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Alyce owns a 30% interest in a continuing partnership. The partnership distributes a $35,000 year-end cash payment to Alyce. In a proportionate current (nonliquidating) distribution, the partnership also distributed property (basis of $20,000, fair market value of $30,000) to Alyce. Immediately before the distributions of cash and property, Alyce's basis in the partnership interest was $60,000. As a result of the distribution, Alyce recognizes:


A) No gain or loss.
B) Ordinary loss of $5,000.
C) Capital loss of $5,000.
D) Ordinary gain of $5,000.
E) Capital gain of $5,000.

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

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DIP LLC reports ordinary income (before guaranteed payments) of $120,000, rent expense of $40,000, and interest income of $4,000 for the year. In addition, DIP paid guaranteed payments of $20,000 to partner Percy. If Percy owns a 40% capital and profits interest, how much income will he report for the year and what is its character?


A) $24,000 ordinary income.
B) $24,000 ordinary income, $1,600 interest income, $20,000 guaranteed payment.
C) $25,600 ordinary income, $8,000 guaranteed payment
D) $32,000 ordinary income, $1,600 interest income.
E) $32,000 ordinary income, $1,600 interest income, $20,000 guaranteed payment.

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

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Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K- 1s show allocations of nonrecourse debt of $20,000 (last year) and $30,000 (this year). Micah's ending capital account is $94,000.

A) True
B) False

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Match each of the following statements with the numbered terms below that provide the best definition. -Profits interest


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.

S) D) and G)
T) J) and K)

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Randi owns a 40% interest in the capital and profits of the RAY Partnership. Immediately before she receives a proportionate current (nonliquidating) distribution from RAY, the basis for her partnership interest is $60,000. The distribution consists of $45,000 in cash and land with a fair market value of $72,000. RAY's adjusted basis in the land immediately before the distribution is $36,000. As a result of the distribution, Randi recognizes a gain of $57,000.

A) True
B) False

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The LN partnership reported the following items of income and deduction during the current tax year: revenues, $300,000; cost of goods sold, $160,000; tax-exempt interest income, $2,000; salaries to employees, $80,000; and long- term capital gain, $10,000. It paid business interest expense of $18,000 and investment interest expense of $2,000. In addition, the partnership distributed $20,000 of cash to 50% partner Nina and $10,000 of cash to 50% partner Len. What is Nina's share of ordinary partnership income and separately stated items?

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blured image The distributions to the part...

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

A) True
B) False

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Gina is a single taxpayer and an active partner in the GMA LLC. Gina's Schedule K-1 reflects a $20,000 ordinary income share, $2,000 of interest income, and a $10,000 guaranteed payment for services. Gina's self-employment income from other sources and modified adjusted gross income is about $300,000. With respect to the income from the LLC, Gina is subject to the 0.9% additional Medicare tax on $30,000 and the 3.8% net investment income tax of $2,000.

A) True
B) False

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Which of the following statements is correct regarding partnership or C corporation tax rates?


A) Partners pay tax on their distributive shares of income at 37%.
B) Partners pay a single tax on their distributive shares of income at the tax rate that applies to the partner's situation.
C) C corporations pay a single level of tax on corporate income at rates up to 35%.
D) C corporations pay tax at 21% and the shareholders pay a second tax of 37% when dividends are distributed.

E) B) and D)
F) A) and B)

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To meet the substantial economic effect tests, a partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital.

A) True
B) False

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Match each of the following statements with the terms below that provide the best definition. -Business purpose


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.

Q) A) and G)
R) C) and K)

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The sum of the partners' ending basis amounts equals the partners' ending capital account balances. These amounts are shown on the partnership's Schedule K.

A) True
B) False

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Laura is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business. She contributes a parcel of this land (basis of $15,000) to a partnership, also to be held as inventory. The fair market value of the property is $12,000 at the contribution date. After three years, the partnership sells the land for $10,000. The partnership will recognize a $5,000 ordinary loss on sale of the property.

A) True
B) False

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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.

A) True
B) False

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Match each of the following statements with the numbered terms below that provide the best definition. -General partnership


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.

S) F) and L)
T) I) and N)

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Match each of the following statements with the terms below that provide the best definition. -Economic risk of loss


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.

Q) A) and B)
R) J) and N)

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Jack has a basis in a partnership interest of $300,000, including his $80,000 share of partnership debt. At the end of the current year, the partnership pays off its liabilities and makes a proportionate current (nonliquidating) distribution to its partners. Jack receives a parcel of land (partnership basis = $120,000, value = $135,000) and inventory (partnership basis = $160,000, value = $180,000) . Following the distribution, what is Jack's basis in the land, inventory, and the partnership interest?


A) $120,000 basis in land, $160,000 basis in inventory, $20,000 basis in partnership interest.
B) $40,000 basis in land, $180,000 basis in inventory, $0 basis in partnership interest.
C) $60,000 basis in land, $160,000 basis in inventory, $0 basis in partnership interest.
D) $135,000 basis in land, $165,000 basis in inventory; $0 basis in partnership interest.
E) $60,000 basis in land, $160,000 basis in inventory; $80,000 basis in partnership interest.

F) A) and D)
G) A) and C)

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Cassandra is a 10% limited partner in C&C, Ltd. Her basis in the interest is $60,000 before loss allocations, including her $30,000 share of the partnership's nonrecourse debt. (This debt is not qualified nonrecourse financing.) Cassandra is also a 10% limited partner in MNOP in which her basis is $30,000. Cassandra is allocated an $80,000 loss from C&C and $20,000 of income from MNOP. How much of the loss from C&C may Cassandra deduct? Under what Code provisions are the remaining losses suspended? Assume that Cassandra has no business losses from other sources.

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Cassandra's $80,000 loss from C&C is fir...

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Nicky's basis in her partnership interest was $150,000, including her $40,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Nicky receives $30,000 cash and inventory with a $50,000 basis and a $58,000 fair market value to the partnership. What loss does Nicky recognize, and what is her basis in the inventory?


A) $70,000 loss; $50,000 basis.
B) $30,000 loss; $50,000 basis.
C) $22,000 loss; $58,000 basis.
D) $62,000 loss; $58,000 basis.
E) $0 loss; $80,000 basis.

F) D) and E)
G) B) and D)

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Match each of the following statements with the numbered terms below that provide the best definition. -Limited partner


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.

S) C) and P)
T) J) and Q)

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