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Exam 14: Partnerships and Limited Liability Entities

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Question 21

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Which of the following entity owners cannot participate in the management of an entity?

A) A general partner in a general partnership.
B) A member of a limited liability company.
C) A partner in a limited liability partnership.
D) A limited partner in a limited partnership.

E) None of the above
F) A) and D)

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Question 22

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At the beginning of the year, Ryan's capital account balance in the RUS Partnership (in which he owned a 40% interest) was $200,000.During the year, Ryan contributed cash ($40,000) and property (basis = $20,000, fair market value = $30,000) .RUS reported ordinary income of $100,000 and tax-exempt income of $6,000.At the end of the year, the partnership distributed $6,000 of cash to Ryan.On the Schedule K-1, the partnership shows that Ryan had a $50,000 share of nonrecourse LLC debt at the end of the year.Using the tax basis method, how much is Ryan's ending capital account balance?

A) $294,000.
B) $296,400.
C) $306,400.
D) $344,000.
E) $346,400.

F) B) and C)
G) A) and B)

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Question 23

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Match each of the following statements with the terms below that provide the best definition. 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. -Startup costs

At the beginning of the year, Heather's tax basis capital account balance in the HEP Partnership was $85,000. During the tax year, Heather contributed property with a basis of $6,000 and a fair market value of $10,000.Her share of the partnership's ordinary income and separately stated income and deduction items was $40,000.At the end of the year, the partnership distributed $15,000 of cash to Heather.In addition, the partnership allocated $12,000 of recourse debt and $10,000 of nonrecourse debt to Heather.What is Heather's ending capital account balance determined using the tax basis method?

Ken and Lars formed the equal KL Partnership during the current year; Ken contributes $100,000 in cash and Lars contributes land (basis of $60,000, fair market value of $40,000) and equipment (basis of $0, fair market value of $60,000).Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.

Steve's basis in his SAW Partnership interest is $200,000 including all adjustments at the beginning of the tax year, . His allocable share of partnership items is: ($120,000) of ordinary loss, $6,000 tax-exempt interest income, and a $14,000 long-term capital gain.In addition, during the year, the LLC distributed $20,000 of cash to Steve.Also during the year, Steve's share of partnership debt increased by $10,000.Steve's ending basis in his LLC interest is $80,000.

Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year.Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain.In addition, the LLC distributed $12,000 of cash to Emma during the year.Assuming that the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

Meredith is a passive 30% member of the MNO LLC.She is not a managing member and she does not participate in any activities of the LLC.Her interest is more in the nature of an investment.In the current year, Meredith's distributive share of income from the LLC was $50,000.In addition, she received a guaranteed payment of $40,000 for the use of her capital.Assume that her income from other sources exceeds $500,000.How much of Meredith's LLC income will be subject to the self-employment (SE) tax and the net investment income (NII) tax? (Disregard the additional Medicare tax on upper-income taxpayers.)

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

Match each of the following statements with the terms below that provide the best definition. 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. -Organizational costs

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?

If a partnership earns tax-exempt income, the income should not affect the partners' bases in their partnership interests.Do you agree with this statement? Explain.

Morgan is a 50% managing member in the calendar year, cash basis MKK LLC.The LLC received $150,000 income from services and paid the following other amounts. How much will Morgan's adjusted gross income increase as a result of these items? What other deductions must be considered? What amount will be included in Morgan's self-employment tax calculation?

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

Samuel is the managing general partner of STU in which he owns a 25% interest.For the year, STU reported ordinary income of $400,000 (after deducting all guaranteed payments) .In addition, the LLC reported interest income of $12,000.Samuel received a guaranteed payment of $120,000 for services he performed for STU.How much income from self-employment did Samuel earn from STU?

Match each of the following statements with the terms below that provide the best definition. 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. -Schedule K-1

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

What is the difference between a partner's basis in the partnership interest and a partner's § 704(b) book capital account? What are the purposes of these two amounts? Why are these amounts typically different?

Palmer contributes property with a fair market value of $4,000,000 and an adjusted basis of $3,000,000 to AP Partnership.Palmer shares in $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $6,000,000.One month after the contribution, Palmer receives a cash distribution from the partnership of $2,000,000.Palmer would not have contributed the property if the partnership had not contractually obligated itself to make the distribution.Assume that Palmer's share of partnership liabilities will not change as a result of this distribution. a.Palmer will likely recognize a $500,000 [($4,000,000 - $3,000,000) × 50% ] gain on the transaction.Palmer received a cash payment equal to one-half the value of the property he contributed.The IRS would likely treat this as a disguised sale of the property which is presumed to occur when a contractual agreement requires a contribution by a partner to be followed within two years by a specified distribution by the partnership and the distribution is made without regard to partnership profits.Both these issues occur in this scenario.While Palmer could argue that the intent of this transaction is not to create a disguised a.Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that Palmer will recognize because of the $2,000,000 cash distribution? b.What is the partnership's basis for the property after the distribution? c.If Palmer is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

If a partnership allocates losses to the partners, the partners first applies the passive loss limitations, then the basis limitation, and finally the at-risk limitations.If all three hurdles are met, a partner may deduct the loss.