Chapter 21 - Test Bank PDF

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CHAPTER 21 Partnerships 2549. In a limited partnership, all partners are protected from debts of the partnership. a. True *b. False 2550. A limited liability company offers all “members” protection from claims by the LLC’s creditors. *a. True b. False 2551. A limited liability limited partnership (LLLP) is a limited partnership (LP) in which all partners, including the general partners, are protected from debts of the partnership. *a. True b. False

2552. The governing document of a limited liability company (LLC) is a partnership agreement which should spell out the partners’ rights and obligations. a. True *b. False 2553. COMPREHENSIVE VOLUME CHAPTER 21PARTNERSHIPS Question TF #5 The taxable income of a partnership flows through to the partners, who report the income on their tax returns. *a. True b. False 2554. The partnership reports each partner’s share of income to the partner in a single amount on Form 1099. a. True *b. False

2555. On Form 1065, partners’ capital accounts should be determined using the same method on Schedule L, Schedule M-2, and the Schedules K-1 prepared for the partners. a. True *b. False 2556. The amount of a partnership’s income and loss from operating activities is combined with separately stated income and expenses in determining the partnership’s net income (loss). This amount is reconciled to book income on the partnership’s Schedule M-1 or Schedule M-3. *a. True b. False

CHAPTER 21 Partnerships 2557. An example of the “entity concept” underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income. a. True *b. False 2558. A partner has a profit-sharing percent, a loss-sharing percent, and a capital-sharing ownership percent. Depending on the provisions in the partnership agreement, these amounts may or may not be the same for a given partner. *a. True b. False

2559. The “outside basis” is defined as a partner’s basis in the partnership interest. *a. True b. False 2560. Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership. A disguised sale is an exception to nonrecognition of gain or loss under § 721. *a. True b. False 2561. Morgan and Kristen formed an equal partnership on August 1 of the current year. Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000. Kristen contributed equipment with a basis of $42,000 and a value of $100,000. Kristen’s tax basis in her interest is $42,000; Morgan’s tax basis is $78,000. *a. True b. False 2562. Tyler and Travis formed the equal T&T Partnership during the current year, with Tyler contributing $300,000 in cash and Travis contributing land (basis of $120,000, fair market value of $160,000) and inventory (basis of $30,000, fair market value of $140,000). Travis recognizes no gain or loss on the contribution and his basis in his partnership interest is $150,000. *a. True b. False 2563. Justin and Kevin formed the equal JK Partnership during the current year, with Justin contributing $60,000 in cash and Kevin contributing land (basis of $40,000, fair market value of $30,000) and equipment (basis of $0, fair market value of $30,000). Kevin recognizes a $20,000 gain on the contribution and his basis in his partnership interest is $60,000. a. True *b. False

CHAPTER 21 Partnerships 2564. Julie owns property that is treated as a capital asset in her hands. She contributed a parcel of land (basis $60,000; fair market value $58,000) to a real estate partnership, which will hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on sale of the property. a. True *b. False

2565. If the partnership properly makes an election for treatment of a specific tax item, the partner is bound by that treatment. *a. True b. False 2566. JLK Partnership incurred $15,000 of organizational costs and $75,000 of startup costs in 2011. JKL may deduct $5,000 each of organizational and startup costs, and the remaining costs ($10,000 of organizational costs and $70,000 of startup costs) may be amortized over 180 months. a. True *b. False

2567. The MNO Partnership, a calendar year taxpayer, was formed on July 1 of the current year and started business on October 1. MNO incurred $30,000 in startup costs. MNO may deduct $5,000 and amortize the remaining $25,000 over 120 months starting in July. a. True *b. False 2568. Syndication costs arise when partnership interests are being marketed to investors. These costs are amortized over 180 months. a. True *b. False 2569. COMPREHENSIVE VOLUME CHAPTER 21PARTNERSHIPS Question TF #21 A partnership cannot use the cash method of accounting if one of the partners is a C corporation. a. True *b. False 2570. ABC, LLC is equally-owned by three corporations. Two corporations have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use a June 30 year end under the majority partners’ tax year rule because more than 50% of the partnership’s capital and profits is owned by partners with the same taxable year. *a. True b. False

CHAPTER 21 Partnerships 2571. PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end. *a. True b. False 2572. A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction. *a. True b. False 2573. The JPM Partnership is a US-based manufacturing company. JPM calculates the domestic production activities deduction (§ 199) and deducts that amount on its Form 1065. a. True *b. False 2574. COMPREHENSIVE VOLUME CHAPTER 21PARTNERSHIPS Question TF #26 A partnership’s allocations of income and deductions to the partners are required to be proportionate to the partners’ percentage ownership of partnership capital in order to meet the substantial economic effect tests. a. True *b. False 2575. Tom and William are equal partners in the TW Partnership. Just before TW liquidated, Tom’s capital account balance was $50,000 and William’s capital account balance was $30,000. To meet the substantial economic effect requirements, any liquidating cash distribution must be allocated equally between the partners. a. True *b. False 2576. Henry contributes property valued at $60,000 (basis $50,000) in exchange for a 25% interest in the HIKE Partnership. If the property is later sold for $80,000, gain of $7,500 will be allocated to Henry. a. True *b. False 2577. Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. If her share of partnership liabilities on the last day of the partnership year is $20,000, her outside basis for her partnership interest at the end of the year is $65,000.

CHAPTER 21 Partnerships *a. True b. False

2578. Emma’s basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming the LLC had no liabilities at the beginning or the end of the year, Emma’s ending basis in her LLC interest is $88,000. a. True *b. False 2579. During the current year, John and Ashley form the JA Partnership and agree to share profits and losses equally. Ashley contributes land with a fair market value of $80,000 (subject to a $30,000 nonrecourse mortgage). On the contribution date, Ashley’s adjusted basis in the land is $40,000. Immediately after formation, Ashley’s partnership outside basis is $25,000. *a. True b. False 2580. Julie and Kate form an equal partnership during the current year. Julie contributes cash of $160,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $100,000. As a result of these transactions, Kate has a basis in her partnership interest of $40,000. a. True *b. False 2581. The partnership must allocate nonrecourse debt among the partners according to the “constructive liquidation scenario.” a. True *b. False

2582. Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt. *a. True b. False 2583. If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss. a. True *b. False

2584. Hardy’s basis in his partnership interest was $5,000 at the beginning of the tax year. For the year, his share of the partnership’s loss was $6,000, and he also received a distribution of $3,000. Hardy can deduct

CHAPTER 21 Partnerships a $2,000 loss, and the remaining $4,000 loss is suspended until a year in which he has adequate basis. *a. True b. False 2585. COMPREHENSIVE VOLUME CHAPTER 21PARTNERSHIPS Question TF #37 Nicholas, a 1/3 partner with a basis in the interest of $80,000 at the beginning of the year, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the guaranteed payment was $20,000. Nicholas must report a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income. *a. True b. False 2586. William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership income. a. True *b. False 2587. Maria owns a 60% interest in the KLM Partnership. Four years ago her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold the land to the partnership for $75,000. The partnership immediately started using the land as a parking lot for its employees. Maria’s recognized gain of $15,000 on the sale is capital—not ordinary. a. True *b. False

2588. One of the disadvantages of the partnership form is that the partner’s share of the partnership’s taxable income is taxed to the partner, regardless of whether or not distributed. *a. True b. False 2589. A property distribution from a partnership to a partner is generally taxable to the partner. a. True *b. False

2590. For Federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders. a. True *b. False

CHAPTER 21 Partnerships 2591. A distribution cannot be “proportionate” if only one partner receives assets from the partnership. a. True *b. False 2592. For income tax purposes, proportionate and disproportionate distributions from a partnership are treated similarly. a. True *b. False

2593. Generally, gain is recognized on a proportionate current or liquidating distribution if the fair market value of property distributed exceeds the partner’s basis in the partnership interest. a. True *b. False 2594. In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash distributed exceeds the partner’s basis in the partnership interest. *a. True b. False 2595. In a proportionate nonliquidating distribution, cash is deemed to be distributed first, followed by unrealized receivables and inventory and, last, capital and other assets. *a. True b. False 2596. For purposes of determining gain on a current distribution to a partner, a distribution of cash includes relief of a partner’s share of partnership liabilities and certain distributions of marketable securities. *a. True b. False

2597. The LMO Partnership distributed $30,000 cash to Emma in a proportionate, nonliquidating distribution. Emma’s basis in her partnership interest was $25,000 immediately before the distribution. As a result of the distribution, Emma’s basis is reduced to $0 and she recognizes a $5,000 gain. *a. True b. False 2598. Jared owns a 40% interest in the capital and profits of the JAJ Partnership. Immediately before he receives a proportionate nonliquidating distribution from JAJ, the basis of his partnership interest is $60,000. The distribution consists of $40,000 in cash and land with a fair market value of $25,000. JAJ’s adjusted basis in the land immediately before the distribution is $30,000. As a result of the distribution, Jared recognizes no gain or loss and his basis in the land is $20,000.

CHAPTER 21 Partnerships *a. True b. False

2599. Jeremy receives a proportionate nonliquidating distribution from the JKL Partnership when the basis of his interest is $100,000. The distribution consists of cash of $25,000, land with a basis of $30,000 and a fair market value of $65,000, and inventory with a partnership basis of $50,000 and fair market value of $60,000. As a result of this distribution, Jeremy recognizes a $50,000 gain and takes a $65,000 basis in the land and a $60,000 basis in the inventory. a. True *b. False 2600. Shelby, a partner in the STU partnership, received a proportionate nonliquidating distribution of $50,000 cash, unrealized receivables with a basis of $0 and a fair market value of $40,000, and land with a basis of $35,000 and a fair market value of $25,000. Her basis in the partnership interest immediately before the distributions was $70,000. She will recognize $0 gain on the distribution, and her basis in the receivables and land will be $0 and $20,000 respectively. *a. True b. False

2601. Matt, a partner in the MB Partnership, receives a proportionate, nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000. Matt’s basis in the partnership is $10,000 before the distribution. In this situation, Matt will recognize a $6,000 gain, take a $16,000 basis in the property, and his basis in the partnership interest is reduced to zero. a. True *b. False

2602. Tim and Darby are equal partners in the TD Partnership. Partnership income for the year is $60,000. Tim needs cash in order to pay tax on his share of the partnership income, but Darby wants to leave the cash in the partnership for expansion. If the partners agree, it is acceptable for TD to distribute $8,000 to Tim, and no cash or other property to Darby. *a. True b. False 2603. Marcie is a 40% member of the M&A LLC. Her basis is $40,000 immediately before the LLC distributes to her $30,000 of cash and land (basis to the LLC of $20,000 and fair market value of $25,000). As a result of the proportionate, nonliquidating distribution, Marcie recognizes a gain of $15,000 and her basis in the land equals its fair market value of $25,000. a. True *b. False 2604. COMPREHENSIVE VOLUME CHAPTER 21PARTNERSHIPS Question TF #56 Pat is a 40% member of the P&J LLC. Her basis is $30,000 immediately before the LLC distributes to her $40,000 of cash and land (basis to the partnership of $25,000 and fair market value of $50,000). As a result of the proportionate nonliquidating distribution, Pat recognizes a gain of $10,000 and her basis in the land

CHAPTER 21 Partnerships is $0. *a. True b. False 2605. In a proportionate liquidating distribution, RST Partnership distributes to partner Riley cash of $30,000, accounts receivable (basis of $0 and fair market value of $40,000), and land (basis of $65,000 and fair market value of $50,000). Riley’s basis was $40,000 before the distribution. On the liquidation, Riley recognizes a gain of $0, and her basis is $10,000 in the land and $0 in the accounts receivable. *a. True b. False

2606. In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000 and fair market value of $8,000), and land (basis of $50,000 and fair market value of $60,000). William’s basis was $75,000 before the distribution. On the liquidation, William recognizes no gain or loss, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land. a. True *b. False 2607. Zach’s partnership interest basis is $80,000. Zach receives a proportionate, liquidating distribution from a liquidating partnership of $60,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $26,000. Zach assigns a basis of $20,000 to the inventory and recognizes no gain or loss. *a. True b. False 2608. Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000. His basis in his partnership interest was $15,000 immediately before the distribution. Carlos assigns a basis of $5,000 to the inventory, and recognizes a $2,000 capital loss. *a. True b. False

2609. In a proportionate liquidating distribution in which the partnership is also liquidated, Macy received cash of $10,000 and inventory (basis of $18,000 and fair market value of $32,000). Immediately before the distribution, Macy’s basis in the partnership interest was $40,000. Macy recognizes no gain or loss, and her basis in the inventory is $30,000. a. True *b. False

2610. In a proportionate liquidating distribution in which the partnership is also liquidated, Ralph received cash of $30,000, accounts receivable (basis of $0 and fair market value of $20,000), and a desk (basis of $0 and fair market value of $1,000). Immediately before the distribution, Ralph’s basis in the partnership interest was $40,000. Ralph realizes and recognizes a loss of $10,000, and his basis is $0 in both the

CHAPTER 21 Partnerships accounts receivable and the desk. a. True *b. False 2611. Tyler’s basis in his partnership interest is $110,000, including his share of partnership debt. Sarah buys Tyler’s partnership interest for $60,000 cash and she assumes Tyler’s $90,000 share of the partnership’s debt. If the partnership owns no hot assets, Tyler will recognize a capital loss of $50,000. a. True *b. False 2612. Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year. Katie also assumed Beth’s share of the partnership’s liabilities. Beth’s basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities. The partnership’s income for the entire year was $100,000, and Beth’s share of partnership debt was $10,000 as of the date she sold the partnership interest. Assume the partnership has no hot assets and that its income is earned evenly throughout the year. Beth recognizes a gain of $12,500 on the sale. *a. True b. False 2613. Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500. The partnership’s assets consist of cash ($100,000), land (basis of $90,000; fair market value of $70,000), and inventory (basis of $40,000; fair market value of $60,000). Nick’s basis in his partnership interest was $57,500. On the sale, Nick will recognize ordinary income of $5,000 and a capital loss of $5,000. *a. True b. False 2614. A partnership has accounts receivable with a basis of $0 and a fair market value of $20,000 and depreciation recapture potential of $30,000. All o...