CHAPTER 21 PARTNERSHIPS

1. On January 1 of the current year, Anna and Jason form an equal partnership. Anna contributes $50,000 cash and a parcel of land (adjusted basis of $100,000; fair market value of $150,000) in exchange for her interest in the partnership. Jason contributes property (adjusted basis of $180,000; fair market value of $200,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation?

a. Jason recognizes a $20,000 gain on his property transfer.

b. Jason has a $200,000 tax basis for his partnership interest.

c. Anna has a $150,000 tax basis for her partnership interest.

d. The partnership has a $150,000 adjusted basis in the land contributed by Anna.

e. None of the statements is true.

2. Tim, Al, and Pat contributed assets to form the equal TAP Partnership. Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Pat contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is notcorrect?

a. Tim’s basis in his partnership interest is $120,000.

b. Al realizes and recognizes a loss of $10,000.

c. Pat realizes a gain of $40,000 but recognizes $0 gain.

d. TAP has a basis of $80,000, $50,000, and $0 in the land and property (excluding cash) contributed by Tim, Al, and Pat, respectively.

e. All of these statements are correct.

3. When property is contributed to a partnership in exchange for a capital and profits interest, when does the partner’s

holding period begin for the partnership interest?

a. The day after the contribution date.

b. The day the property was contributed.

c. The day the contributed property was purchased.

d. The day the partnership interest was acquired.

e. Either (or both) c. and d. may be true, depending upon the types of property contributed.

4. In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

a. Partner George contributes appreciated property to the GM Partnership, and three years later GM distributes

$100,000 proportionately to the partners.

b. Brianna contributes property with a basis of $20,000 and a fair market value of $50,000 to the BGB Partnership in exchange for a 20% interest therein. The partnership agrees to distribute $20,000 to Brianna in fifteen months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.

c. Luis contributes appreciated property to the BLP Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that BLP would make the distribution, and Luis would have made the contribution whether or not the partnership made the distribution.

d. None of the above transactions will be treated as a disguised sale.

e. a., b., and c. are all treated as disguised sales.

5. Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital if she would come to work for the partnership. She will also receive a 25% interest in future partnership profits. On July 1 of the current year, the unrestricted partnership capital interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year?

a. Nontaxable.

b. $25,000 ordinary income.

c. $25,000 short-term capital gain.

d. $25,000 long-term capital gain.

e. None of the above.

6. Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume the interest is not sold within two years after the time it is granted to the service partner.)

a. A 10% interest in the capital of the partnership that will vest in 3 years.

b. A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership.

c. A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.

d. A 30% interest in ongoing profits of the partnership where the partnership is not a publicly-traded partnership and the income stream is not assured.

e. All of the above.

7. Which of the following is an election or calculation made by the partner rather than the partnership?

a. Calculation of a § 199 deduction amount.

b. Whether to capitalize, amortize, or expense research and experimental costs.

c. The partnership’s overall accounting method.

d. Whether to claim a § 179 deduction related to property acquired by the partnership.

e. All of the above elections are made by the partnership.

8. TEC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner. The property had been held as MACRS property for ten years by the contributing partner, and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements is correct regarding these items?

a. TEC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred.

b. TEC must amortize the $10,000 of organizational expenses over 180 months.

c. TEC’s startup expenses are amortized over 60 months.

d. TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed.

e. None of the above statements are true.

9. Which of the following statements is alwayscorrect regarding assets acquired by a newly formed partnership? If a partner contributes:

a. Depreciable property: the partnership treats the property as newly acquired depreciable property, and may

claim a § 179 deduction.

b. Unrealized (cash-basis) receivables: the partnership will report a capital gain when the receivable is collected.

c. Inventory (in the partner’s hands): the partnership reports ordinary income if the property is held as a capital

asset and sold within five years of the contribution date.

d. Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.

e. None of these statements is correct.

10.Which of the following statements is alwaystrue regarding accounting methods available to a partnership?

a. If a partnership is a tax shelter, it can use the cash method of accounting.

b. If a non­tax­shelter partnership had “average annual gross receipts” of less than $5 million in all prior years,

it can use the cash method.

c. If a partnership has a partner that is a personal service corporation, it cannot use the cash method.

d. If a partnership has a partner that is a C corporation, it cannot use the cash method.

e. All of the above statements are false.