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Exam 14: Partnerships and Limited Liability Entities

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Question 61

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Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest.Paul held the land for investment purposes.The partnership is in the real estate development business and will build residential housing (for sale to customers) on the land (the land is inventory to the partnership) .Paul will recognize:

A) $0 gain or loss.
B) $36,000 ordinary income.
C) $36,000 capital gain.
D) $60,000 ordinary income.
E) $60,000 capital gain.

F) B) and C)
G) A) and E)

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Question 62

Multiple Choice

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Which one of the following statements is true regarding a partner's personal liability for partnership assets?

A) LLC members can never be liable for entity debts.
B) In a limited partnership, all partners have limited liability for partnership debts.
C) In a limited liability partnership, a partner might be subject to liability for other partners' malpractice.
D) In a general partnership, all partners are liable for entity debts.
E) None of these statements is true.

F) B) and E)
G) All of the above

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Question 63

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Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

The total tax burden on entity income is greater for a partner in a partnership (up to 37% for an individual partner) than on a shareholder in a corporation (21% for an individual shareholder), so partnerships are used only in special situations.

Match each of the following statements with the numbered terms below that provide the best definition. a.Organizational choice of many large accounting firms. b.Partner's percentage allocation of current operating income. c.Might affect any two partners' tax liabilities in different ways. d.Partnership in which partners are liable only for any partner's malpractice. e.Amount that might be reported on either form 1065, page 1 or, on Schedule K. f.Transfer of asset to partnership followed by immediate distribution of cash to partner. g.Must have at least one general and one limited partner. h.Long-term capital gain might be recharacterized as ordinary income.i.All partners are jointly and severally liable for entity debts. j.Theory treating the partner and partnership as separate economic units. k.Partner's basis in partnership interest after tax-free contribution of asset to partnership.l.Partnership's basis in asset after tax-free contribution of asset to partnership. m.One way to calculate a partner's economic interest in the partnership.n.Owners are members. o.Theory treating the partnership as a collection of taxpayers joined in an agency relationship.p.Participates in management. q.Not liable for entity debts. r.No correct match provided. -Entity concept

During the current year, MAC Partnership reported the following items of receipts and expenditures: $600,000 sales, $80,000 utilities and rent, $200,000 salaries to employees, $20,000 guaranteed payment to partner Antonio for services to the partnership, investment interest income of $4,000, a charitable contribution of $8,000, and a distribution of $30,000 to partner Carl.Antonio is a 25% general partner.Based on this information, what information will be shown on Antonio's Schedule K-1? What income and deductions will Antonio report? What taxes and other calculations might Antonio need to report?

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 and Morgan both have a basis of $100,000 in their partnership interests.

The BMR LLC conducted activities that were eligible for a $20,000 credit for increasing research activities.In addition, the LLC paid foreign taxes of $1,200.On the partners' Schedules K-1, BMR will allocate the $20,000 credit, and it will provide the necessary information so the partners can calculate the foreign tax credit if they so choose.

BRW Partnership reported gross income from operations of $60,000, interest income of $3,000, utilities expense of $20,000, and a charitable contribution of $6,000.On its Schedule K, the partnership reports ordinary business income of $40,000, separately stated interest income ($3,000), and charitable contributions ($6,000).

The inside basis is defined as a partner's basis in the partnership interest.

Match each of the following statements with the terms below that provide the best definition. a.Adjusted basis of each partnership asset. b.Operating expenses incurred after entity is formed but before it begins doing business. c.Each partner's basis in the partnership. d.Reconciles book income to taxable income. e.Tax accounting election made by partnership. f.Tax accounting calculation made by partner. g.Tax accounting election made by partner. h.Does not include liabilities. i.Designed to prevent excessive deferral of taxation of partnership income. j.Amount that may be received by partner for performance of services for the partnership. k.Theory under which a partnership's recourse debt is shared among the partners. l.Will eventually be allocated to partner making tax-free property contribution to partnership. m.Partner's share of partnership items. n.Must generally be satisfied by any allocation to the partners. o.Justification for a tax year other than the required taxable year. p.No correct match is provided. -Business purpose

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years.This year, when his adjusted basis in the property was $250,000, he transferred the property to the newly formed PLA LLC in exchange for a one-third interest in it.PLA incurred $10,000 of transfer taxes and fees related to the property.It must treat the $260,000 basis in the property, fees, and expenses, as new MACRS property depreciable over 27.5 years.

Match each of the following statements with the numbered terms below that provide the best definition. a.Organizational choice of many large accounting firms. b.Partner's percentage allocation of current operating income. c.Might affect any two partners' tax liabilities in different ways. d.Partnership in which partners are liable only for any partner's malpractice. e.Amount that might be reported on either form 1065, page 1 or, on Schedule K. f.Transfer of asset to partnership followed by immediate distribution of cash to partner. g.Must have at least one general and one limited partner. h.Long-term capital gain might be recharacterized as ordinary income.i.All partners are jointly and severally liable for entity debts. j.Theory treating the partner and partnership as separate economic units. k.Partner's basis in partnership interest after tax-free contribution of asset to partnership.l.Partnership's basis in asset after tax-free contribution of asset to partnership. m.One way to calculate a partner's economic interest in the partnership.n.Owners are members. o.Theory treating the partnership as a collection of taxpayers joined in an agency relationship.p.Participates in management. q.Not liable for entity debts. r.No correct match provided. -Limited liability company

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits.During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000.The partnership distributed $10,000 cash to Binita.Her adjusted basis (outside basis) for her partnership interest at year-end is:

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs.JKL may deduct $5,000 each of organizational and startup costs, and the remaining costs ($1,000 of organizational costs and $45,000 of startup costs) may be amortized over 60 months.

Belinda owns a 30% profit and loss interest in the BOW LLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities.Belinda guarantees a $40,000 LLC debt.Remaining liabilities (not guaranteed by any of the LLC members) are $100,000.Belinda's basis in the LLC is $100,000.

The MOG Partnership reports ordinary income of $60,000, long-term capital gain of $12,000, and tax-exempt income of $12,000.The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income.Their allocation of ordinary income will be reduced accordingly, and Olivia will be allocated a proportionately greater share of ordinary income.(In other words, each partner will receive allocations totaling one-third of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket. a.Describe the elements that must be included in a partnership agreement in order for an allocation to have economic effect. b.Discuss whether or not the MOG allocation would be permitted and provide your reasoning.

Match each of the following statements with the terms below that provide the best definition. a.Adjusted basis of each partnership asset. b.Operating expenses incurred after entity is formed but before it begins doing business. c.Each partner's basis in the partnership. d.Reconciles book income to taxable income. e.Tax accounting election made by partnership. f.Tax accounting calculation made by partner. g.Tax accounting election made by partner. h.Does not include liabilities. i.Designed to prevent excessive deferral of taxation of partnership income. j.Amount that may be received by partner for performance of services for the partnership. k.Theory under which a partnership's recourse debt is shared among the partners. l.Will eventually be allocated to partner making tax-free property contribution to partnership. m.Partner's share of partnership items. n.Must generally be satisfied by any allocation to the partners. o.Justification for a tax year other than the required taxable year. p.No correct match is provided. -Inside basis

Which one of the following is not an item that should be documented in the partnership (or LLC operating) agreement?