CHAPTER 9—TAXATION OF PARTNERSHIPS AND
PARTNERS Key
1. Under the ‘‘check the box’’ regulations, any unincorporated business having two or more owners and that
does not elect to be taxed as a corporation will be treated as a partnership.
2. Owners of investment property can elect that Subchapter K not apply to their ventures if each owner retains a
separate and undivided ownership interest in the acquisition, operation, and disposition of the property.
3. It is possible for a business to be taxed as a partnership even though one of its partners is a corporation.
4. General partnerships are owned solely by two or more general partners, and limited partnerships are owned
solely by two or more limited partners.
5. A limited partner, by definition, may not participate in the management of the limited partnership.
6. A contributing partner’s holding period for an interest in a partnership begins on the date the partnership
interest is acquired.
7. B contributes her business property to AB Partnership. This property has a market value of $2,000 and a basis
to B of $1,500. The entity theory applies in this situation. Accordingly, the basis of the property to the
partnership is $2,000, and B recognizes a $500 gain.
8. When noncash assets are contributed to a partnership, the entity theory usually applies and, therefore, gain or
loss is recognized.
9. The partnership’s holding period for assets contributed to the partnership by a partner begins with the date the
assets are contributed.
10. A partner’s share of liabilities is generally based on her or his economic risk of loss in the case of recourse
debt and loss-sharing ratio in the case of nonrecourse debt.
11. When a partner’s share of debt is decreased, the reduction is treated as a cash distribution from the
partnership to the partner.
12. The contribution of depreciated property in a tax-free exchange for a partnership interest does not trigger the
§ 1245 or § 1250 depreciation recapture provisions.
13. Partners may agree to specially allocate any existing revenue, expense, or other partnership item in any way
they wish when (a) they have owned their interest in the partnership for the entire year, and (b) the allocation
has a substantial economic effect. (Assume all partners contributed cash for their capital interests.)
14. Special allocations of depreciation, depletion, gain, and loss accrued at the date property is
contributed to a partnership is optional.
15. An individual who contributes services in exchange for an unrestricted capital interest in a
partnership has includible ordinary income equal to the fair market value of the capital interest.
16. Organization costs of a partnership can be deducted when incurred or paid, or they can be amortized on a
straight-line basis over a period not to exceed 60 months, provided the partnership files the proper election.
17. Syndication fees paid by a partnership may be amortized on a straight-line basis over a period of 60 months
or longer.
18. Form 1065 and Schedule K-l are prepared according to the aggregate theory; however, special tax elections
usually reflect the entity theory.
19. An individual who contributes services in exchange for an interest in the future profits of a newly formed
partnership does not recognize current year income on the receipt of the interest.
20. S owns a 30 percent interest in the capital and profits of ST partnership. S sold land ($5,000 basis) to ST for
its fair market value of $3,000. S’s $2,000 loss will be disallowed to him.
21. A has been a partner in the ABC Partnership for only four months. During the current year, the partnership
sold investment land that it purchased six years ago and recognized a $100,000 gain. A’s distributive share of
this gain is long-term capital gain.
22. A 70 percent partner has a $5,000 recognized loss when he sells equipment with a basis of $35,000 to the
partnership at its FMV of $30,000.
23. In most instances, a new partnership should use a January 31 year-end in order to maximize deferral of
partnership income for calendar year partners.
24. W, B, and G, the sole owners of a partnership, use different tax years for their individual returns. They agree
to adopt concurrent tax years for their personal returns. The partnership may also change its tax year to coincide
with those of the partners without approval from the IRS.
25. For purposes of determining a year-end for the partnership, a principal partner is defined as one who owns
50 percent or more of the partnership.
26. The portion of a partner’s distributive share of losses that exceeds the partner’s basis may be carried forward
indefinitely and deducted in a later year or years when that partner’s basis is increased.
27. The flow-through of partnership losses is considered to be the last event to occur during a partnership’s
taxable year.
28. Dividend and interest income are considered passive activity income to a partner.
29. Any portion of a partner’s distributive share of current year partnership loss that is a nondeductible passive
activity loss does not reduce the partner’s outside basis in the partnership interest.
30. A guaranteed payment from a partnership always represents current ordinary income to the recipient
partner.
31. Which of the following is not considered a partnership for Federal income tax purposes?
32. Which of the following is not a legal characteristic of a general partnership?
33. Based on the entity concept of partnerships, which of the following statements is false?
34. Which of the following transactions between partnerships and partners are reported based on the entity
concept?
35. An individual received a 70 percent capital interest in a general partnership by contributing the following:
· Investment land purchased 10 years ago for $40,000 and valued at $90,000. There was a $50,000 nonrecourse
debt on the land that was also transferred to the partnership.
· Services to organize the partnership valued at $22,500.
· Business inventory purchased nine months ago for $10,000 and valued at $8,000.
This general partner’s basis in the partnership after the contribution is
36. T transfers a building ($90,000 market value, $40,000 basis), plus a $60,000 nonrecourse debt on the
building, to a partnership in exchange for a 30 percent capital interest valued at $30,000. The partnership has no
other debt. T’s basis in his partnership interest is
37. On January 1, 2011, F exchanged proprietorship equipment ($102,000 market value and $84,000 basis) for a
20 percent capital interest in a partnership. The calendar year partnership’s 2011 and 2012 tax depreciation
deductions for this equipment total $8,400 (10% of contributed basis). How much of the $8,400 should be
allocated to F?
38. R exchanged a proprietorship parking lot ($23,000 market value and $15,000 basis) for a 10 percent capital
interest in a partnership. The partnership uses the property for four years and then sells it for $25,000. R must
recognize income from the sale of
39. An accountant performed services for EZ partnership and, in lieu of her normal fee, accepted a 10 percent
unrestricted capital interest in the partnership with a fair market value of $7,500. How much income from this
arrangement should the accountant report on her tax return?
40. Individual D contributes $15,000 cash and investment land (FMV $35,000 and basis $22,000) and
Individual E contributes business assets (FMV $50,000 and basis $60,000) to create the new DE Partnership.
Which of the following statements is accurate?
41. V is to perform services in exchange for a 20 percent capital interest in a partnership. Both the services and
the capital interest are valued at $30,000. However, the agreement between V and the partnership states that the
capital interest is forfeited if V violates any part of the service contract during the next five years. V believes the
market value of the interest at the end of the fifth year will be $70,000. (Assume this $70,000 value is accurate
when choosing among the answers below.) V has a choice of recognizing
42. In return for services rendered to it by C, the ABC partnership transfers a one-fourth capital interest to C
when it only has one asset, a tract of land with a basis of $20,000 and fair market value of $30,000. The
partnership has no liabilities. As a result, ABC’s recognized gain and basis in the land, respectively, are
43. QT Partnership, which operates a retail clothing store, had the following information at year-end:
Gross sales
$580,000
Cost of goods sold
377,000
Repairs
1,500
Depreciation
2,000
Employee salaries
32,000
Charitable contributions
500
Section 1231 gain
200
Short-term capital gain
350
Dividends
750
What is QT Partnership’s ordinary income for the year?
44. Which of the following is not used to calculate ordinary income (loss) on Form 1065?
45. Items that may be subject to special tax treatment and that are reported separately on Schedule K of the
partnership return include all of the following except
46. For the current year, Gamma Partnership has $60,000 net operating revenues before consideration of any
payment to its two equal partners, G and H. During the year, Gamma made a $25,000 guaranteed payment to
Partner G. It also distributed $5,000 cash to both G and H. Gamma and its two partners all use the calendar year
for tax purposes. Based on these facts, how much partnership income should G and H report on their current
year individual returns?
47. At the beginning of the current year, K’s basis in her partnership interest was $35,000. At the end of the
year, K received a K-1 from the partnership that showed the following:
Increase in share of partnership liabilities
$8,700
Cash withdrawal
20,000
Partnership taxable income
13,500
Dividend income
5,000
Short-term capital loss
1,400
Charitable contribution
500
Special allocation of depreciation
1,800
Based on these facts, compute K’s basis in her partnership interest at the beginning of the next year.
48. Two years ago, J contributed a capital asset (FMV $10,000 and basis $16,000) to the JKL Partnership. The
asset was a nondepreciable § 1231 asset to the partnership. During the current year, the partnership sold the
asset for $8,000. As a result of the sale, the partnership should recognize:
49. Z has a 40% interest in the profits and a 20% interest in the losses of the Lytton Partnership. Z’s outside
basis in his interest at the beginning of the year was $100,000. During the year the partnership borrowed
$80,000 on a fully recourse basis and took out a $200,000 nonrecourse mortgage on real estate owned by the
partnership. Based on these facts, which of the following statements is accurate?
50. At the beginning of the current year, Corporation M had a $50,000 basis in its 50% interest in the M&N
Partnership. For the year, M&N incurred a $168,000 net operating loss and a $32,000 capital loss and received
$20,000 of dividend income. The amount of the partnership’s debts did not change during the year and it made
no distributions to its partners. Based on these facts, what amount of M&N’s ordinary loss and capital loss may
M recognize during the current year?
51. Which of the following is not a requirement for “substantial economic effect” within the meaning of §
704(b)?
52. Which of the following is false regarding a guaranteed payment?
53. Partner A owns a 60% interest in the capital and profits of the ABC Partnership. During the year A sells
marketable securities to the partnership for their FMV of $30,000. The partnership intends to hold the securities
as an investment. Based on these facts, which of the following is accurate?
54. Partner J, a cash basis taxpayer, is a 75% partner in the cash basis J&D Partnership. During the current year,
J lends the partnership $50,000, receiving a properly executed note from the partnership bearing the market rate
of interest. J&D used the loan proceeds as working capital. Which of the following is accurate?
55. Unrelated individuals P, Q, R, and S are partners in PQRS Partnership. The partnership experienced an
operating loss of $5,000 during the year. Based on the following information, how much loss can the partners
deduct on their respective individual tax returns?
Partner
Basis in Partnership
Determined before
Loss Distribution
P
$10,000
Q
8,000
R
1,000
S
1,000
$20,000
The following answer choices are arranged in partner order of P, Q, R, and S.
56. G and H are individual partners in GH Partnership and share equally in its profits and losses. G had a basis
of $5,000 in the partnership, before considering the $14,000 ordinary loss reported by GH for 2011. In 2012, the
partnership reports a $6,000 ordinary gain on Form 1065. What income or loss should G properly report on his
2012 individual return? Assume that there are no other transactions that affect G’s basis in the partnership for
2011 and 2012.
57. X has the following income and loss items for the current year:
Salary from an unrelated corporation
$100,000
Interest income
1,000
Loss from a general partnership in which X materially participated
(20,000)
Loss from a limited partnership
(10,000)
X’s A.G.I, for the current year is
58. Which of the following partnership interests is not a § 469 passive activity?
59. Before consideration of his $8,000 distributive share of Jedi Partnership’s current year loss, individual C’s
basis in his partnership interest was $5,000 and his at-risk amount was only $2,500. C has no passive activity
income for the current year. Based on these facts:
60. O purchased a 20% interest in the OOPS partnership for $20,000 on January 1, 2012. He purchased another
10% interest in OOPS for $10,000 on December 1, 2012. As of January 1, 2013, what is O’s holding period in
his partnership interest?
61. G is a 50% general partner and L is a 50% limited partner in the GL limited partnership. The partnership’s
ordinary business income for the year is $60,000. G receives a guaranteed payment of $15,000 for managing the
partnership and L receives a guaranteed payment of $5,000 for helping to arrange some financing for GL. How
much of this income is subject to the self-employment tax?