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Flashcards in Chapter 9 Deck (54)
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1

Which of the following entities is not considered a flow-through entity?


A. C corporation

B. S corporation

C. Limited Liability Company (LLC)

D. Partnership

A. C corporation

2

Which of the following statements exemplifies the entity theory of partnership taxation?


A. Partnerships are taxable entities.

B. Partnerships determine the character of separately stated items at the partnership level.

C. Partnerships make the majority of the tax elections.

D. Both partnerships are taxable entities and partnerships make the majority of the tax elections are correct

E. Both partnerships determine the character of separately stated items at the partnership level and partnerships make the majority of the tax elections are correct

E. Both partnerships determine the character of separately stated items at the partnership level and partnerships make the majority of the tax elections are correct

3

Gerald received a 33% capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?


A. $6,000

B. $9,000

C. $21,000

D. $24,000

B. $9,000

4

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with a FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?


A. $0

B. $4,000

C. $48,000

D. $52,000

A. $0

5

Erica and Brett decide to form their new motorcycle business as a LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?


A. $37,500

B. $40,000

C. $42,500

D. $45,000

D. $45,000

6

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:


A. Recourse - profit sharing ratios; nonrecourse - profit sharing ratios

B. Recourse - capital ratios; nonrecourse - capital ratios

C. Recourse - to partners with the ultimate responsibility for paying the debt; nonrecourse - profit sharing ratios

D. Recourse - profit sharing ratios; nonrecourse - to partners with the ultimate responsibility for paying the debt

C. Recourse - to partners with the ultimate responsibility for paying the debt; nonrecourse - profit sharing ratios

7

Which of the following statements is true when property is contributed in exchange for a partnership interest?


A. Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property.

B. The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution.

C. The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.

D. Services are not allowed to be contributed to a partnership in return for a partnership interest.

E. All of these are true.

C. The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.

8

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest, which of the following tax consequences does not occur in X2?


A. Cory reports $60,000 of ordinary income in X2

B. Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2

C. Adam and Jason receive an ordinary deduction of $30,000 in X2

D. Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2

B. Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2

9

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?


A. $10,000

B. $14,500

C. $17,000

D. $19,500

D. $19,500

10

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false?


A. The holding period of a capital or profits interest begins on the date the interest is received

B. Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain

C. Partners receiving only profits interests generally don't recognize income when the profits interest is received

D. Partners receiving only profits interests include their share of partnership debt in the tax basis of their partnership interest

B. Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain

11

Partnerships must maintain their capital accounts according to which of the following rules?


A. GAAP

B. 704(b)

C. Tax

D. All of these

E. Only GAAP and 704(b)

D. All of these

12

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition, Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with a FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?


A. $140,000

B. $165,000

C. $175,000

D. $200,000

A. $140,000

13

Which of the following does not represent a tax election available to either partners or partnerships?


A. Electing to change an accounting method

B. Electing to amortize organization costs

C. Electing to expense a portion of syndication costs

D. Electing to immediately expense depreciable property under Section 179

C. Electing to expense a portion of syndication costs

14

In what order should the tests to determine a partnership's year end be applied?


A. majority interest taxable year - least aggregate deferral - principal partners test.

B. principal partners test - majority interest taxable year - least aggregate deferral.

C. principal partners test - least aggregate deferral - majority interest taxable year.

D. majority interest taxable year - principal partners test - least aggregate deferral.

E. None of these.

D. majority interest taxable year - principal partners test - least aggregate deferral.

15

Sarah, Sue, and AS Inc. formed a partnership on May 1, 20X9 called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30% profits and capital interest while Sue has a 35% profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Inc. holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP use for 20X9 and which test or rule requires this year-end?


A. 9/30, majority interest taxable year

B. 12/31, majority interest taxable year

C. 12/31, principal partners test

D. 12/31, least aggregate deferral test

B. 12/31, majority interest taxable year

16

XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a corporation with a 6/30 year end, owns a 4% profits and capital interest while DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% of the profits and capital interests in XYZ. What tax year-end should XYZ use and which test or rule requires this year-end?


A. 4/30, principal partners test

B. 4/30, least aggregate deferral test

C. 12/31, principal partners test

D. 12/31, least aggregate deferral test

A. 4/30, principal partners test

17

This year, HPLC, LLC was formed by H Inc., P Inc., L Inc., and C Inc. Each member had an equal share in the LLC's capital. H Inc., P Inc., and L Inc. each had a 30% profits interest in the LLC with C Inc. having a 10% profits interest. The members had the following tax year-ends: H Inc. [1/31], P Inc. [5/31], L Inc. [7/31], and C Inc. [10/31]. What tax year-end must the LLC use?


A. 1/31

B. 5/31

C. 7/31

D. 10/31

B. 5/31

18

Which of the following statements regarding the process for determining a partnership's tax year-end is true?


A. Only the partners' profits interests are relevant when determining if a partnership has a majority interest taxable year.

B. Under the principal partners test, a principal partner is defined as a partner having an interest of 3% or more in the profits or capital of the partnership.

C. The least aggregate deferral test utilizes the partners' capital interests to measure the amount of aggregate deferral.

D. A partnership is required to use a calendar year-end if it has a corporate partner.

E. None of these is true.

E. None of these is true.

19

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _________.


A. $500,000

B. $1,000,000

C. $5,000,000

D. Partnerships may never use the cash method if they have corporate partners

C. $5,000,000

20

TQK, LLC provides consulting services and was formed on 1/31/X5. Aaron and ABC, Inc. each hold a 50% capital and profits interest in TQK. If TQK averaged $7,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?


A. Accrual method

B. Cash method

C. Hybrid method

D. Either accrual method or cash method

A. Accrual method

21

How does a partnership make a tax election for the current year?


A. Partnerships make certain elections automatically by simply filing their returns.

B. Partnerships make certain tax elections by filing a separate form with the IRS.

C. Partnerships do not need to file anything to make a tax election.

D. Partnerships do not make tax elections. Partners must make tax elections separately.

E. Partnerships make certain elections automatically by simply filing their returns, and partnerships make certain tax elections by filing a separate form with the IRS.

E. Partnerships make certain elections automatically by simply filing their returns, and partnerships make certain tax elections by filing a separate form with the IRS.

22

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?


A. To increase the amount of aggregate tax deferral partners receive

B. To minimize the amount of aggregate tax deferral partners receive

C. To align the year-end of the partnership with the year-end of a majority of the partners

D. To spread the workload of CPAs more evenly over the year

E. To minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners

E. To minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners

23

On 12/31/X4, Zoom, LLC reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualifying dividends, $22,000 in cost of goods sold, $50,000 charitable contribution, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?


A. ($8,000)

B. ($25,000)

C. ($60,000)

D. ($95,000)

B. ($25,000)

24

Which of the following would not be classified as a separately-stated item?


A. Short-term capital gains

B. Charitable contributions

C. MACRS depreciation expense

D. Guaranteed payments

C. MACRS depreciation expense

25

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?


A. Tim - Short-term capital gain

B. Ken - Ordinary Income

C. Hardware, Inc. - Long-term capital gain

D. All of these accurately report the gain to the partner

E. None of these accurately report the gain to the partner

C. Hardware, Inc. - Long-term capital gain

26

Kim received a 1/3 profits and capital interest in Bright Line, LLC in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: Sales - $150,000, Cost of Goods Sold - $90,000, Depreciation Expense - $45,000, Long-Term Capital Gains - $15,000, Qualifying Dividends - $6,000, and Municipal Bond Interest - $3,000. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?


A. ($15,000)

B. $6,000

C. $9,000

D. $15,000

E. None of these will be reported as ordinary business income (loss) on Schedule K-1.

E. None of these will be reported as ordinary business income (loss) on Schedule K-1.

27

A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss)?


A. General partner - only guaranteed payments affect self-employment earnings (loss)

B. General partner - ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss)

C. Limited partner - only guaranteed payments affect self-employment earnings (loss)

D. Limited partner - only ordinary business income (loss) affects self-employment income (loss)

E. Both general partner - ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss) and limited partner - only guaranteed payments affect self-employment earnings (loss) are correct

E. Both general partner - ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss) and limited partner - only guaranteed payments affect self-employment earnings (loss) are correct

28

Under proposed rules issued by the IRS, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?


A. The member is not personally liable for any of the LLC debt.

B. The member has authority to contract on behalf of the LLC.

C. The member spends 450 hours participating in the management of the LLC's trade or business during the taxable year.

D. The member is listed on the LLC's letterhead.

B. The member has authority to contract on behalf of the LLC.

29

Which of the following items are subject to the Medicare contribution tax when an individual partner is a material participant in the partnership?


A. Partner's distributive share of dividends

B. Partner's distributive share of interest

C. Partner's distributive share of ordinary business income

D. Both partner's distributive share of dividends and of interest are correct

D. Both partner's distributive share of dividends and of interest are correct

30

Which of the following items are subject to the Medicare contribution tax when a partner is a not a material participant in the partnership?


A. Partner's distributive share of dividends

B. Partner's distributive share of interest

C. Partner's distributive share of ordinary business income

D. All of these are correct.

D. All of these are correct.