Income Tax Lesson 207 - Partnerships

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 You will need IRS Publication 541 to complete the following questions:

1. The Rising Moon Partnership with a fiscal year ending March 31 terminated the partnership on January 31, 2008. If no extension is filed by Rising Moon, by what date must they file their final Form 1065 U.S. Return of Partnership Income?

A. March 14, 2009.
B. April 15, 2009.
C. May 15, 2008.
D. July 15, 2008.

2. A domestic limited liability company with at least two members that does not file Form 8832, Entity Classification Election, is classified as:

A. An entity disregarded as an entity separate from its owner by applying the rules in regulations section 301.7701-3.
B. A partnership.
C. A corporation.
D. A non-entity which requires members to report the income and related expenses on Form 1040.

3. Members of a family can be partners. Family members generally will be recognized as partners if:

A. The partnership agreement states that they have a right to share in earnings and profits of the partnership.
B. Capital is not a material income-producing factor, they joined together in good faith for the conduct of a business, and they agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner.
C. Capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction, actually own the partnership interest but allow the related partner to control the interest.
D. The partnership agreement designates who the partners are, what degree of service they will perform for the partnership and the extent to which they share in the profits, losses, and other attributes of the partnership.

4. Partnership A purchased a tract of land for investment for $50,000. They immediately sold the land to Partnership B for $70,000. The fair market value of the land of the time of sale was $75,000. Betty owns 50% of Partnership A. Betty owns 30% and her mother, Irene, owns 30% of Partnership B. All other partnership owners are not related to Betty, Irene, or each other. Identify the nature and the amount of gain (loss) Partnership A should properly report for tax for the year of the sale.

A. Partnership A should report a short-term capital gain of $20,000.
B. Partnership A should report an ordinary gain of $20,000 because the sale was made to a related party.
C. Partnership A may elect to defer the $20,000 capital gain on the sale of the property.
D. Partnership A should report $25,000 capital gain on the sale of the property.

5. Generally, no gain or loss is recognized by the partnership or a partner when the partner contributes property to the partnership, unless:

A. The partnership is being formed.
B. A gain is realized on the transfer of property to a partnership that would be treated as an investment company if the partnership were incorporated.
C. The partnership is already operating.
D. Unencumbered depreciable property is contributed.

6. Sharon provides services to a partnership in 2008 in exchange for a capital interest of 30% worth $25,000. Sharon's basis in the partnership is:

A. Zero since she exchanged services for her interest.
B. $25,000, which must be reported by her as income in the year of receipt if the interest is vested.
C. The present value of $25,000 computed over the lesser of Sharon's remaining life or the average remaining life of the other partners.
D. Considered a profits interest and has a zero basis.

7. A loss incurred from the abandonment of a partnership interest is an ordinary loss when:

A. The partner receives a de minimis or deemed distribution.
B. The partner's capital account reflects a positive balance.
C. The partner transfers the entire interest to a non-related party.
D. The transaction is not a sale or exchange and the partner has not received an actual or deemed distribution from the partnership.

8. Larkspur, a calendar year partnership, is owned equally by Nathan, Jerry, Jon, and Marty. The partnership agreement states that Nathan will receive 25% of the profit (loss) for the partnership with a minimum of $15,000 for his services to the partnership. The other partners are each to receive 25% of the profit (loss). The net income of the partnership without regard to the $15,000 minimum is $40,000 for 2008. The partnership should deduct a guaranteed payment of:

A. $15,000.
B. $10,000.
C. $0.
D. $5,000.

9. Patti and Kae formed a partnership in which they share income and loss equally. Kae contributes land on which there is a recourse mortgage of $18,000. The land has an adjusted basis to Kae of $15,000 and a fair market value of $20,000 at the time of the contribution. Patti contributes $2,000 to the partnership in cash. What amount of gain should Kae recognize as a result of the contribution of property?

A. $0.
B. $9,000.
C. $5,000.
D. $2,000.

10. Mary and Jonah formed the Quaking Aspen Partnership. Mary contributed $25,000 in cash and Jonah contributed property with an adjusted basis of $40,000, with a fair market value of $25,000. Quaking Aspen sells the contributed property to an unrelated party 2 years after start up for $27,000. How much gain (loss) should the partnership recognize on the sale of the contributed property?

A. $0.
B. $2,000 gain.
C. $15,000 loss.
D. $13,000 loss.

11. Jacob contributes property with a fair market value of $7,000, adjusted basis of $4,000, and a mortgage of $1,000, which the partnership assumes, to a partnership for a 40% interest in the partnership. What is Jacob's basis in his partnership interest?

A. $4,000.
B. $3,000.
C. $6,000.
D. $3,400.

12. Abby sells her 50% interest in the ABC partnership to Marty for $1,000 cash. Her outside basis at the time is $775. The partnership has inventory and a capital asset with respective bases of $1,200 and $300 and respective fair market values of $1,500 and $450. Abby should properly recognize:

A. Ordinary income of $300 and a capital loss of $75.
B. Capital gain of $225 on the sale of her partnership interest.
C. An ordinary gain of $225 since she received cash of at least that amount.
D. Ordinary income of $150 and a capital gain of $75.

13. A newly-formed single-member domestic limited liability company (LLC) is eligible to file an election to be taxed as a:

A. Disregarded entity.
B. Corporation.
C. Either A or B above.
D. Partnership.

14. Bill and Jimmy formed a new partnership. Bill contributes property that has an adjusted basis of $1,400 and a fair market value of $2,000 to the partnership. Jimmy contributes $2,000 in cash to the partnership. Each partner's capital account as reflected on the partnership's books is $2,000. What is the adjusted basis of each partner's interest?

A. Bill's at $1,400 and Jimmy's at $1,400.
B. Bill's at $1,400 and Jimmy's at $2,000.
C. Bill's at $1,700 and Jimmy's at $1,700.
D. Bill's at $2,000 and Jimmy's at $2,000.

15. Carol owns 50% of the capital interest in ABC Partnership and 50% of the profits interest in XYZ Partnership. In 2006 for $100,000, ABC Partnership sells land to XYZ Partnership, which XYZ Partnership will use in its trade or business. The ABC Partnership's adjusted basis in the land at the time of the sale was $120,000. In 2008, the XYZ Partnership sells the land to an unrelated third party for $160,000. How much gain will the XYZ Partnership recognize in 2008?

A. $30,000.
B. $40,000.
C. $60,000.
D. $20,000.

16. Archie sells his 50% interest in XYZ Partnership to Hal for $5,000 cash. His outside basis in the partnership is $3,500. The partnership has inventory and a capital asset with respect to basis of $6,000 and $2,000. The respective fair market values of the inventory and capital asset are $8,000 and $1,000. Archie should properly recognize:

A. Ordinary income of $2,000 and a capital loss of $500.
B. Capital gain of $1,500 on the sale of his partnership interest.
C. Ordinary income of $1,500, the amount of cash he received.
D. None of the above.

17. Michael has a partnership interest with a zero basis. The partnership has inventory valued at $250,000. Michael's share of the ordinary income to be received from the sale of the inventory would be $10,000. In 2008, Michael sells his partnership interest for $30,000. Michael we report the following gain in 2008.

A. $30,000 capital gain.
B. $20,000 ordinary gain and $10,000 capital gain.
C. $10,000 ordinary gain and $20,000 capital gain.
D. No gain or loss.

18. In 2008, Linda sold her partnership interest for $25,000. Her adjusted basis at the time of the sale is $22,500 which includes her $12,500 share of partnership liabilities. When she initially invested in the partnership, she contributed $10,000 worth of equipment. There was no profit or loss at the partnership level at the time she sold her interest. What is the amount and nature of her gain or loss from the sale of her partnership interest in 2008?

A. $7,500 ordinary loss.
B. $10,000 capital gain.
C. $12,500 ordinary gain.
D. $15,000 capital gain.

19. Under a partnership agreement, Fred is to receive 30% of the partnership income, but not less than $8,000. In 2008 the partnership has net income of $20,000. What is the amount of guaranteed payment that can be deducted by the partnership in 2008?

A. $8,000.
B. $6,000.
C. $2,000.
D. $0.

20. Jane gave each of her two children, Jake & Jeff, a 30% interest in her clothing store. Capital is a material income-producing factor. Jeff is 21 and has worked in the store since he was 15 and has developed significant sales skills and helps his mom with the management duties. Jake is 25, married and has a job in another state and does not participate in any of the stores management decisions. Who are recognized as partners?

A. Jane.
B. Jane and Jake.
C. Jane, Jake, and Jeff.
D. Jane and Jeff.

21. In which of the following ownership combinations would Fred be treated as owning more than 50% of the partnership?

A. Fred 20%, Fred's Son 20%, Fred's Uncle 60%.
B. Fred 25%, Fred's Wife 10%, Fred's Aunt 75%.
C. Fred 40%, Fred's Nephew 20%, Fred's Son 40%.
D. Fred 45%, Fred's Cousin 55%.

22. A partner's basis in a partnership interest includes the partner's share of a partnership liability in all of the following, except:

A. A liability that creates or increases the partnership's basis in any of its assets.
B. A partner's share of accrued but unpaid expenses of a cash basis partnership.
C. A liability that is a nondeductible, non-capital expense of the partnership.
D. A liability that gives rise to a current deduction to the partnership.

23. When payments are made to a retiring partner, or successor in interest of a deceased partner, for an interest in the partnership property, which of the following is correct?

A. Payments that are based on partnership income are not taxable as a distributive share of partnership income but for the interest in the partnership.
B. A retiring partner is treated as a partner until his or her interest in the partnership has been completely liquidated.
C. Payments made for a retiring partner's share of the partnership's unrealized receivables are treated as made in exchange for partnership property if capital is not a material income producing factor and the retiring partner was a general partner.
D. If the amount of the payment is based on partnership income, the payment is treated as a guaranteed payment.

24. The adjusted basis of Rebecca's partnership interest is $17,500. She received a distribution of $9,000 cash and a piece of land with an adjusted basis of $2,500 and a fair market value of $4,000. What is the gain to be recognized at the time of these distributions?

A. $1,500.
B. $-0-.
C. $4,500.
D. $6,000.

25. Peter is a partner in the Waltz, Foxtrot and Tango Partnership. The adjusted basis of his partnership interest at the end of the year 2007 was $30,000, which includes his $12,000 share of partnership liabilities. Peter sold his interest in the partnership for $20,000, and was relieved of his share of partnership liabilities. What is the gain or (loss) Peter must recognize?

A. $-0-.
B. $32,000.
C. $(10,000).
D. $2,000.

26. Joan's adjusted basis in the So-Lo Partnership is $15,000. She received a non-liquidating cash distribution of $2,500 and a piece of land with an adjusted basis of $7,500 and a fair market value of $5,000. What is the gain or loss to be recognized at the time of the distribution?

A. $5,000 loss.
B. $2,500 loss.
C. $-0-.
D. $5,000 gain.

27. Mike invested $10,000 cash for a 25% interest in Matthew and Lewis partnership. Mike materially participates in the partnership business. Matthew and Lewis Partnership had an $80,000 loss in 2008. The partnership agreement states that Mike is additionally liable for all the partnership liabilities of $5,000. What is the amount of Mike's deductible loss for Matthew and Lewis Partnership?

A. $10,000.
B. $11,250.
C. $15,000.
D. $20,000.

28. Zeke is a partner in Butter and Egg Partnership. Zeke is to receive 40% of the partnership's income, but not less than $20,000. The partnership has a net income of $10,000 after deducting the $20,000 in 2008. How much can the partnership deduct for Zeke's guaranteed payment on Form 1065 Partnership Return.

A. $0.
B. $8,000.
C. $12,000.
D. $20,000.

29. Marlene acquired a 30% interest in a partnership by contributing property that had an adjusted basis to her of $25,000, fair market value of $50,000 and a $40,000 mortgage. The partnership assumed the liability. What is Marlene's gain or loss on the contribution of her property to the partnership?

A. $0.
B. $3,000 gain.
C. $12,000 gain.
D. $10,000 loss.

30. On January 1, 2007, Brian contributed $20,000 cash to Lock and Key Partnership for a 25% interest. The adjusted basis of his partnership interest at the end of 2008 was $35,000, which included his $16,000 share of partnership liabilities and the contributed cash. The partnership had no other liabilities and no unrealized receivables or substantially appreciated inventory items. On December 31, 2008 Brian sold his entire interest in Lock and Key Partnership for $19,000 cash. Brian did not take any distributions in 2008. What is the amount of Brian's capital gain or (loss)?

A. $0.
B. $(1,000).
C. $16,000.
D. $19,000.

31. Clyde is a limited partner in Marathon Marchers Partnership. He contributed $40,000 in cash on the formation of the partnership. His current adjusted basis in the partnership is $50,000, which includes his share of partnership liabilities of $10,000. Clyde's share of unrealized receivables in the partnership is $12,000. Clyde sold his partnership interest for $85,000 cash. What is the amount and character of Clyde's gain?

A. Capital Gain $0           Ordinary Gain $35,000.
B. Capital Gain $45,000    Ordinary Gain $0.
C. Capital Gain $33,000    Ordinary Gain $12,000.
D. Capital Gain $23,000    Ordinary Gain $12,000.

32. Payments made by a partnership to a partner that are determined without regard to the partnership income are called:

A. Guaranteed payments.
B. Minimum payments.
C. Ordinary income.
D. Capital gains.

33. If the partner's distributive share of a partnership item cannot be determined under the partnership agreement, it is determined by his or her interest in the partnership. The partnership interest is determined by taking into account all of the following items, except:

A. The partner's relative contributions to the partnership.
B. The interests of all partners in economic profits and losses (if different from interests in taxable income or loss) and in cash flow and other nonliquidating distributions.
C. The amount of the partnership's nonrecourse liabilities.
D. The right of the partners to distributions of capital upon liquidation.

34. F & J Partnership had the following income for the current year:

Partners Fred and Joe share the profits and losses equally. What is Fred's share of the partnership income (excluding all partnership items which must be accounted for separately)?

A. $85,000.
B. $95,000.
C. $97,500.
D. $170,000.

35. A partnership, in which Jane is a 50% owner had a profit of $80,000. The partnership agreement provides for a 50-50 sharing of income. Capital is a material income producing factor. During the year, Jane performed services worth $20,000. What is the total income Jane should report from the partnership?

A. $20,000.
B. $40,000.
C. $50,000.
D. $80,000.

36. Under a partnership agreement, June is to receive 40% of the partnership income but not less than $12,000 a year. The partnership has net income of $20,000. What is the guaranteed payment that the partnership can deduct in figuring its ordinary income on Page 1 of Form 1065?

A. $0.
B. $3,200.
C. $4,000.
D. $8,000.

37. Sharon's basis in S&P Partnership is $185,000. In a complete liquidation of Sharon's interest in S&P, Sharon received the following:

What is Sharon's basis in the building?

A. $50,000.
B. $100,000.
C. $116,667.
D. $120,000.

38. The adjusted basis in Carol's partnership interest is $50,000. She receives a distribution of $10,000 cash, land that has an adjusted basis of $30,000 and a FMV of $50,000.

What is Carol's adjusted basis in the land?

A. $20,000.
B. $30,000.
C. $40,000.
D. $50,000.

39. Mrs. Zee sold her 30% interest in LPM partnership for $50,000. The partnership reports income on the accrual basis. Mrs. Zee's adjusted basis in the partnership interest was $30,000. The partnership had no liabilities at the date of the sale. The partnership had the following assets at the time of Mrs. Zee's sale:

How much should Mrs. Zee report as capital gain and ordinary gain?

A. Capital gain $20,000; Ordinary gain $0.
B. Capital gain $16,400; Ordinary gain $3,600.
C. Capital gain $13,700; Ordinary gain $6,300.
D. Capital gain $-0-; Ordinary gain $20,000.

 You will need IRS Instructions Form 1065 to complete the following questions:

40. Bytes, Ltd is a partnership formed by Warren Corporation, JCL Corporation, and Mike (an individual), to build and repair personal computers. The partners' profits interest in Bytes and their respective taxable year's are stated below. Assuming there is no business purpose for any particular year and no Section 444 election has been made, determine the partnership's required taxable year.

A. Since no business purpose to establish a particular year exists, the partnership must adopt the calendar taxable year.
B. The partnership may adopt a taxable year ending either May 31 or August 31.
C. Under the required tax year rules, the partnership must adopt a taxable year ending August 31.
D. Under the required tax year rules, the partnership must adopt a calendar year.

41. Comfy Chairs Manufacturing, Ltd. Operates as a partnership and files Form 1065. Comfy manufactures inflatable lounge chairs. During tax year ended December 31, 2008, Comfy generated income and expenses as stated below. What is the correct amount of ordinary income (loss) from trade or business activities Comfy should report on Schedule K for 2008?

A. $65,000.
B. $69,500.
C. $50,000.
D. $30,000.

42. Shizaam Bakery operates as a calendar year partnership. Shizaam's two partners, Kalla and Henry share profits and losses 60% and 40%, repectively. For tax year ended December 31, 2008, Shizaam had the following income and expense:

Compute the partnership's ordinary income and flow through amounts to partners.

A. Kalla - ordinary income $85,500 and short-term capital loss $3,000; Henry - ordinary income $57,000 and short-term capital loss $2,000.
B. Kalla - ordinary income $82,500; Henry - ordinary income $55,000.
C. Kalla - ordinary income $81,000, interest income $1,500 and short-term capital loss $3,000; Henry - ordinary income $54,000, interest income $1,000 and short-term capital loss $2,000.
D. Kally - ordinary income $84,000, interest income $1,500 and short-term capital loss $3,000; Henry - ordinary income $56,000, interest income $1,000 and short-term capital loss $2,000.

43. Lori's outside basis in the Briar Patch Partnership at January 1, 2008, was $11,000. She is a 50% partner and shares profits and losses in the same ratio. For 2008, the partnership's ordinary business income was $40,000, tax-exempt interest income $200. Lori received a cash distribution from the partnership of $700 in 2008. If the partnership were to liquidate on December 31, 2008, what would be Lori's basis for determining gain or loss?

A. $24,900.
B. $30,750.
C. $30,400.
D. $30,300.

44. The due date, without regard to extensions, of a domestic partnership filing U.S. Return of Partnership income Form 1065 is the 15th day of which month following the end of the tax year?

A. Third.
B. Fourth.
C. Sixth.
D. Ninth.

45. On January 1, 2008, Ben and Jerry each own 50% of the B&J Fudge partnership. B&J Fudge employs the cash method of accounting and receives $1,000 in interest income each month from an unrelated party loan receivable. On July 1, 2009, Jerry purchased 50% of Ben's partnership interest. There were no other changes in partnership interest for the remainder of the 2008 year. How much does Ben report as his ratable share of the interest income for 2008?

A. $7,500.
B. $6,000.
C. $4,500.
D. $3,000.

46. The L&J Auto Parts Store operated as an accrual based partnership and filed a form 1065 for 2008. In addition to receipts from parts sales of $250,000, they had the following other items of income and expenses for 2008.

What is the correct Ordinary income or Loss that L&J should report on line 22 of their 2008 form 1065?

A. $85,000.
B. $115,000.
C. $100,000.
D. $150,000.

47. Which of the following partnership items must be separately stated on the partner's K-1:

A. Cost of goods sold.
B. Employee benefit programs.
C. Charitable contributions.
D. Taxes and licenses.

48. A partner is considered not at risk for which of the following amounts:

A. The money and adjusted basis of any property the partner contributed to the activity.
B. The partner's share of net income retained by the partnership.
C. An allocation of a loss, deduction, or expense attributable to a partnership nonrecourse liability.
D. Certain amounts borrowed by the partnership for use in the activity if the partner is personally liable for repayment.

49. Simon and Maggie Partnership, a calendar year partnership, with two partners, filed its 2007 Form 1065 tax return on December 31, 2008. An extension of time to file was not filed. What is the amount of their Failure to File penalty?

A. $50.
B. $100.
C. $500.
D. $1,620.

50. Alex and Arthur are equal partners in the A&R Partnership. Alex receives a guaranteed payment of $5,000. The partnership had distributive net income (after deducting the guaranteed payment of $5,000) of $80,000. What amounts are subject to self employment tax?

A. Alex: $37,500    Arthur: $37,500.
B. Alex: $42,500    Arthur: $42,500.
C. Alex: $40,000    Arthur: $40,000.
D. Alex: $45,000    Arthur: $40,000.

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Revised: 08/08/11