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Exam 20: Forming and Operating Partnerships

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Question 61

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On June 12, 20X9, Kevin, Chris, and Candy Corporation came together to form Scrumptious Sweets General Partnership. Now, Scrumptious Sweets must decide which tax year-end to use. Kevin and Chris have calendar year-ends, and each holds a 35percent profits and capital interest. However, Candy Corporation has a September 30 ^th year-end and holds the remaining 30percent profits and capital interest. What tax year-end must Scrumptious Sweets adopt, and what rule mandates this year-end?

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Scrumptious Sweets must use a calendar y...

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Question 62

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On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G General Partnership. Their partnership agreement states that they will each receive a 50percent profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information: The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9. B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9.Complete the following table related to Mr. Blue's interest in B&G partnership:

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See table below:
Tax basis = Initial c...

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Question 63

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Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP) . In exchange for this interest, Gerald contributed a building with an 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?

In what order are the loss limitations for partnerships applied?

Why are guaranteed payments deducted in calculating the ordinary business income (loss)of partnerships and treated as a separately stated item for the partners that receive the payment?

Fred has a 45percent profits interest and 30percent capital interest in the SAP Partnership, and his tax basis before considering his share of SAP's current-year loss is $11,000. Included in his tax basis is a $2,600 share of recourse debt and a $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

Partners adjust their outside basis by adding nondeductible expenses and subtracting any tax-exempt income to avoid being double taxed.

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 $7,500. This includes his $2,000 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $14,500. If Tom bought Bob's LLC interest for $12,000, what would Tom's outside basis be in Freedom, LLC?

On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G General Partnership. Their partnership agreement states that they will each receive a 50 percent profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information: The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9. B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9. Complete the following table related to Mr. Blue's interest in B&G partnership:

Which of the following items is subject to the net investment income tax when an individual partner is a material participant in the partnership?

Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: Given these items, what amount of ordinary business income (loss)and what separately stated items should be allocated to each partner for the year?

On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $3,000 in cash and real property with a $4,000 tax basis secured by a $3,000 nonrecourse mortgage. High Air reported a $16,000 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?

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

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?

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 an FMV and tax basis of $5,000, and a building with an 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 an FMV of $27,000 and tax basis of $20,000.Sarah-cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an 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?

Tax elections are rarely made at the partnership level.

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $19,800 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $9,800. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $1,800, qualified nonrecourse debt increased from $0 to $2,800, and nonrecourse debt increased from $0 to $2,800. Finally, the Schedule K-1 Clint recently received from ABC reflected a $800 cash contribution he made to ABC during the year. Clint is not a material participant in ABC Partnership, and he received $9,800 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $19,800 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years.

Kim received a one-third 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 $23,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales-$143,000, cost of goods sold-$83,000, depreciation expense-$40,000, long-term capital gains-$8,000, qualified dividends-$5,300, and municipal Bond interest-$3,300. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

In what order should the tests to determine a partnership's year-end be applied?