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An example of the aggregate concept underlying partnership taxation is the fact that the partners rather than the partnership) pay tax on partnership income.

A) True
B) False

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Limited liability company


A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) H) and K)
T) A) and N)

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Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Moreover, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.

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Because neither partner is a C corporati...

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Belinda owns a 30% profit and loss interest in the BOW LLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000.

A) True
B) False

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Brad is a 40% member in the BB LLC. At the beginning of the tax year, his capital account showed a balance of $120,000. In this case, his capital account equals his basis in the LLC interest excluding his share of the LLC's debts. His prior year-end Schedule K-1 showed recourse debt guaranteed by Brad) and nonrecourse debt of $10,000 and $20,000, respectively. During the current year, BB reported net ordinary income of $200,000 and nondeductible expenses of $2,000. There were no distributions during the year. At the end of the year, Brad's current year Schedule K-1 showed recourse guaranteed) and nonrecourse debt of $20,000 and $30,000, respectively. How much is Brad's basis in the LLC interest at the end of the year?


A) $199,200.
B) $200,000.
C) $220,000.
D) $249,200.
E) $250,000.

F) B) and E)
G) A) and E)

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Match each of the following statements with the terms below that provide the best definition. -Schedule M-1


A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to taxable income.
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Theory under which a partnership's recourse debt is shared among the partners.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) G) and J)
R) E) and M)

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The RGBY LLC operating agreement provides that 50% of depreciation expense is allocated to Red, and all remaining income including the remaining 50% of depreciation) is allocated equally among the four partners. Before guaranteed payments and depreciation, RGBY's net income is $120,000 for the year. RGBY's depreciation expense is $20,000, and it paid a guaranteed payment to Yellow of $8,000. Assume that all allocations and payments meet the substantial economic effect rules. After all deductions and special allocations are taken into account, Red is allocated a net deduction of $15,500 from the partnership.

A) True
B) False

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Match each of the following statements with the terms below that provide the best definition. -Inside basis


A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to taxable income.
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Theory under which a partnership's recourse debt is shared among the partners.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) C) and N)
R) M) and P)

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Which of the following allocations is most likely to meet the substantial test in the substantial economic effect rules? Assume all economic effect tests are met.)


A) The ROY LLC specially allocates $20,000 of income each year to partner Red with no offsetting loss allocations in other years.
B) The YGB LLC specially allocates $30,000 of ordinary income this year to partner Green with an offsetting allocation of loss in that same amount next year.
C) The BPV LLC specially allocates $10,000 of capital gains to Violet and $10,000 of interest income to Purple because Purple is in a lower tax bracket.
D) The PIR LLC specially allocates $60,000 of income to Indigo with no offsetting allocations. Indigo has expiring net operating losses.

E) A) and B)
F) A) and C)

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MNO Partnership has three equal partners. Moon, Inc. and Neptune, Inc. each have fiscal years ending March 31. Omega uses the calendar year. MNO's required taxable year-end is March 31 under the majority partner rule.

A) True
B) False

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Concerning a partnership's Form 1065, which of the following statements is not true?


A) The partnership reconciles its "Income Loss) per Books" with "Income Loss) per Return" 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 taxable/deductible 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) The partnership deducts its allowable business interest expense on Form 1065, page 1, and allocates any excess to the partners for carryover.

F) B) and D)
G) None of the above

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Match each of the following statements with the terms below that provide the best definition. -Organizational costs


A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to taxable income.
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Theory under which a partnership's recourse debt is shared among the partners.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) F) and P)
R) C) and L)

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ACME Partnership has had the following gross receipts since its formation: $21.8 million in 2019, $24.6 million in 2020, $28.8 million in 2021, $23 million in 2022, and $32 million in 2023. ACME is not a tax shelter. Partner Meile, Inc. is a C corporation. In which tax years 2019 to 2023) must ACME use the accrual method?


A) 2019 and all following years, because it has a partner that is a C corporation.
B) 2021 to 2023, because gross receipts are more than $25 million in 2021.
C) 2022 and 2023, because average annual gross receipts are more than $25 million in 2021.
D) 2021 and 2023 because those are the only years in which gross receipts exceeded $25 million.
E) ACME can always use the cash method because it is not a tax shelter.

F) C) and D)
G) A) and E)

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The sum of the partners' ending basis amounts equals the partners' ending capital account balances. These amounts are shown on the partnership's Schedule K.

A) True
B) False

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Rebecca is a limited partner in the RST Partnership, which is not publicly traded. Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is $60,000) . Rebecca has a $40,000 adjusted basis outside basis) for her interest in RST before deduction of any of the passive losses) . Her amount "at risk" is $30,000 before deduction of any of the passive losses) . She also has $25,000 of passive income from other sources. She has no business losses for the year from other sources. How much of her $60,000) allocable RST loss can Rebecca deduct on her current-year tax return?


A) $25,000
B) $30,000
C) $40,000
D) $60,000

E) None of the above
F) B) and D)

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Which of the following is not a 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 these are requirements of the substantial economic effect test.

F) C) and D)
G) B) and C)

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Disguised sale


A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) E) and L)
T) B) and J)

Correct Answer

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Entity concept


A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) B) and M)
T) C) and I)

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Which one of the following statements is true regarding a partner's personal liability for partnership assets?


A) LLC members can never be liable for entity debts.
B) In a limited partnership, all partners have limited liability for partnership debts.
C) In a limited liability partnership, a partner might be subject to liability for other partners' malpractice.
D) In a general partnership, all partners are liable for entity debts.
E) None of these statements is true.

F) A) and B)
G) A) and C)

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At the beginning of the tax year, Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution of $20,000 cash from the partnership during the year. He is an active general partner and has no passive income or business losses from other sources. For the tax year, Zach will report:


A) A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000.
B) An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000.
C) A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
D) An ordinary loss of $44,000 and a nontaxable distribution of $20,000.

E) None of the above
F) All of the above

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