Question 1

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Accepted Answer

A) True 
 B)False  True

Question 2

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?

Accepted Answer

Guaranteed payments are conceptually sim...

Question 3

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?

Accepted Answer

A)   Passive activity income
B)   Portfolio income
C)   Active business income
D)  Any of these types of income can be offset.
E)  None of theseF) A) and E)
G) A) and C)

Question 4

Partnerships may maintain their capital accounts according to which of the following rules?

Accepted Answer

A)   GAAP
B)   704(b) 
C)   Tax
D)  Any of these
E)  Only GAAP and 704(b) F) D) and E)
G) A) and E)

Question 5

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?

Accepted Answer

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 X2E) None of the above
F) A) and C)

Question 6

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?

Accepted Answer

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 theseF) None of the above
G) A) and B)

Question 7

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% 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:
 $$\begin{array} { | l | r | } 
\hline \text { Gross receipts from sales } & \$ 150,000 \
\hline \text { Cost of sales } & ( \$ 220,000 ) \
\hline \text { Gross profit } & ( \$ 70,000 ) \
\hline \text { Guaranteed payments to Mr. Blue } & ( \$ 36,000 ) \
\hline \text { Interest paid on business debt } & ( \$ 3,000 ) \
\hline \text { Dividend income } & \$ 500 \
\hline \text { Tax exempt interest } & \$ 1,500 \
\hline \text { Operating expenses } & ( \$ 138,000 ) \
\hline \text { Depreciation expense } & ( \$ 9,000 ) \
\hline \text { Sec. 1231 Gains } & \$ 8,000 \
\hline
\end{array}$$

Accepted Answer

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

Question 8

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?

Accepted Answer

$$\begin{array} { | l | r | r | r | r | r | } 
\hline { \text { J\&u Limited Liablity Company } } \
\hline & \text { Basis } & \text { FMV } & & \text { Basis } & \text { FMN } \
\hline \text { Cash } & 20,000 & 20,000 & \begin{array} { r } 
\text { Account } \
\text { Payable }
\end{array} & 7,000 & 7,000 \
\hline \text { Inventory } & 5,000 & 5,000 & \begin{array} { r } 
\text { Mortgage } \
\text { Payable }
\end{array} & 20,000 & 20,000 \
\hline \text { Equipment } & 10,000 & 17,000 & & & \
\hline \text { Building } & 30,000 & 45,000 & \text { A - Capital } & 22,000 & 30,000 \
\hline & & & \text { B - Capital } & 16,000 & 30,000 \
\hline \text { Total Assets } & \mathbf { 6 5 , 0 0 0 } & \mathbf { 8 7 , 0 0 0 } & \begin{array} { r } 
\text { Total Liab. \& } \
\mathbf { 0 E }
\end{array} & \mathbf { 6 6 , 0 0 0 } & \mathbf { 8 7 , 0 0 0 } \
\hline
\end{array}$$ If member C received a 1/3 capital interest for her services, the following tax consequences would result:
• A is allocated a $10,000 expense reducing A's FMV capital account to $20,000 and his tax basis capital account to $12,000. His tax basis would include a 1/3 share of the LLC debt or $9,000.
• B is allocated a $10,000 expense reducing B's FMV capital account to $20,000 and his tax basis capital account to $6,000. His tax basis would include a 1/3 share of the LLC debt or $9,000.
• C reports ordinary income of $20,000 as a guaranteed payment for services provided. C's FMV and tax basis capital account will equal $20,000. Her tax basis would include a 1/3 share of the LLC debt or $9,000.
• J&J, LLC-No gain or loss recognized and no adjustments to assets and liabilities. Member's capital accounts are adjusted as indicated.
If member C received a 1/3 profits interest for her services, the following tax consequences would result:
• A - No deduction would be available to member A because member C would not receive anything if the LLC were to liquidate immediately after the contribution. His tax basis would include a 1/3 share of the LLC debt or $9,000.
• B - No deduction would be available to member B because member C would not receive anything if the LLC were to liquidate immediately after the contribution. His tax basis would include a 1/3 share of the LLC debt or $9,000.
• C - Member C would not recognize any income because the liquidation value of her partnership interest is zero with a profits interest. Additionally, member C would have $0 in both her FMV and tax basis capital accounts. Her tax basis would include a 1/3 share of the LLC debt or $9,000. From this point forward, C's capital accounts will be adjusted to reflect her share of future LLC profits and losses.
• J&J LLC - No gain or loss recognized and no adjustments to assets and liabilities.

Question 9

KBL, Inc., AGW, Inc., Blaster, Inc., Shiny Shoes, Inc., and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9. Now, Shoes Galore must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Shoes Galore use and what rule requires this year-end?

Accepted Answer

$$\begin{array}{l}
\text { Shoes Galore Partnership }\
\begin{array} { | l | c | c | c | } 
\hline & \text { Year-End } & \text { Profits } & \text { Capital } \
\hline \text { KBL, Inc. } & 1 / 31 & 25 \% & 25 \% \
\hline \text { AGW, Inc. } & 1 / 31 & 20 \% & 20 \% \
\hline \text { Blaster, Inc } & 3 / 31 & 4 \% & 4 \% \
\hline \text { Shiny Shoes, Inc. } & 6 / 30 & 3 \% & 3 \% \
\hline \text { 24 Individuals } & 12 / 31 & \begin{array} { c } 
2 \% \text { each } \
( 48 \% \text { total) }
\end{array} & \begin{array} { c } 
2 \% \text { each } \
( 48 \% \text { total) }
\end{array} \
\hline
\end{array}
\end{array}$$ Shoes Galore must adopt a 1/31 year end because all of its principal partners use this year-end. A principal partner is a partner having an interest of 5 percent or more in the capital or profits of the partnership. KBL, Inc. and AGW, Inc. are both principal partners because they each own more than a 5% profits and capital interest in Shoes Galore. Blaster, Inc., Shiny Shoes, Inc., and the individual partners are not principal partners because none of them individually owns 5% or more of the profits or capital interests in Shoes Galore.
Shoes Galore does not have a majority interest taxable year because KBL, Inc. and AGW, Inc. together do not own more than 50 percent of the profits and capital interests. Moreover, Shoes Galore does not have a majority interest taxable year because the twenty-four individual investors together do not own more than 50 percent of the profits and capital interests in Shoes Galore.

Question 10

Erica and Brett decide to form their new motorcycle business as an 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?

Accepted Answer

A)   $37,500
B)   $40,000
C)   $42,500
D)  $45,000E) A) and B)
F) A) and C)

Question 11

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 _________.

Accepted Answer

A)   $500,000
B)   $1,000,000
C)   $5,000,000
D)  Partnerships may never use the cash method if they have corporate partnersE) C) and D)
F) None of the above

Question 12

A partner can apply any passive activity losses against any passive activity income for the year.

Accepted Answer

A) True 
 B)False

Question 13

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?

Accepted Answer

A)   Accrual method
B)   Cash method
C)   Hybrid method
D)  Accrual method or Cash methodE) A) and B)
F) A) and C)

Question 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.

Accepted Answer

A) True 
 B)False

Question 15

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income. List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

Accepted Answer

Income from a trade or business is treat...

Question 16

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

Accepted Answer

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 incomeE) B) and C)
F) A) and D)

Question 17

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?

Accepted Answer

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 testE) B) and D)
F) B) and C)

Question 18

Which of the following would not be classified as a separately-stated item?

Accepted Answer

A)   Short-term capital gains
B)   Charitable contributions
C)   MACRS depreciation expense
D)  Guaranteed paymentsE) B) and C)
F) B) and D)

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1st, 20X9. Now, Nothing-But-Net must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Nothing-But-Net use and what rule requires this year-end?

Accepted Answer

<img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> Because the partners all have different...

Exam 9: Forming and Operating Partnerships

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Correct Answer
verified
True

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?

Correct Answer
verified
Guaranteed payments are conceptually sim...
View Answer

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?

Correct Answer
verified

Partnerships may maintain their capital accounts according to which of the following rules?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
See table below:
Tax basis = Initial co...
View Answer

Correct Answer
verified

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 _________.

Correct Answer
verified

A partner can apply any passive activity losses against any passive activity income for the year.

Correct Answer
verified

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?

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified
Income from a trade or business is treat...
View Answer

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

Correct Answer
verified

Correct Answer
verified

Which of the following would not be classified as a separately-stated item?

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified
Because the partners all have different...
View Answer

Exam 9: Forming and Operating Partnerships

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Correct AnswerverifiedTrue

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?

Correct AnswerverifiedGuaranteed payments are conceptually sim...View AnswerShow Answer

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?

Correct AnswerverifiedShow Answer

Partnerships may maintain their capital accounts according to which of the following rules?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answerverified See table below:Tax basis = Initial co...View AnswerShow Answer

Correct AnswerverifiedShow Answer

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 _________.

Correct AnswerverifiedShow Answer

A partner can apply any passive activity losses against any passive activity income for the year.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedIncome from a trade or business is treat...View AnswerShow Answer

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following would not be classified as a separately-stated item?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct Answerverified Because the partners all have different...View AnswerShow Answer

Correct Answer
verified
True

Correct Answer
verified
Guaranteed payments are conceptually sim...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
See table below:
Tax basis = Initial co...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Income from a trade or business is treat...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Because the partners all have different...
View Answer