Chapter 10: Partnership Taxation Key
1. A partnership generally must adopt the same tax year as its majority partners.
2. A partnership reports its income on a Form 1040.
3. Guaranteed payments made by a partnership must be made to individuals other than partners in the
partnership.
4. A partnership must separately report Section 1231 gains and losses rather than including them in ordinary
taxable income.
5. Income from a partnership is taxed to the partner only if the partner receives the income as a distribution
during the year.
6. The basis of a partner’s interest in a partnership is increased by losses of the partnership allocated to the
partner.
7. Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in
the partnership.
8. Partnership losses that are not used because a partner’s basis in the partnership interest is zero may not be
carried forward and are lost by the partner.
9. Partnership income is taxed at the same tax rates as the income of corporations.
10. Because a partnership does not pay taxes, a partnership is not recognized as a legal entity under civil law.
11. In general, income is recognized by the partner when a partnership interest is received in exchange for
services rendered to the partnership.
12. The holding period of property contributed to a partnership includes the period of time that the contributor
has held the property.
13. A partnership may not show a loss as a result of deducting guaranteed payments made to the partners.
14. A partnership tax year will close if the partnership ceases to carry on any business activity.
15. The tax year of a partnership generally closes upon entry of a new partner.
16. Ownership of a partnership interest by a taxpayer’s brother is considered indirect ownership by the
taxpayer.
17. If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of
property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital
asset to the partnership.
18. The “at-risk” rule applies, with limited exceptions, to all taxable activities.
19. The “at-risk” rule acts to prevent tax shelters from generating large losses for their investors while exposing
them to little personal risk.
20. The “at-risk” rule does not apply to activities involving real estate.
21. A partnership may deduct a single personal exemption in calculating ordinary taxable income or loss.
22. If Margo and Bruce purchase and operate an ice cream store, for tax purposes they have formed a
partnership.
23. Guaranteed payments received from a partnership are included in the income of the partner receiving the
payments on a cash basis, without regard to the partnership’s tax year.
24. Losses on transactions between a partnership and its partners are always disallowed.
25. There is no general partner required in a limited liability company (LLC).
26. Limited liability companies may operate in more than one state.
27. Under which of the following circumstances would a partnership terminate and close its tax year?
A. Divorce of a partner
28. Sabrina contributes a building with an adjusted basis of $40,000 to a partnership. The fair market value of
the building is $100,000 on the date of the contribution. What is Sabrina’s basis in her partnership interest
immediately after the contribution?
A. $0
29. Which of the following items must be reported separately from ordinary income or loss on a partnership
return?
30. Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the
building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this
transaction?
A. $95,000 loss
31. Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent
interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During
2011, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership
intends to hold the rental as inventory for resale. What is the amount and nature of Barry’s gain or loss on this
transaction?
A. $40,000 long-term capital loss
32. On July 1, 2011, Bertram acquired a 30 percent interest in Sycamore Company, a partnership, by
contributing property with an adjusted basis of $6,000 and a fair market value of $12,000. The property was
subject to a mortgage of $8,000, which was assumed by Sycamore Company. What is Bertram’s basis in his
partnership interest in Sycamore Company immediately after the partnership contribution?
33. On July 1, 2011, Ambrose was admitted to partnership in the firm of Ambrose and Nectar. His contribution
to capital consisted of 500 shares of stock in Paniculata Corporation, which he bought in 1985 for $10,000 and
which had a fair market value of $50,000 on July 1, 2011. Ambrose’s interest in the partnership’s capital and
profits is 25 percent. On July 1, 2011, the fair market value of the partnership’s net assets (after Ambrose was
admitted) was $200,000. What is Ambrose’s taxable gain in 2011 on the exchange of stock for his partnership
interest?
34. Nash and Ford are partners who share profits and losses equally. For the year ended December 31, 2011, the
partnership had book income of $80,000 which included the following deductions:
Guaranteed payments to partners:
Nash
$35,000
Ford
25,000
Charitable contributions
5,000
What amount should be reported as ordinary income on the partnership return for 2011?
35. For tax purposes, in computing the ordinary income of a partnership, a deduction is allowed for:
36. The partnership of Felix and Oscar had the following items of income during the tax year ended December
31, 2011:
Income from operations
$156,000
Tax-exempt interest income
8,000
Dividend income
6,000
What is the total ordinary income from business activities passed through by the partnership for the 2011 tax year?
37. The partnership of Truman and Hanover realized the following items of income during the year ended
December 31, 2011:
Net income from operations
$62,000
Dividends from domestic corporations
4,000
Interest on corporate bonds
3,000
Net long-term capital gains
5,000
Net short-term capital gains
1,000
Both the partners are on a calendar year basis. What is the total income which should be reported as ordinary income from business activities of the
partnership for 2011?
38. Jordan files his income tax return on a calendar-year basis. He is the principal partner of a partnership
reporting on a June 30 fiscal year end basis. Jordan’s share of the partnership’s ordinary income was $24,000 for
the fiscal year ended June 30, 2011, and $72,000 for the fiscal year ended June 30, 2012. How much should
Jordan report on his 2011 individual income tax return as his share of taxable income from the partnership?
39. During 2011, Norman contributed investment property held for over one year to the Mary Ann Partnership
for a 40 percent interest in partnership capital and profits. His tax basis in the property contributed was $8,000,
and the property had a fair market value of $10,000 on the date of the contribution to the partnership. What gain
or loss should Norman report as a result of the contribution of the property to the partnership in exchange for
the 40 percent partnership interest?
40. Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and
Pedersen, but are otherwise unrelated. On August 1, 2011, Wallace sold 100 shares of Kalmia Mining
Corporation to the partnership for its fair market value of $7,000. Wallace had bought the stock in 1998 at a cost
of $10,000. What is Wallace’s deductible loss for 2011 as a result of the sale of this stock?
A. $0
41. Leslie contributes a building worth $88,000, with an adjusted basis of $38,000, to a partnership in exchange
for a 50 percent interest in the partnership’s capital and profits. What is the amount of Leslie’s basis in her
partnership interest immediately after the contribution?
42. Phil and Bill each own a 50 percent interest in P&B Interests. P&B Interests has ordinary income for the
year of $35,000 before guaranteed payments. If Phil receives guaranteed payments of $25,000 during the tax
year, what is the total income or loss that should be reported by Phil from the partnership for this tax year?
43. Barbara receives a current distribution consisting of $2,000 cash plus other property with an adjusted basis
to the partnership of $2,300 and a fair market value on the date of the distribution of $7,000. Barbara has a 10
percent interest in the partnership and her basis in her partnership interest, immediately prior to the distribution,
is $5,000. What is Barbara’s basis in the non-cash property received in the current distribution?
A. $2,000
44. An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a
fair market value of $150,000, adjusted basis of $55,000, and subject to a liability of $60,000. Gerry contributes
cash of $100,000. What amount of gain must Rita recognize as a result of this transaction?
45. An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a
fair market value of $150,000, adjusted basis of $55,000, and subject to a liability of $60,000. Gerry contributes
cash of $100,000. What is Rita’s basis in her partnership interest immediately after formation of the
partnership?
46. An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a
fair market value of $150,000, adjusted basis of $55,000 and subject to a liability of $60,000. Gerry contributes
cash of $100,000. What is the partnership’s basis in the building contributed by Rita?
47. Loretta contributes property to a partnership in exchange for a 25 percent partnership interest. The property
contributed has a fair market value of $45,000 and a basis of $35,000 on the date of the contribution to the
partnership. In addition, Loretta receives a 10 percent partnership interest, valued at $18,000, in exchange for
services rendered to the partnership. What is Loretta’s basis in her partnership interest, immediately after these
transactions?
48. Salix Associates is a partnership with an October 31 year-end. For the fiscal year ended October 31, 2011,
Salix Associates reported ordinary income of $100,000, after deducting guaranteed payments. Max, a calendar
year taxpayer, is a 30 percent partner in the partnership and received $2,000 monthly as a guaranteed payment
for the calendar year 2010, and $2,100 monthly for the calendar year 2011. What is the total income from the
partnership that Max should report on his 2011 individual income tax return?
49. Which of the following statements about partnerships is true?
50. A partner’s interest in a partnership is decreased by:
51. Which one of the following is not true about partnerships?
52. Jamie decides to contribute cash and property to a partnership she and her friends started. She contributes a
building worth $260,000 that she purchased for $100,000 and she also contributes $40,000 in cash. What is her
basis in the partnership?
53. Which one of the following is not true about partnerships and their income-reporting process?
A. The partnership must file a Form 1065.
54. Jim’s basis in his partnership is $200,000. His share of the 2011 income is $60,000. The partnership gave
him a $75,000 distribution in 2011. What is his new basis in the partnership and what is his taxable income?
55. Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that
has a $45,000 basis. What would the taxable income be for Owen and what is the partnership’s basis in the
machine?
56. Which of the following liabilities would be considered nonrecourse?
57. Which of the following is true about an LLC (Limited Liability Company)?
A. An LLC is always treated like a corporation for tax purposes.
58. Michael invests in Buxus Interests, a partnership. Michael’s capital contribution to the partnership consists
of $10,000 cash and equipment with an adjusted basis of $120,000 (fair market value of $150,000) subject to a
nonrecourse liability of $60,000.
Calculate the amount that Michael is at-risk in the activity after making the above contribution?
If Michael’s share of the partnership loss in the year after he makes the contribution is $150,000, how much of the loss may be deducted in
that year (before considering the limitations on passive losses)? Assume the partnership had no other transactions.
What may Michael do with the nondeductible part of the loss in part b?
The loss may be carried forward by the partner for an indefinite period, subject to similar limitations in the carryover years.
59. During 2011, Jay operates an automobile dealership. Jay’s amount at-risk at the beginning of the year is
$90,000, and during 2011 the dealership has a loss of $120,000.
What is the amount of the loss from the automobile dealership that Jay may deduct in 2011?
If the dealership has a profit of $63,000 in 2012 how much of the 2012 income is taxable to Jay?
60. Cooke and Thatcher form the C&T Partnership. Cooke contributes equipment with a fair market value of
$80,000 and a basis of $35,000, in exchange for an 80 percent interest in the partnership capital and profits.
Thatcher performs services worth $20,000 for the partnership in exchange for a 20 percent interest in capital
and profits.
What is the amount of Cooke’s recognized gain or loss (if any) as a result of the contribution to the partnership in exchange for the
partnership interest?
What is Cooke’s basis in his partnership interest immediately after the contribution?
What is the amount of Thatcher’s recognized income or loss (if any) on the contribution to the partnership?
What is Thatcher’s basis in her partnership interest immediately after the contribution?
What is C&T Partnership’s basis in the equipment received from Cooke?
61. Oscar and Frank form an equal partnership, the O and F Partnership. Oscar contributes land with an adjusted
basis of $45,000, subject to a mortgage of $100,000, in exchange for a partnership interest worth $250,000.
Frank contributes cash of $100,000 and performs services for the partnership in exchange for a partnership
interest worth $250,000.
What is the amount of Oscar’s recognized gain or loss (if any) as a result of the contribution to the partnership in exchange for the
partnership interest?
What is Oscar’s basis in his partnership interest immediately after the contribution?
What is the amount of Frank’s recognized income or loss (if any) as a result of the receipt of the partnership interest in exchange for the
cash and services?
What is the partnership’s basis in the land received from Oscar?
a.
b.
62. Lucky’s original contribution to the Boxwood Partnership was land with a basis of $5,000 and a market
value of $55,000. Her share of the taxable income from the partnership since her original contribution has been
$95,000 and Lucky has received $50,000 in cash distributions from the partnership. Lucky did not recognize
any gains as a result of the distributions. Calculate Lucky’s current basis in her partnership interest.
63. Cypress Road is a partnership with two partners, Saul, a 60 percent partner, and Robbie, a 40 percent
partner. The partnership has income for the year of $100,000 before guaranteed payments. Guaranteed
payments of $50,000 are paid to Robbie for his management services during the year. Calculate the amount of
income that should be reported by Saul and Robbie from the partnership for the year.
Saul should report income of $__________
Robbie should report income of $__________
64. Lilac Designs is a partnership with a tax year that ends November 30, 2011. During that year, William, a
partner, received $5,000 per month as a guaranteed payment and his share of partnership income after
guaranteed payments was $20,000. For December of 2011, William received a guaranteed payment of $10,000.
Calculate the amount of income from the partnership that William should report for his tax year ended
December 31, 2011.
65. Rochelle owns 40 percent of a partnership and her brother owns the remaining 60 percent interest. During
the current tax year, Rochelle sold a building to the partnership for $180,000, to be used for the partnership’s
office. She had held the building for 3 years at the time of the sale.
Assuming Rochelle’s basis in the building was $200,000, what is the amount and nature of her gain or loss?
Assuming Rochelle’s basis in the building was $150,000, what is the amount and nature of her gain or loss?
a.
c.
d.
66. Jerry receives cash of $15,000 and a building with a fair market value of $50,000 (adjusted basis of
$30,000) in a current distribution.
Assuming his basis in his partnership interest was $50,000, what amount of gain must Jerry recognize as a result of the current
distribution?
Assuming his basis in his partnership interest was $10,000, what amount of gain must Jerry recognize as a result of the current
distribution?
67. Jennifer has a 25 percent interest in the Aspen Aircraft partnership. Her basis in her partnership interest is
$10,000 at the beginning of 2011. The partnership reported the following activity for 2011:
Ordinary income
$40,000
Section 1231 gain
10,000
Charitable contribution
12,000
Total distributions to partners
20,000
68. Debbie and Betty operate the D & B partnership. Betty, a 50 percent partner, receives a guaranteed payment
of $10,000 for her services in operating the partnership. The partnership has income before the guaranteed
payment of $5,000. What is the taxable income Debbie and Betty must each report from the partnership for the
year?
Debbie should report income of $__________
Betty should report income of $__________
69. A partner contributes assets with a basis of $50,000 and a fair market value of $80,000 to a partnership.
What is the basis of the property to the partnership and what is the general rule for the basis of appreciated
property contributed to a partnership?
70. A distribution of cash to a partner was greater than his basis in the partnership. How would this distribution
be treated by the partner, assuming the distribution is not a liquidating distribution?