CHAPTER 21 PARTNERSHIPS

1. Fern, Inc., Ivy, Inc., and Jeremy formed a general partnership. Fern owns a 50% interest and Ivy and Jeremy each own 25% interests. Fern, Inc. files its tax return on an October 31 year-end; Ivy, Inc., files with a July 31 year-end, and Jeremy 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 because it has no principal partners.

b. The partnership must choose an October year-end because Fern, Inc., is a principal partner.

c. The partnership can request permission from the IRS to use a March 31 fiscal year under § 444.

d. The partnership must use the “least aggregate deferral” method to determine its taxable year.

e. None of the above.

2. In the current year, the POD Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities, and $20,000 as a distribution to partner Olivia. In addition, the partnership earned $6,000 of long- term capital gains during the year. Partner Donald owns a 50% interest in the partnership. How much income must Donald report for the tax year?

a. $68,000 ordinary income.

b. $78,000 ordinary income.

c. $65,000 ordinary income; $3,000 of long-term capital gains.

d. $75,000 ordinary income; $3,000 of long-term capital gains.

e. None of the above.

3. Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of

$280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and the partnership paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year:

a. $54,000 ordinary income; $9,000 charitable contribution.

b. $60,000 ordinary income; $9,000 charitable contribution.

c. $36,000 ordinary income.

d. $54,000 ordinary income.

e. None of the above.

4. Which one of the following is notshown on the partnership’s Schedule K on Page 4 of Form 1065?

a. The partnership’s self­employment income.

b. The partnership’s separately stated income and deductions.

c. The partnership’s tax preference and adjustment items.

d. The partnership’s net operating loss carryforward.

e. All of the above.

5. On a partnership’s Form 1065, which of the following statements is nottrue?

a. The partnership reconciles its net income (including separately stated items) to book income on Schedule M- 1 or M-3.

b. The partnership balance sheet on Schedule L is generally presented on a financial (book) basis.

c. All partnership income and expense items are reported on Form 1065, page 1.

d. The partnership’s equivalent of taxable income is reported in the “Analysis of Income (Loss).”

e. None of the above statements are true.

6. ABC LLC reported the following items on the LLC’s Schedule K: ordinary income, $100,000; interest income,

$3,000; long-term capital loss, ($4,000); charitable contributions, $1,000; post-1986 depreciation adjustment, $10,000; and cash distributions to partners, $50,000. How much will ABC show as net income (loss) on its Analysis of Income (Loss)?

a. $68,000.

b. $78,000.

c. $95,000.

d. $98,000.

e. $102,000.

7. Which of the following statements is nota requirement of the substantial economic effect test?

a. Income, gains, losses, and deductions must be allocated to the partners in accordance with their capital contributions.

b. An allocation of income must increase the partner’s capital account balance, and an allocation of deduction must decrease the partner’s capital account balance.

c. A partner with a negative capital account balance must “restore” that capital account, generally by

contributing cash to the partnership.

d. On liquidation of the partner’s interest in the partnership, the partner must receive assets that have a fair market value equal to that partner’s (positive) capital account balance.

e. All of the above statements are requirements of the substantial economic effect test.

8. Brooke and John formed a partnership. Brooke received a 40% interest in partnership capital and profits in exchange for contributing land (basis of $30,000 and fair market value of $120,000). John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of cash. Three years after the contribution date, the land contributed by Brooke is sold by the partnership to a third party for $150,000. How much taxable gain will Brooke recognize from the sale?

a. $102,000.

b. $90,000.

c. $48,000.

d. $36,000.

e. $0.

9. Mark and Addison formed a partnership. Mark received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000. Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash. Three years after the contribution date, the land contributed by Mark is sold by the partnership to a third party for $76,000. How much taxable gain will Mark recognize from the sale?

a. $0.

b. $9,000.

c. $24,000.

d. $36,000.

e. None of the above.

10.Molly is a 30% partner in the MAP Partnership. During the current tax year, the partnership reported ordinary income of $200,000 before payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $20,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $20,000 each ($60,000 total guaranteed payments). How much will Molly’s adjusted gross income increase as a result of the above items?

a. $42,000.

b. $60,000.

c. $62,000.

d. $80,000.

e. None of the above.