HS 321 Module 14

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HS 321 Module 14
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2012-09-13 23:13:56
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HS 321 Module 14
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HS 321 Module 14
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  1. Business organizations that are unincorporated under state law may generally choose whether to be taxed as partnerships or corporations.

    a) True 
    b) False  
    a) True 
  2. A limited liability company has the corporate characteristic of limited liability but may be taxed as a partnership.

    a) True
    b) False  
    a) True 
  3. Profits earned by a partnership are taxed twice: once to the partnership itself and also to its owners.

    a) True
    b) False  
    b) False 

    The partnership itself is not a taxpayer. Therefore profits are taxed only once to each partner. 
  4. Partners in a partnership may deduct their shares of the partnership's net loss on their individual tax returns.

    a) True
    b) False  
    a) True 
  5. The aggregate theory and the entity theory are two theories of partnership taxation used in tax law relating to partnerships and their partners.

    a) True
    b) False  
    a) True 
  6. When a partner contributes appreciated assets to a partnership, he or she recognizes gain on the transfer.

    a) True
    b) False  
    b) False 

    No gain is recognized on the transfer of appreciated assets to a partnership. The contributor-partner will generally take as his or her original basis for his or her partnership interest the basis he or she had in the property contributed at the time of contribution. 
  7. A partnership files its own partnership return and pays partnership income taxes.

    a) True
    b) False  
    b) False 

    A partnership does file a partnership return, but only for informational purposes. A partnership does not pay income taxes. 
  8. A partner's distributive share of items of partnership income or loss is included in his or her personal tax return.

    a) True
    b) False  
    • a) True 
    •  
  9. A partner's distributive share is generally determined in accordance with the partnership agreement.

    a) True
    b) False  
    a) True 
  10. If a partner lends money to his or her partnership as an outsider, the basis of his or her partnership shares is not affected.

    a) True
    b) False  
    b) False 

    When a partner lends money to his or her partnership as an outsider, his or her partnership basis is increased by his or her share of the partnership's liability to him or her. 
  11. The basis of a contributing partner's partnership interest is generally the amount of cash contributed plus the adjusted basis of the property he or she contributes to the partnership.

    a) True
    b) False  
    a) True 
  12. Taxable income may be realized by a contributing partner where services are contributed for an interest in the partnership capital.

    a) True
    b) False  
    a) True 
  13. A retiring partner's share of the gain attributable to inventory is treated as ordinary income when the partnership liquidates the retiring partner's interest.

    a) True
    b) False  
    a) True 
  14. Upon the liquidation of an interest in a service partnership, payments for goodwill are treated as capital gain regardless of whether they are mentioned as such in the partnership agreement.

    a) True
    b) False  
    b) False 

    If the partnership agreement specifies that payments will be made for goodwill, the partners receiving liquidating distributions will report payments for goodwill as capital gain, but the payments are not deductible by the partnership. If the agreement is silent as to goodwill, the payments are taxable to the partners as ordinary income and are deductible by the partnership. 
  15. A manufacturing partnership can deduct payments for unrealized receivables when liquidating a retiring partner's interest.

    a) True
    b) False
    b) False 

    Payments to a retiring partner that are attributable to unrealized receivables are not deductible by a manufacturing partnership. Although the retiring partner will treat such amounts as ordinary income, the partnership treats such amounts as made-for-partnership property. No deduction is allowed.
  16. A limited partner in a limited partnership has liability only to the extent of his or her financial contribution to the partnership.

    a) True
    b) False
    a) True
  17. Generally, limited partners are limited in authority.

    a) True
    b) False
    a) True
  18. A family partnership is recognized as a partnership for tax purposes if the partnership arrangement has economic reality.

    a) True
    b) False
    a) True
  19. In a family partnership that is capital intensive, a donee of a partnership interest will be taxed on his or her share of partnership income even if the donor retains control over the exercise of the donee's partnership interest.

    a) True
    b) False
    b) False 

    The donee must have dominion and control over the partnership interest in order to be taxed on his or her share of partnership income.
  20. In a family partnership where capital is not a material income-producing factor, a donee of a partnership interest must contribute services in order to be treated as a partner for tax purposes.

    a) True
    b) False
    a) True
  21. In determining his individual income tax, each partner reports his distributive share of the partnership income. Subject to certain restrictions, a partner's distributive share is generally determined by

    A) the current value of the capital account of each partner
    B) the amount of salary payments made to a partner for services rendered
    C) reference to the basis of each individual partner's interest
    D) the partnership agreement
    D) the partnership agreement

    Salary, capital accounts, and basis are not necessarily related to the partner's distributive share, which is determined under the partnership agreement.
    (this multiple choice question has been scrambled)
  22. Which of the following statements concerning the retirement of a general partner in a service partnership is (are) correct?

    I. Payments attributed to inventory and unrealized receivables will be treated as ordinary income to the retiring partner.

    II. Payment for goodwill will be treated as capital gain to the retiring partner if the partnership agreement provides for payments for goodwill.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    C) Both I and II
    (this multiple choice question has been scrambled)
  23. All the following statements concerning the tax consequences of forming a partnership are correct EXCEPT

    A) When a partner receives a partnership interest in exchange for services, the value of the interest may be taxable to the partner as compensation.
    B) The contributing partner's basis with respect to contributed property subject to indebtedness is reduced to the extent the indebtedness is taken over by the other partners.
    C) As a general rule no gain or loss is recognized on the transfer of property or money to a partnership in exchange for a partnership interest.
    D) A partnership's basis in contributed property is the property's fair market value at the time of the transfer.
    D) A partnership's basis in contributed property is the property's fair market value at the time of the transfer.

    A partnership generally retains the same basis in contributed property as the property had in the hands of the contributing partner.
    (this multiple choice question has been scrambled)
  24. All the following statements concerning the income tax status of a family partnership are correct EXCEPT

    A) The IRS may ignore the partnership agreement and reallocate income for tax purposes to properly reflect the economic reality of the partnership arrangement.
    B) A family partnership is generally structured to shift income within the family so that the total income taxes of family members are less than if the business were a sole proprietorship.
    C) If a family member is to be considered a partner in a family partnership in which capital is a material income-producing factor, the family member must have acquired his capital interest through a bona fide transaction.
    D) Without contributing services to the partnership, a family member can be treated as a partner in a family partnership whose income consists primarily of fees or commissions.
    D) Without contributing services to the partnership, a family member can be treated as a partner in a family partnership whose income consists primarily of fees or commissions.

    A family member in a partnership which is in the business of performing services must contribute services to the partnership to be treated as a partner for tax purposes.
    (this multiple choice question has been scrambled)
  25. An individual sold his interest in a partnership to another individual. All the following statements concerning the income taxation of the sale proceeds to the individual are correct EXCEPT

    A) That portion of the proceeds which represents his share of depreciable partnership property with a fair market value in excess of basis is received by him on a tax-free basis.
    B) That portion of the proceeds which represents his share of the potential gain on partnership inventory is taxable to him as ordinary income.
    C) That portion of the proceeds which represents specified goodwill is taxable to him as a capital gain.
    D) That portion of the proceeds which represents his share of unrealized receivables is taxable to him as ordinary income.
    A) That portion of the proceeds which represents his share of depreciable partnership property with a fair market value in excess of basis is received by him on a tax-free basis.

    Proceeds received for the fair market value of property in excess of its basis are taxable.
    (this multiple choice question has been scrambled)
  26. Julie is a partner in a partnership. All the following statements concerning adjustments to Julie's interest in the partnership are correct EXCEPT

    A) Basis is decreased by distributions made to Julie.
    B) Basis is increased by Julie's share of increased partnership liabilities.
    C) Basis is decreased by Julie's share of the partnership's liability to her to the extent that she loaned money to the partnership as an outsider.
    D) Basis is decreased by Julie's share of any partnership losses.
    C) Basis is decreased by Julie's share of the partnership's liability to her to the extent that she loaned money to the partnership as an outsider.

    Any liability to the partner by the partnership will increase, not decrease, basis
    (this multiple choice question has been scrambled)
  27. Smith and Jones formed a partnership. Smith contributed a building with an original cost of $80,000, a fair market value of $100,000, and an adjusted basis of $40,000. Jones contributed $100,000 cash. Each partner is a material participant in partnership business. How much can Smith currently deduct if his share of the partnership’s first-year operating loss is $45,000?

    A) $40,000
    B) $5,000
    C) $20,000
    D) $45,000
    A) $40,000

    The distributive share of a partnership’s operating loss that is deductible by an individual partner is limited to the adjusted basis of his or her partnership interest. Hence Smith’s adjusted basis in his partnership interest is $40,000, determined by his adjusted basis for the property he has contributed.
    (this multiple choice question has been scrambled)
  28. Which of the following statements is correct regarding partnership taxation?

    A) A partner will recognize gain if he or she contributes appreciated property to a partnership.
    B) A partnership must file an information return, Form 1065, annually with the IRS.
    C) A business organization that is unincorporated under state law must be taxed as a partnership.
    D) Partnership profits are taxed both to the partnership and to the partners.
    B) A partnership must file an information return, Form 1065, annually with the IRS.






    A is incorrect. Unincorporated businesses, such as limited liability companies (LLCs), can choose to be taxed as either a corporation or a partnership.
    B is incorrect. Partnership profits are only taxed to the partners, as a partnership is a flow-through entity. D is incorrect. When a partner contributes appreciated property to a partnership, no gain or loss is recognized. Instead, the partner's basis in the partnership interest is increased by the partner's basis in the property contributed.
    (this multiple choice question has been scrambled)
  29. Which of the following statements is/are correct regarding a partnership?

    I. If an organization is treated as a partnership, the organization and its partners are treated as two distinct taxable entities.

    II. If a partnership has a net loss, the partners will be allowed to deduct their share of the loss on their personal income tax return.

    A) Only II.
    B) Only I.
    C) Neither I nor II.
    D) Both I and II.
    A) Only II.

    I is incorrect. If an organization is treated as a corporation, the organization and its owners are treated as two distinct taxable entities. With a partnership, the partnership income is taxed to the partners.
    (this multiple choice question has been scrambled)
  30. All of the following statements are indicia of the entity theory of partnerships EXCEPT:

    A) The partnership may have its own accounting method.
    B) The partnership must file an annual income tax return.
    C) The partnership is a conduit for income tax purposes.
    D) The partnership can make various income tax elections.
    C) The partnership is a conduit for income tax purposes.

    Under the entity theory, a partnership is a separate entity that must file an annual tax return, may have its own taxable year, and can make certain tax elections. The AGGREGATE theory supports the fact that the partners pay the income tax on partnership income (partnership is a conduit).
    (this multiple choice question has been scrambled)
  31. David contributed the following items to a partnership in exchange for a 50% partnership interest:

    • Cash-$12,000.
    • Land - purchased originally for $90,000 and valued at $130,000 at the time of transfer.
    • Inventory - purchased originally for $50,000 and valued at $40,000 at the time of transfer.

    What is David's basis in the partnership interest?

    A) $192,000.
    B) $152,000.
    C) $142,000.
    D) $182,000.
    B) $152,000.

    The basis in the partnership interest is equal to David's basis in the property donated.
    •Cash-$12,000 •Land - $90,000
    •Inventory $50,000
    •Total basis = $12,000 + $90,000 + $50,000 = $152,000
    (this multiple choice question has been scrambled)
  32. All of the following statements are correct regarding guaranteed payments received by a partner
    EXCEPT:

    A) A guaranteed payment will be deductible by the partnership, thus reducing the partner's taxable distributable share.
    B) A guaranteed payment can only be made to a partner if the partnership has net income for the tax year.
    C) A guaranteed payment made to a partner will not affect the basis in his or her partnership
    interest.
    d) A guaranteed payment will be taxable to the partner as ordinary income.
    B) A guaranteed payment can only be made to a partner if the partnership has net income for the tax year.

    A guaranteed payment is similar to a salary. It can be paid regardless of whether or not the partnership is profitable.
    (this multiple choice question has been scrambled)
  33. All of the following statements are correct regarding a partner's basis in a partnership interest EXCEPT:

    a) A partner's basis is increased each year by the partner's distributive share of partnership
    income.
    b) A partner's basis includes his or her share of partnership indebtedness.
    c) A partner's basis is increased by any distribution received by the partner from the partnership.
    d) A partner's basis is decreased by any share of his or her liabilities assumed by the partnership.
    c) A partner's basis is increased by any distribution received by the partner from the partnership.

    A partner's basis is DECREASED by any distribution received by the partner from the partnership.
  34. Which of the following statements is/are correct regarding contributions to partnerships?

    I. If a partner lends money to the partnership as an outsider, the partner will receive an increase in the basis of his or her partnership interest.

    II. If a partner contributes services to a partnership in exchange for a partnership interest, the partner will recognize taxable income.

    A) Neither I nor II.
    B) Both I and II.
    C) Only II.
    D) Only I.
    B) Both I and II.
    (this multiple choice question has been scrambled)
  35. Which of the following statements is correct regarding the taxation of partnerships?

    a) A partner is required to report his or her share of partnership income on Schedule C of his or her personal income tax return.
    B. b) partnership income is determined initially by rules of tax law.
    c) Allocations of partnership income to a partner will be accepted by the IRS if the allocations have substantial economic effect.
    d) Cash distributions from a partnership to a partner will be treated as dividends and will be subject to double taxation.
    c) Allocations of partnership income to a partner will be accepted by the IRS if the allocations have substantial economic effect.

    Schedule C is used by sole proprietors. Partnership income is reported on Schedule E.

    The distributive share of income is determined by the partnership agreement.

    Cash distributions are considered a return of capital, and are therefore tax-free.
  36. David and Sarah formed a partnership. David contributed real estate to the partnership with an original cost of $160,000, a fair market value of $200,000, and an adjusted basis of $90,000.

    David is a material participant in the partnership business. If David's distributable share of the partnership loss
    is $100,000, how much can he currently deduct?

    A) $40,000.
    B) $90,000.
    C) $100,000.
    D) $70,000.
    B) $90,000.

    A partner's deduction for a partnership loss is limited to his or her adjusted basis in the partnership.
    (this multiple choice question has been scrambled)
  37. Which of the following statements is/are correct regarding the tax ramifications of the sale of a partnership interest?

    I. When a partner sells their interest in a partnership, the portion of the gain on sale attributable to inventory is taxed as capital gain to the selling partner.

    II. When a partner sells their interest in a partnership, the portion of the gain on sale attributable to unrealized receivables is taxed as ordinary income to the selling partner.
     
    A) Both I and II.
    B) Only II.
    C) Only I.
    D) Neither I nor II.
    B) Only II.

    I is incorrect. When a partner sells their interest in a partnership, the portion of the gain on sale attributable to inventory is taxed as ordinary income to the selling partner.
    (this multiple choice question has been scrambled)
  38. Wich of the following events will cause the dissolution of a partnership?

    I. The death, incapacity, or bankruptcy of a limited partner.

    II. The express will of any general partner.

    A) Neither I nor II.
    B) Only I.
    C) Only II.
    D) Both I and II.
    C) Only II.

    I is incorrect. The death, incapacity, or bankruptcy of a general (not a limited) partner will cause dissolution.
    (this multiple choice question has been scrambled)
  39. John is a partner in ABC partnership, a service partnership. The partnership liquidated John's interest, resulting in a gain to John.

    All of the following statements are correct regarding this arrangement EXCEPT:

    A) If the partnership agreement is silent as to goodwill, the portion of John's gain attributable to goodwill will be taxed as capital gain.
    B) The portion of John's gain attributable to inventory will be taxed as ordinary income.
    C) The portion of John's gain attributable to unrealized receivables will be taxed as ordinary income.
    D) The portion of John's gain attributable to partnership property (other than inventory and unrealized receivables) will be taxed as capital gain.
    A) If the partnership agreement is silent as to goodwill, the portion of John's gain attributable to goodwill will be taxed as capital gain.

    If the partnership is a service partnership, the portion of the gain attributable to goodwill can be taxed as either ordinary income or capital gain. If the partnership agreement is silent as to goodwill, the gain is taxed as ordinary income.
    (this multiple choice question has been scrambled)
  40. Which of the following statements is/are correct regarding the tax treatment of liquidation payments made to a retiring partner?

    I. If capital is not a material income-producing factor in the partnership, payments made to the partner that represent unrealized receivables will be taxed as ordinary income.

    II. If capital is a material income-producing factor in the partnership, payments made to the partner that represent goodwill will be taxed as capital gain.

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    B) Both I and II.
    (this multiple choice question has been scrambled)
  41. Which of the following statements is/are correct regarding the tax treatment of liquidation payments made to a retiring partner?

    I. If capital is not a material income-producing factor in the partnership, payments made to the partner that represent unrealized receivables will be taxed as ordinary income.

    II. If capital is a material income-producing factor in the partnership, payments made to the partner that represent goodwill will be taxed as capital gain.

    A) Neither I nor II.
    B) Only I.
    C) Both I and II.
    D) Only II.
    A) Neither I nor II.

    Limited partnerships are typically created to raise capital for a business venture (real estate development, etc).
    (this multiple choice question has been scrambled)
  42. Which of the following statements is correct concerning the income tax status of a family partnership?

    A) If the income of a family partnership consists principally of commissions, capital will be a material income-producing factor of the partnership.
    B) If the partnership is capital intensive, the recipient of a gift of a partnership interest will be taxed on their distributive share of income even if the donor retains some control over the interest.
    C) The IRS may ignore the partnership agreement and reallocate income among the partners to more accurately reflect the reality of the arrangement.
    D) A junior family member cannot be a partner for tax purposes if capital is not a material income- producing factor.
    C) The IRS may ignore the partnership agreement and reallocate income among the partners to more accurately reflect the reality of the arrangement.

    A junior family member can be a partner for tax purposes even if capital is not a material
    income-producing factor, as long as the family member contributes services to the partnership.

    If the income of a family partnership consists principally of commissions, fees, or othercompensation for services, capital will not be a material income-producing factor of the partnership.

    The recipient must have control of the interest in order to be taxed on the interest.
    (this multiple choice question has been scrambled)

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