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Tina and Randy formed the TR Partnership four years ago. Because they decided the company needed some
expertise in multimedia presentations, they offered Susan a 1/3 interest in partnership capital and profits if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair
market value of $25,000) was transferred to Susan. How should Susan treat the receipt of the partnership interest in the current year?
C. 25,000 ordinary income
D. 25,000 stcg
A person who receives an unrestricted partnership
capital interest for services rendered recognizes ordinary income when the interest is received. The amount of income recognized is the fair market value of the partnership interest on the date it is received.
(this multiple choice question has been scrambled)
Partner Tom transferred property (basis of $20,000; fair market value of $50,000) to the TUV Partnership in exchange for a partnership interest. At a later date, when Tom's outside basis for his partnership interest was $70,000, Tom received a $50,000 cash distribution from the partnership. Which one of the following statements
is not true?
a. If the cash distribution occurred two months after the property contribution, the IRS may treat the transaction as a disguised sale.
b. If the transaction is treated as a disguised sale, Tom's basis in the partnership interest will be $20,000.
c. If Tom would have made the
property contribution anyway, even if he knew that the partnership would probably not have any cash to distribute to him, the IRS would not likely contend the transaction was a disguised sale.
d.If the IRS treated the transaction as a disguised sale, the partnership's basis in the property would be $50,000.
- A contribution and distribution are presumed to be a
- disguised sale if they occur within two years (choice a. is true). Conversely, if there is entrepreneurial risk related to the future distribution, the transaction is not generally treated as a disguised sale (choice c. is true).
- If a transaction is treated as a disguised sale, it is treated as a sale for all calculations: The partnership takes a cost ($50,000) basis in the property (choice d. is true).
When property is contributed to a partnership for a capital and profits interest, the holding period of the contributing partner’s interest:
a. May include the holding period of the contributed property.
b. Always starts the day after the contribution date.
c. Always starts the day the property was contributed.
d. Never includes the holding period of the contributed property.
- Generally, the holding period of a partner’s interest
- includes the holding period of any capital gain property contributed by the
Cheryl and Nina formed a partnership. Cheryl received a 40% interest in partnership capital and profits in exchange for contributing land with a basis of $60,000 and a fair market value of $80,000. Nina received a 60% interest in partnership capital and profits in exchange for contributing $120,000 of cash. Three years after the
contribution date, the land contributed by Cheryl is sold by the partnership to a third party for $90,000. How much taxable gain will Cheryl recognize from the sale?
- Section 704(c)(1)(A) requires that any precontribution
- gain must be allocated entirely to Cheryl. Therefore, Cheryl is allocated the $20,000 precontribution (“built-in”) gain and 40% ($4,000) of the $10,000 post-contribution gain.
Which of the following is an election or calculation made by the partner rather than the partnership?
a. The amount of the 199 (domestic production activities) deduction related to partnership activities.
b. The taxable year of the partnership
c. The depreciation method used for partnership property
d. Amortization of organizational and startup expenses incurred by the partnership
e. All of above
- The partner determines the amount of the § 199
- deduction based on information provided by the partnership and taking into account the taxpayer’s other domestic production activities.
MEM Partners was formed during the current tax year. It incurred $20,000 of organizational expenses, $100,000 of startup expenses, and $200,000 of syndication costs. Which of the following statements is correct regarding these payments?
a. MEM may deduct $5,000 of the syndication costs; the remaining amount must be amortized.
b.MEM must amortize the$20,000 of organizational expenses over 180 months.
c.MEM’s startup expenses are amortized over 60 months.
d.MEM must file an election to deduct and/or amortize its organizational expenses, startup costs, and syndication costs.
e. none are true
- Choice a. is incorrect because no portion of
- syndication costs is deductible or amortizable. Choice b. is incorrect because the first $5,000 of organizational costs may be deducted if total organizational costs are less than $50,000. Choice c. is incorrect because the portion of startup costs that cannot be currently deducted must be amortized over 180 months. Choice d. is incorrect because, under current IRS regulations, a taxpayer is deemed to have elected the deduction and/or amortization
- treatment permitted for organizational and startup expenses, and because syndication costs may not be deducted or amortized.
Cardinal, LLC incurred $20,000 of startup expenses, $3,000 of organizational costs, and paid $10,000
in transfer taxes to change the title (ownership) of a building contributed by one of the LLC’s members. Which of the following statements is correct regarding these three amounts?
a. Cardinal can deduct $5,000 of the startup expenses.
b. Cardinal can amortize $15,000 of the startup expenses over 180 months.
c. Cardinal may deduct the full amount of the organizational costs.
d. Cardinal can capitalize the $10,000 tax paid as a part of the depreciable basis of the building.
e. All of the above statements are true.
- Cardinal can deduct the first $5,000 of startup
- expenses and the remaining $15,000 of such expenses can be amortized over 180 months. Cardinal can deduct the entire $3,000 of organizational costs because the amount is less than $5,000. Cardinal must capitalize the $10,000 transfer tax as part of the basis in the building; this basis is treated as a new asset and depreciated in the same manner in which the underlying building is depreciated.
Fern, Inc., Ivy Inc., and Jason formed a general partnership, each contributing equally. Fern, Inc. files
its tax return on a July 1 - June 30 fiscal year; Ivy Inc. files on a September 1 - August 31 fiscal year; and Jason is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose?
a. The partnership must choose the calendar year since it has no principal partners.
b. The partnership can choose the taxable year of any of its “principal partners” without obtaining IRS permission.
c. The partnership can choose a January 31 fiscal year without obtaining IRS permission, if the partnership
can prove that the January 31 fiscal year will reduce the cost of preparing the partnership tax return.
d. The partnership can choose the taxable year that provides for the “least aggregate deferral” without obtaining IRS permission.
e. None of the above.
- The partnership chooses the taxable year that provides
- for the least amount of aggregate deferral. Because the partnership does not have any majority partners and since the principal partners do not all have the same taxable year, the least aggregate deferral rule determines the partnership "required" taxable year. The partnership may be able to obtain IRS permission to adopt a different taxable year if it can demonstrate to the IRS that it has a substantial business purpose for choosing that year. The
- partnership can also make an election under § 444 (not an option choice in this problem).
Michelle and Jacob formed the MJ Partnership. Michelle contributed $20,000 of cash in exchange for her
50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable
income of $10,000; Michelle received a distribution of $8,000 cash from the partnership; and Michelle had a 50% share in the partnership’s $16,000 of recourse liabilities on the last day of the partnership year. Michelle’s adjusted basis for her partnership interest at year end is:
- Michelle’s adjusted basis consists of her $20,000 cash
- contribution, plus her $5,000 share of partnership income, minus the $8,000 cash distribution, plus her $8,000 share of partnership liabilities.
Which of the following is not an adjustment to the partners’ basis in the partnership interest?
a.Increased by contributions the partner made to the partnership.
b. Decreased by the amount of guaranteed payments the partner received from the partnership.
c. Increased by the partner’s share of tax-exempt income.
d. Decreased by any decrease in the partner’s share of partnership liabilities.
e. Increased by the partner’s share of separately stated income items.
- The partner’s basis in the partnership interest is not
- affected by guaranteed payments that partner receives. The guaranteed payments are already factored into the partnership’s income or loss amounts; therefore,
- the partner’s proportionate share of the guaranteed payments will affect the partner’s basis. However, the basis is not again affected when the partner reports the (entire) guaranteed payment as income.
Which of the following is not true regarding a limited liability company?
a. The Code does not specifically provide for the taxation of limited liability companies. Therefore, an LLC that is taxed as a partnership must rely primarily on the tax
provisions that apply to partnerships.
b. Under the “check the box” regulations, a domestic, two-owner unincorporated business organization, such as an LLC, is taxed as a partnership unless the owners elect otherwise.
c. An LLC offers several advantages over the S corporation, including not making the managing member of the LLC liable for self-employment taxes on his or her share of LLC income.
d. The economic benefits of an LLC may be reduced if lenders require owners to personally guarantee LLC debts.
e. In general, an LLC member is not personally liable for LLC debts.
- LLC members are subject to self-employment taxes on their share of the entity’s income if they are active
- participants in the management of the LLC. Choices a., b., d., and e. are true statements.
Which of the following statements, if any, about an LLC is false?
a. An LLC is usually taxed like a partnership.
b. “Members” of an LLC generally have limited personal liability for debts of the LLC.
c. “Members” of an LLC can participate in management of the LLC unless the member agrees not to participate.
d. An LLC can specially allocate income items, as long as the substantial economic effect rules of § 704(b) are followed.
e. none above
All of these statements are true.