EA2 Study Unit 9.1-9.4 Questions PDF

******Study Unit 9:***** *****Partnerships -***** *****Contributions to a Partnership \| Subunit 1: Partnership Defined****** 42)Dianne owns 10% interest in DJJ Partnership and 20% of the outstanding stock of PAD Corporation. Her son, Nick, owns 60% of the outstanding shares of PAD Corporation. The...

******Study Unit 9:***** *****Partnerships -***** *****Contributions to a Partnership \| Subunit 1: Partnership Defined****** 42)Dianne owns 10% interest in DJJ Partnership and 20% of the outstanding stock of PAD Corporation. Her son, Nick, owns 60% of the outstanding shares of PAD Corporation. The PAD Corporation owns 50% interest in the DJJ Partnership. Dianne's sister, Dolores, owns 40% interest in the DJJ Partnership. Using the constructive ownership rules for partnerships, Dianne is considered to own how much of DJJ Partnership? A.50% Answer (A) is incorrect.\ *The stock the sister owns must be included.* **B.90%** **Answer (B) is correct.\ An individual is treated as owning the stock owned by his or her spouse, brothers and sisters, children, grandchildren, and parents. If 50% or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, that person is considered to own the stock, directly or indirectly, by or for his or her corporation in the proportion that the value of the stock (s)he owns bears to the value of all the stock in the corporation. Dianne is considered to own 90% of the partnership: 10% direct ownership, plus 80% indirect ownership (made up of her 20% ownership of PAD corporation plus her son's 60% ownership of the corporation times the 50% corporate ownership of the partnership), plus her sister's 40% ownership of the partnership.** C.80% D.20% === 45)Members of a family who must meet special requirements to be recognized as partners for determining a partner's distributive share include all of the following **EXCEPT** A.Spouses. B.Ancestors. Answer (B) is incorrect.\ *Ancestors do need to meet special requirements to be recognized as partners.* C.Lineal descendants. **D.Brothers and sisters.** **Answer (D) is correct.\ Under Sec. 704(e), the "family" of any individual includes only a spouse, ancestors, lineal descendants, and any trusts for the primary benefit of such persons. Brothers and sisters do not have to meet any special requirements to be recognized as partners.** === 10)Rimrock Partnership has a fiscal year ending June 30. The partnership's four partners have the following ownership percentages and fiscal years: Marble 30% Owner March 31 Stone 25% Owner December 31 Brick 25% Owner September 30 Quartz 20% Owner September 30 Assuming the partnership does not make a Sec. 444 election and does not establish a business purpose for a different period, what tax year must the partnership use to file its tax return? A.March 31. Answer (A) is incorrect.\ The tax year must be the partner's tax year that results in the least deferral of income to the partners. B.September 30. Answer (B) is correct.\ A partnership's required tax year is that of the partner(s) owning more than 50% of partnership capital and profits. If the majority partner(s) do not have the same year, the tax year of all principal (5%) partners must be adopted. If all principal partners do not have the same taxable year, under Temp. Reg. 1.706-1T(a)(1) and (2) the partnership must adopt the tax year of the partner that results in the least aggregate deferral of income to the partners. Aggregate deferral is the sum of the products of deferral for each partner and each partner's interest in partnership profits.  Using Marble's tax year would result in aggregate deferral of income of 4.95 \[(6 × 25%) + (6 × 20%) + (9 × 25%) + (0 × 30%)\].  Using Stone's tax year would result in aggregate deferral of 4.95 \[(3 × 30%) + (9 × 25%) + (9 × 20%) + (0 × 25%)\].  Using Brick's and Quartz's tax year would result in aggregate deferral of 2.55 \[(3 × 25%) + (6 × 30%) + (0 × 25%) + (0 × 20%)\].  Because Brick's and Quartz's tax years result in the least deferral of income, September 30 should be the partnership's tax year. C.December 31. D.June 30. === 11)Collins Partnership has a December 31 tax year, which is the tax year of its partners. Collins Partnership is not a member of a tiered structure nor has it previously made a Sec. 444 election. If Collins makes a Sec. 444 election, which of the following could the partnership elect as a tax year? A.September 30. Answer (A) is incorrect.\ A partnership that has the same tax year as all of its partners is ineligible for the Sec. 444 election. B.March 31. C.December 31. Answer (C) is correct.\ A partnership must use the same tax year as its partners unless a business purpose for using a different tax year is established or a Sec. 444 election is made. Because all the partners have the same tax year as the partnership, the partnership is ineligible for the Sec. 444 election. D.June 30. === 20)Rose and Irene each have a 50% interest in a partnership that started business on July 1. Rose uses a calendar year, while Irene has a fiscal year ending November 30. Which of the following is true? A.The partnership may use either the calendar year or fiscal year ending November 30 because each partner owns an equal percentage. B.The partnership may also use the calendar year because at least 50% is owned by a calendar-year taxpayer. C.The partnership must use the fiscal year ending November 30 because it results in a deferral of 11 months. Answer (C) is incorrect.\ A November 30 fiscal year end results in a 1-month deferral. D.The partnership must use the fiscal year ending November 30 because it results in a deferral of 1 month. Answer (D) is correct.\ A partner reports his or her distributive share of partnership items, including guaranteed payments, in that tax year of the partner within (or with) which the partnership's tax year ended. Unless an exception applies, the partnership must use a required tax year. The required tax year is the first of 1., 2., or 3., following, that applies. The partners, not the partnership, are obligated to make any estimated tax payments. 1. Majority interest tax year is the tax year of partners owning more than 50% of partnership capital and profits if they held the same tax year on the first day of the partnership tax year. 2. Principal partners' tax year is the same tax year of all principal partners, i.e., partners owning 5% or more in capital or profits. 3. Least aggregate deferral tax year is determined by multiplying each partner's ownership percentage by the number of months of income deferral for each possible partnership tax year and then selecting the tax year that produces the smallest total tax deferral. 6)Josephine acquired a 20% interest in a partnership by contributing property that had an adjusted basis to her of \$8,000 and a \$4,000 mortgage. The partnership assumed payment of the mortgage. What is the basis of Josephine's interest? A.\$4,000 B.\$1,600 C.\$4,800 Answer (C) is correct.\ Under Sec. 722, the basis of a partnership interest acquired by the contribution of property is the adjusted basis of the property to the contributing partner. Under Sec. 752(b), the assumption by a partnership of a partner's individual liabilities is treated as a distribution of money to the partner, which reduces the basis of the partner's interest (Sec. 733). Josephine's basis is the \$8,000 adjusted basis of the equipment contributed less the relieved individual liability (\$4,000 × 80% = \$3,200). The basis is \$4,800 (\$8,000 -- \$3,200). D.\$8,000 Answer (D) is incorrect.\ The basis is the basis of the equipment less any relieved individual liability. === 10)On June 1 of the current year, Kelly received a 10% capital interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of \$70,000 and a fair market value of \$100,000. In Kelly's current year income tax return, what amount must Kelly include as income from the transfer of the partnership interest? A.\$10,000 capital gain. B.\$7,000 capital gain. C.\$10,000 ordinary income. Answer (C) is correct.\ An individual must recognize compensation income when a partnership interest is received in exchange for services (whether current or past) rendered \[Reg. 1.721-1(b)(1)\]. The receipt of a capital interest in a partnership for services must be included in the year of receipt under Sec. 83. The income that should be recognized is the \$10,000 (\$100,000 × 10%) fair market value of the partnership interest received unless the interest is nontransferable or subject to a substantial risk of forfeiture. The income is ordinary because it is compensation for services. D.\$7,000 ordinary income. Answer (D) is incorrect.\ The amount is recognized at fair market value, not basis. === 11)Marlene acquired a 30% interest in a partnership by contributing property that had an adjusted basis to her of \$25,000, a 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.\$10,000 loss. B.\$0 Answer (B) is incorrect.\ The partnership recognizes no gain or loss, but Marlene does because she received boot from the partnership's assumption of her mortgage. C.\$12,000 gain. D.\$3,000 gain. Answer (D) is correct.\ To the extent liabilities assumed by the partnership exceed the partner's aggregate adjusted basis in all property contributed, the partner recognizes gain. Accordingly, Marlene recognizes a \$3,000 gain \[(\$40,000 × 70%) -- \$25,000\]. Note that a partner still bears responsibility for his or her share of the liabilities assumed by the partnership. === 13)Mr. A, Mr. B, and Mr. C formed a calendar-year partnership. Profits and losses are to be shared equally. Mr. A contributed a building to be used in the business that had an adjusted basis to him of \$10,000 and a fair market value of \$13,000. The partnership also assumed Mr. A's \$6,000 mortgage on the building. Mr. B and Mr. C each contributed \$4,000 in cash to the partnership's capital. What is the partnership's basis for determining depreciation on the building? A.\$10,000 Answer (A) is correct.\ Under Sec. 723, the partnership's basis in property is the contributing partner's basis at the time of contribution. Therefore, the partnership's basis in the building is Mr. A's adjusted basis of \$10,000. No adjustment in basis of the building is made for the mortgage. B.\$4,000 C.\$13,000 D.\$0 === 20)A partner's basis in a cash-basis partnership includes a partnership liability only if, and to the extent that, the liability A.Allows the partnership to accrue unpaid expenses. B.Gives rise to a current deduction to the partnership. Answer (B) is correct.\ A partner's basis in a cash-basis partnership includes a partnership liability only if, and to the extent that, the liability (1) creates or increases the partnership's basis in any of its assets; (2) gives rise to a current deduction; or (3) gives rise to a nondeductible, noncapital expense. C.Increases the partner's basis in the partnership. Answer (C) is incorrect.\ The liability should increase the partnership's basis in its assets, not the partner's basis. D.Decreases the partnership's basis in assets. === 1)Bob and Bill form a partnership with cash contributions of \$20,000 each. Bill is not a general partner. Under the partnership agreement, Bob and Bill share all partnership profits and losses equally. The partnership borrows \$60,000 to purchase depreciable equipment to be used in the partnership's business. Bob was required under the partnership agreement to pay the creditor if the partnership defaulted. Based upon these facts, what are Bob's and Bill's bases in the partnership? Bob Bill A. Bob \$50,000 Bill \$50,000 Answer (A) is incorrect.\ The partners do not share an equal amount of economic loss with regard to the liability. B. Bob \$80,000 Bill \$80,000 C.Bob \$80,000 Bill \$20,000 Answer (C) is correct.\ An increase in a partner's share of liabilities is treated as a contribution of money by such partner, which increases the partner's basis. Partners share recourse liabilities based on their ratio for sharing economic losses \[Reg. 1.752-2(a)\]. In the absence of guarantees and special arrangements, the limited partner's economic loss is usually limited to the amount of additional contributions the partner must make. Bob's basis in the partnership includes the full \$60,000 liability because he would be liable for the \$60,000 under the partnership agreement. D. Bob \$20,000 Bill \$20,000 ---------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 23)[]{#anchor} []{#anchor-1}Dave Burr acquired a 20% interest in a partnership by contributing a parcel of land. At the time of Burr's contribution, the land had a fair market value of \$35,000, had an adjusted basis to Burr of \$8,000, and was subject to a mortgage of \$12,000. Payment of the mortgage was assumed by the partnership. The partners share economic risk of loss according to their loss interest. The partnership has no other liabilities. Burr's basis for his interest in the partnership is[]{#anchor-2} ---------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 22)[]{#anchor-3}[]{#anchor-4} []{#anchor-5}Three individuals formed a partnership sharing in profits and losses equally. Mr. Aardvark contributed \$10,000 cash. Mr. Baboon contributed \$5,000 in cash and land worth \$5,000 with an adjusted basis of \$4,000. Mr. Camel contributed machinery with a fair market value of \$16,000 subject to a mortgage of \$6,000, which the partnership assumed, and with an adjusted basis of \$16,000. The partnership has no other liabilities. The adjusted basis of Mr. Baboon's interest in the partnership is[]{#anchor-6} ------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- +-----------------------------------+-----------------------------------+ | 3)[]{#anchor-7}[]{#anchor-8} | []{#anchor-9}Martin acquired a | | | 30% interest in LMN Partnership, | | | a cash-basis partnership, by | | | contributing \$15,000 cash and | | | the property listed below. In | | | addition, in order to become a | | | partner, Martin had to assume his | | | share of LMN's liabilities. | | | Partnership liabilities consisted | | | of a \$50,000 loan, incurred to | | | purchase assets used in the | | | business, and \$10,000 of | | | accounts payable. What is the | | | basis of Martin's interest in | | | LMN? | | | | | | \*The undeveloped land was | | | contributed subject to a | | | \$100,000 mortgage that was | | | assumed by the | | | partnership.[]{#anchor-10} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | 3)[]{#anchor-11}[]{#anchor-12} | []{#anchor-13}Martin acquired a | | | 30% interest in LMN Partnership, | | | a cash-basis partnership, by | | | contributing \$15,000 cash and | | | the property listed below. In | | | addition, in order to become a | | | partner, Martin had to assume his | | | share of LMN's liabilities. | | | Partnership liabilities consisted | | | of a \$50,000 loan, incurred to | | | purchase assets used in the | | | business, and \$10,000 of | | | accounts payable. What is the | | | basis of Martin's interest in | | | LMN? | | | | | | \*The undeveloped land was | | | contributed subject to a | | | \$100,000 mortgage that was | | | assumed by the | | | partnership.[]{#anchor-14} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+