 2006, when the FMV of the land is $38,000, the partnership distributes the land to Calvin, another partner. Which of the following is true?;a. Wendy recognizes no gain or loss.;b. Calvin recognizes a gain of $14,000.;c. Wendy recognizes a gain of $12,000.;d. Calvin has a basis of $38,000 in the land.;46. All of the following statements are correct concerning liquidating distributions of a partnership except;a. A loss can never be recognized.;b. A distribution of money in excess of basis causes a gain to be recognized..;c. Basis in a property distribution is allocated essentially the same as a nonliquidating distribution.;d. Generally, no gain or loss is recognized when the liquidating distribution consists only of property.;47. On November 1, Ashton sells her interest in XYZ partnership to Wayne for $200,000 cash and a release of liability of $30,000. Ashton?s basis at the beginning of the year was $125,000 (including the $30,000 of liability). Ashton?s share of income through November 1 was $45,000 and she received a $15,000 cash distribution earlier in the year. What are the tax consequences to Ashton on the sale of her partnership interest?;a. $ 0 tax effects.;b. $ 45,000 capital gain;c. $ 75,000 capital gain;d. $105,000 capital gain;Problems;48. Denise contributes the following assets to a partnership in exchange for a 25% partnership interest;FMV Basis;Cash $ 20,000 $ 20,000;Office equipment $ 12,000 $ 5,000;Auto $ 20,000 $ 6,000;What is Denise?s beginning basis in her partnership interest?;49. On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest. She purchased the equipment three years ago.;a. What is Patti?s basis in her partnership basis?;b. What is the Patti?s holding period of the partnership interest?;c. What is the basis of the equipment in the hands of the partnership?;d. What is the holding period of the equipment in the hands of the partnership?;e. How will the partnership depreciate the equipment in the year of contribution?;50. Dennis, Suzy, and Katherine form a partnership. Dennis and Suzy give equipment and a building, respectively. Katherine agrees to perform all of the accounting and office work in exchange for a 10% interest.;FMV Basis Partnership %;Dennis?s equipment $100,000 $ 10,000 45%;Suzy?s building $100,000 $ 45,000 45%;Katherine?s services $ 0 $ 0 10%;a. Do any of the partners recognize any gain? If so, how much and why?;b. What is the basis for each partner in his or her partnership interest?;c. What is the basis to the partnership of each asset?;51. Moe, Johnny, and Raymond form a partnership and contribute the following assets.;FMV Basis Partnership %;Moe?s inventory $ 50,000 $ 10,000 33.3%;Johnny?s building $110,000 $ 80,000 33.3%;Raymond?s cash $ 50,000 $ 50,000 33.3%;Johnny?s building has a mortgage of $60,000 which the partnership assumes.;a. Do any of the partners recognize any gain? If so, how much and why?;b. What is the basis for each partner in their partnership interest?;c. What is the basis to the partnership in each asset?;d. How would your answer change with respect to Johnny if the basis in the building was $45,000?;52. Barry and Kurt are equal partners in the BK partnership. Barry receives a guarantee payment of $55,000. In addition to the guaranteed payment, Barry withdraws $10,000 from the partnership. The partnership has $24,000 in ordinary income during the year.;a. How much income must Barry report from BK partnership?;b. What is the effect on Barry?s partnership basis?;53. Kerry is a partner in the Kerry, Davis, Smith & Jones partnership. Kerry owned 25% from January 1, 2006 to June 30, 2006 when he bought Jones?s 25% interest. He owed 50% for the rest of the year. The partnership had ordinary income of $146,000 and $15,000 in long-term capital gains. Barring any special allocations in a partnership agreement, what is Kerry?s share of income?;54. Wade has a beginning basis in a partnership of $23,000. His share of income and expense from the partnership consist of the following amounts;Ordinary income $43,000;Guaranteed payment $12,000;Long-term capital gain $15,500;?1231 gain $ 4,300;Charitable contributions $ 2,000;?179 expense $18,000;Cash distribution $ 6,000;a. What is Wade?s self-employment income?;b. Calculate Wade?s basis at the end of the year?;55. Bryan and Gayle are equal partners in BG Partnership. The partnership reports the following items of income and expense;Ordinary income from operations $13,000;Interest income $ 5,000;Long-term capital gains $23,000;Section 179 expense $55,000;Charitable contributions $ 3,000;a. Which of these items are considered separately stated items? How will these items be reported to the partners? What form?;b. Where will these amounts be reported by the partners?;56. Kim has a basis in her partnership interest of $12,000 and receives a distribution from the partnership of $6,000 cash and equipment with a basis $8,000 ($12,000 FMV).;a. How much gain or loss must Kim recognize on the distribution?;b. What is Kim?s ending partnership basis?;c. What is Kim?s basis in the equipment?;57. Zach contributes land with a FMV of $25,000 and a basis of $14,000 to a partnership on April 5, 2004. On June 6, 2006, the partnership distributed the land to Art a partner in the same partnership. At the distribution, the land had a FMV of $29,000.;a. What is the effect of the distribution on Zach, if any?;b. What is the effect of the distribution to Art?;58. Roberto has a basis of $6,000 in a partnership at the beginning of the year. He receives $7,000 in cash distributions, his distributive share of income is $3,500, and he receives a land distribution with a basis of $6,000 (FMV $12,000).;a. Is Roberto required to recognize any gain? If so, how much is the gain?;b. What is Roberto?s basis in the land?;c. What is Roberto?s ending basis in his partnership interest?;59. Rhonda has a basis of $8,000 in a partnership at the beginning of the year. She receives $12,000 in cash distributions and her distributive share of income is $2,500.;a. Is Rhonda required to recognize any gain? If so, how much?;b. What is Roberto?s ending basis in his partnership interest?;60. Rebecca has $40,000 basis in her partnership interest when she receives liquidating distributions from the partnership. She receives cash of $24,000 and equipment with a $12,000 basis to the partnership. What are the tax consequences of the liquidating distributions to Rebecca?;61. Calvin purchased a 40% partnership interest for $43,000 in February 2004. His share of partnership income was $22,000 in 2004, $25,000 in 2005, and $12,000 in 2006. He made no additional contributions to or withdrawals from the partnership. On December 18, 2006, Calvin sold his partnership interest for $103,000. What is his gain or loss on the sale of his partnership interest?;Tax Return Problem #1;Paul and Wayne equally own the PW Partnership. Paul?s basis was $30,000 and Wayne?s basis was $22,000 at the beginning of the year. PW Partnership had the following income and expense items;Sales $330,000;Cost of goods sold 220,000;Guaranteed payment to Paul 40,000;Rent expense 24,000;Depreciation 33,000;Interest expense 4,000;Tax-exempt income 3.000;Health insurance premiums for Paul 3,600;Health insurance premiums for Wayne 3.600;a. Prepare page 1 and page 3 of form 1065 - ordinary income and separately stated items for the partnership.;b. Calculate Paul?s basis in his partnership interest.;c. Calculate Wayne?s basis in his partnership interest.;Tax Return Problem #2;Phil Williams and Liz Johnson are 60% and 40% partners, respectively, in Williams & Johnson Partnership. Their beginning basis is $33,000 for Phil and $31,000 for Liz. The partnership had the following activity during the year.;Income $336,123;Interest income 1,259;Dividend income (qualified) 4,586;Long-term capital gains 13,458;Total Revenue $355,426;Expenses;Salaries and wages (non-partners) $ 47,000;Guaranteed payments;Williams 75,000;Johnson 50,000;Depreciation (MACRS ? includes $9,000;?179 Expense) 41,888;Interest expense 5,220;Taxes and licenses 15,548;Meals and entertainment (100%) 15,257;Auto 5,254;Insurance (non-partner health) 6,000;Accounting and legal 2,800;Repairs 1,200;Charitable contributions 2,500;Payroll penalties 500;Total Expenses $268,167;Net Income $ 87,259;a. Calculate the ordinary income for the partnership and prepare page 1 of Form 1065.;b. Prepare page 3 of Form 1065?;c. What is the ending basis for Phil Williams?;d. What is the ending basis for Liz Johnson?

 

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