DISCUSSION QUESTIONS AND PROBLEMS

DISCUSSION QUESTIONS AND PROBLEMS

Discussion Questions

1. Discuss the formation of a partnership. Is any gain or loss recognized? Explain?

2. What entity forms are considered partnerships for federal income tax purposes?

3. How does taxation for the corporate form and the partnership form differ?

4. What is the concept of basis? In your discussion, differentiate between outside basis and inside basis.

5. Elaborate on the term basis-in – basis-out. What does that phrase mean in the context of a partnership formation?

6. How can two partners, each with a 50% interest in a partnership, have different amounts of outside basis at the formation of a partnership? Shouldn’t the two partners contribute the same amount to have the same interest?

7. When a partnership receives an asset from a partner, does the partnership ever recognize a gain? What is the basis of the asset in the hands of the partnership after contribution?

8. Discuss the concept of steps into the shoes. Does how this concept pertains to the partnership, the partners, or both?

9. Why would smaller partnerships (and other businesses for that matter) use only the tax basis of accounting, which does not follow GAAP?

10. How is depreciation calculated by the partnership when a partner contributes a business asset?

11. Discuss the concepts of ordinary income and separately stated items concerning partnerships. When must a partnership item of income or loss be separately stated and why?

12. Can a partner have a salary from a partnership? Why? What is a guaranteed payment?

13. Are guaranteed payments treated as an ordinary income items or as separately stated items?

14. Is the Section 179 expense deduction allowed for partnerships? If so, is Section 179 an ordinary income item or a separately stated item? Why?

15. If a partner owns a 20% interest, does that necessarily mean that he or she will receive 20% of the net income from the partnership? Explain?

16. Is partnership income considered self-employment income? If so, how is it calculated?

17. Why must some income and gain items be separately stated in a partnership?

18. Explain why nontaxable income and nondeductible expenses increase or reduce outside basis?

19. When is it mandatory that a partner calculate his or her partner interest basis (outside basis)? What items affect the outside basis of a partner?

20. How does a partner’s share of partnership liabilities affect his or hers outside basis?

21. The general rule is that partners do not recognize any gain when he or she receives a distribution. In what circumstances might a partner recognize a gain on a current distribution?

22. Define precontribution gain? What causes a partner to recognize it?

23. Describe the rules concerning the basis of property distributed to a partner. How does the concept of “basis-in, basis-out” apply to partnership distributions?

24. How can a partnership interest be disposed of? Which disposal method is more likely to produce a gain or loss? How is the gain or loss calculated?

25. How is the outside basis of a partner allocated to assets in a liquidation of the partnership interest? Include in your answer the effects of distributing cash, ordinary assets, §1231 assets, and capital assets.

Multiple Choice

26. Carmin performs services in exchange for a 25% interest in Real Estate Rental Partnership. The services were worth $15,000. The tax implications to Carmin are:

a. No taxable income and a partnership interest with a basis of $0.

b. No taxable income and a partnership interest with a basis of $15,000.

c. $15,000 of taxable income and a partnership interest with a basis of $0.

d. $15,000 of taxable income and a partnership interest with a basis of $15,000.

27. Billy contributes land with an FMV of $7,000 and a basis of $3,000 to a partnership in return for a 5% partnership interest in ABCD partnership. Billy’s basis in the partnership is:

a. $0.

b. $3,000.

c. $7,000.

d. Cannot be determined.

28. Billy contributes land with a FMV of $7,000 and a basis of $3,000 to a partnership in return for a 5% partnership interest in ABCD partnership. ABCD’s basis in the land is:

a. $0.

b. $3,000.

c. $7,000.

d. Cannot be determined.

29. Jake has a Schedule C with the following assets:

                        Basis FMV

Cash $4,500 $4,500

A/R 0 10,000

Building 95,000 155,000

Jake contributes these assets to form AJ’s Partnership and receives a 50% interest. His basis in the partnership interest is:

a. $ 0.

b. $ 99,500.

c. $159,500.

d. $169,500.

30. Jake has a Schedule C with the following assets:

                        Basis FMV

Cash $4,500 $4,500

A/R 0 10,000

Building 95,000 155,000

Jake contributes these assets to form AJ’s Partnership and receive a 50% interest. AJ’s basis in the assets is:

a. Cash $4,500; A/R $0; building $155,000.

b. Cash $4,500; A/R $10,000; building $155,000.

c. Cash $4,500; A/R $0; building $95,000.

d. Cash $4,500; A/R $10,000; building $95,000.

31. Allie contributed the following business assets to ASW Partnership on August 1, 2006:

                                    Basis FMV Date Purchased by Allie

            Building $175,000 $300,000 07/01/93

            Inventory $ 50,000 $ 100,000 05/08/03

What is the holding period for the building and the inventory to ASW Partnership?

a. Building – long-term capital or Section 1231 asset.

b. Building – short-term ordinary asset.

c. Inventory – short-term ordinary asset.

d. Both a. and c.

32. Allie contributed the following business assets to ASW Partnership on August 1, 2006:

                                    Basis FMV Date Purchased by Allie

            Building $175,000 $300,000 07/01/93

            Inventory $ 50,000 $100,000 05/08/03

What is the basis in the inventory and the building to ASW?

a. Building $0; Inventory $ 0.

b. Building $175,000; Inventory $ 50,000.

c. Building $175,000; Inventory $100,000.

d. Building $300,000; Inventory $100,000.

33. All of the following are considered ordinary items to a partnership except:

a. Gross Profit.

b. Salary and Wages.

c. Taxes and Licenses.

d. Capital Gains and Losses.

34. Styron is a partner in Styron, Lee, & Jane partnership. Styron owned 25% from January 1, 2006 to June 30, 2006, when he bought Lee’s 25% interest. He owed 50% for the rest of the year. The partnership had ordinary income of $88,000 and $12,000 in long-term capital gains. Barring any special allocations in a partnership agreement, Styron’s share of ordinary income for the year is:

a. $ 11,000.

b. $ 33,000.

c. $ 88,000.

d. $100,000.

35. All of the following are considered separately stated items to a partnership except:

a. Charitable contributions.

b. Section 179 expense.

c. Depreciation..

d. Capital gains and losses.

36. All of the below items from a partnership go into the calculation of a partners self-employment income except:

a. Share of ordinary income.

b. Dividend income.

c. Guaranteed payment.

d. Section 179 expense.

37. A partner’s share of income and separately stated items is reported to the partner via what form:

a. Form 1065.

b. Form 1040 - Schedule SE.

c. Form 1065, Schedule K-1.

d. Form 1065, Schedule D.

38. Retish is a 10% partner in a partnership. The partnership pays Retish a guaranteed payment of $45,000 per year. If the partnership’s ordinary income is $38,000 before considering the guaranteed payment, the partnership will report ordinary income of how much?

a. $ ($7,000).

b. $ 0.

c. $ 33,500.

d. $ 38,000.

39. The calculation of a partner’s basis in his partnership interest is mandatory in which of the following situations:

a. In a partnership loss year.

b. At the liquidation or disposition of a partner’s interest.

c. When the partner receives nonliquidating distributions.

d. All of the above.

40. Julianna and Dennis are equal partners in a partnership. When forming the partnership, Dennis contributed a building with an FMV of $250,000 and a basis of $150,000. During the first year of operations, the partnership earned $70,000 in ordinary income and tax-exempt interest of $1,200. Assuming no special allocations, Dennis’s basis in the partnership interest at the end of the year is:

a. $ 0.

b. $150,000.

c. $185,600.

d. $221,200.

41. All of the following items affect the basis of a partnership interest except:

a. Cash or property contributed.

b. Guaranteed payments.

c. Partnership income or loss items.

d. A partner’s share of recourse liabilities.

42. Partner Beth has a basis of $10,000 in a partnership at the beginning of the year. She receives $6,000 in cash distributions, her distributive share of income is $5,000, and she receives a land distribution with a basis of $8,000 (FMV $20,000). What is Beth’s partnership interest basis at the end of the year?

a. $ 0.

b. $ 1,000.

c. $ 9,000.

d. $10,000.

43. Molly, a 30% partner in XYZ partnership, has a basis of $55,000 in her partnership interest. Molly receives a cash distribution of $54,000 at year-end. The distribution has what tax effect on Molly:

a. No gain or loss is recognized and she has a $55,000 basis in her partnership interest.

b. No gain or loss is recognized and she has a $1,000 basis in her partnership interest.

c. She has a recognized gain of $37,500 and a basis of $0 in her partnership interest.

d. She has a recognized gain of $55,000 and a basis of $0 in her partnership interest.

44. A partner recognizes a gain on a current distribution in which of the following situations?

a. When a partner receives a property distribution with a basis in excess of her or his basis.

b. When money or marketable securities are distributed in excess of the partner’s basis.

c. When the current distribution triggers a precontribution gain.

d.. Both b. and c.

45. Wendy contributes land to a partnership with a basis of $24,000 and an FMV of $36,000 in 2004. In 2006, when the FMV of the land is $38,000, the partnership distributes the land to Calvin, another partner. Which of the following is true?

a. Wendy recognizes no gain or loss.

b. Calvin recognizes a gain of $14,000.

c. Wendy recognizes a gain of $12,000.

d. Calvin has a basis of $38,000 in the land.

46. All of the following statements are correct concerning liquidating distributions of a partnership except:

a. A loss can never be recognized.

b. A distribution of money in excess of basis causes a gain to be recognized..

c. Basis in a property distribution is allocated essentially the same as a nonliquidating distribution.

d. Generally, no gain or loss is recognized when the liquidating distribution consists only of property.

47. On November 1, Ashton sells her interest in XYZ partnership to Wayne for $200,000 cash and a release of liability of $30,000. Ashton’s basis at the beginning of the year was $125,000 (including the $30,000 of liability). Ashton’s share of income through November 1 was $45,000 and she received a $15,000 cash distribution earlier in the year. What are the tax consequences to Ashton on the sale of her partnership interest?

a. $ 0 tax effects.

b. $ 45,000 capital gain

c. $ 75,000 capital gain

d. $105,000 capital gain

Problems

48. Denise contributes the following assets to a partnership in exchange for a 25% partnership interest:

                                                     FMV Basis

            Cash $ 20,000 $ 20,000

            Office equipment $ 12,000 $ 5,000

            Auto $ 20,000 $ 6,000

What is Denise’s beginning basis in her partnership interest?

49. On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest. She purchased the equipment three years ago.

            a. What is Patti’s basis in her partnership basis?

            b. What is the Patti’s holding period of the partnership interest?

            c. What is the basis of the equipment in the hands of the partnership?

            d. What is the holding period of the equipment in the hands of the partnership?

            e. How will the partnership depreciate the equipment in the year of contribution?

50. Dennis, Suzy, and Katherine form a partnership. Dennis and Suzy give equipment and a building, respectively. Katherine agrees to perform all of the accounting and office work in exchange for a 10% interest.

                                    FMV Basis Partnership %

Dennis’s equipment $100,000 $ 10,000 45%

Suzy’s building $100,000 $ 45,000 45%

Katherine’s services $ 0 $ 0 10%

                        a. Do any of the partners recognize any gain? If so, how much and why?

                        b. What is the basis for each partner in his or her partnership interest?

                        c. What is the basis to the partnership of each asset?

51. Moe, Johnny, and Raymond form a partnership and contribute the following assets.

                                    FMV Basis Partnership %

Moe’s inventory $ 50,000 $ 10,000 33.3%

Johnny’s building $110,000 $ 80,000 33.3%

Raymond’s cash $ 50,000 $ 50,000 33.3%

Johnny’s building has a mortgage of $60,000 which the partnership assumes.

a. Do any of the partners recognize any gain? If so, how much and why?

b. What is the basis for each partner in their partnership interest?

c. What is the basis to the partnership in each asset?

d. How would your answer change with respect to Johnny if the basis in the building was $45,000?

52. Barry and Kurt are equal partners in the BK partnership. Barry receives a guarantee payment of $55,000. In addition to the guaranteed payment, Barry withdraws $10,000 from the partnership. The partnership has $24,000 in ordinary income during the year.

            a. How much income must Barry report from BK partnership?

            b. What is the effect on Barry’s partnership basis?

53. Kerry is a partner in the Kerry, Davis, Smith & Jones partnership. Kerry owned 25% from January 1, 2006 to June 30, 2006 when he bought Jones’s 25% interest. He owed 50% for the rest of the year. The partnership had ordinary income of $146,000 and $15,000 in long-term capital gains. Barring any special allocations in a partnership agreement, what is Kerry’s share of income?

54. Wade has a beginning basis in a partnership of $23,000. His share of income and expense from the partnership consist of the following amounts:

                        Ordinary income $43,000

                        Guaranteed payment $12,000

                        Long-term capital gain $15,500

                        §1231 gain $ 4,300

                        Charitable contributions $ 2,000

                        §179 expense $18,000

                        Cash distribution $ 6,000

            a. What is Wade’s self-employment income?

            b. Calculate Wade’s basis at the end of the year?

55. Bryan and Gayle are equal partners in BG Partnership. The partnership reports the following items of income and expense:

                        Ordinary income from operations $13,000

                        Interest income $ 5,000

                        Long-term capital gains $23,000

                        Section 179 expense $55,000

                        Charitable contributions $ 3,000

a. Which of these items are considered separately stated items? How will these items be reported to the partners? What form?

b. Where will these amounts be reported by the partners?

56. Kim has a basis in her partnership interest of $12,000 and receives a distribution from the partnership of $6,000 cash and equipment with a basis $8,000 ($12,000 FMV).

            a. How much gain or loss must Kim recognize on the distribution?

            b. What is Kim’s ending partnership basis?

            c. What is Kim’s basis in the equipment?

57. Zach contributes land with a FMV of $25,000 and a basis of $14,000 to a partnership on April 5, 2004. On June 6, 2006, the partnership distributed the land to Art a partner in the same partnership. At the distribution, the land had a FMV of $29,000.

            a. What is the effect of the distribution on Zach, if any?

            b. What is the effect of the distribution to Art?

58. Roberto has a basis of $6,000 in a partnership at the beginning of the year. He receives $7,000 in cash distributions, his distributive share of income is $3,500, and he receives a land distribution with a basis of $6,000 (FMV $12,000).

            a. Is Roberto required to recognize any gain? If so, how much is the gain?

            b. What is Roberto’s basis in the land?

            c. What is Roberto’s ending basis in his partnership interest?

59. Rhonda has a basis of $8,000 in a partnership at the beginning of the year. She receives $12,000 in cash distributions and her distributive share of income is $2,500.

            a. Is Rhonda required to recognize any gain? If so, how much?

            b. What is Roberto’s ending basis in his partnership interest?

60. Rebecca has $40,000 basis in her partnership interest when she receives liquidating distributions from the partnership. She receives cash of $24,000 and equipment with a $12,000 basis to the partnership. What are the tax consequences of the liquidating distributions to Rebecca?

61. Calvin purchased a 40% partnership interest for $43,000 in February 2004. His share of partnership income was $22,000 in 2004, $25,000 in 2005, and $12,000 in 2006. He made no additional contributions to or withdrawals from the partnership. On December 18, 2006, Calvin sold his partnership interest for $103,000. What is his gain or loss on the sale of his partnership interest?

Tax Return Problem #1

Paul and Wayne equally own the PW Partnership. Paul’s basis was $30,000 and Wayne’s basis was $22,000 at the beginning of the year. PW Partnership had the following income and expense items:

                        Sales $330,000

                        Cost of goods sold 220,000

                        Guaranteed payment to Paul 40,000

                        Rent expense 24,000

                        Depreciation 33,000

                        Interest expense 4,000

                        Tax-exempt income 3.000

                        Health insurance premiums for Paul 3,600

                        Health insurance premiums for Wayne 3.600

a. Prepare page 1 and page 3 of form 1065 - ordinary income and separately stated items for the partnership.

b. Calculate Paul’s basis in his partnership interest.

c. Calculate Wayne’s basis in his partnership interest.

Tax Return Problem #2

Phil Williams and Liz Johnson are 60% and 40% partners, respectively, in Williams & Johnson Partnership. Their beginning basis is $33,000 for Phil and $31,000 for Liz. The partnership had the following activity during the year.

Income $336,123

Interest income 1,259

Dividend income (qualified) 4,586

Long-term capital gains 13,458

                        Total Revenue $355,426

Expenses:

            Salaries and wages (non-partners) $ 47,000

            Guaranteed payments

                        Williams 75,000

                        Johnson 50,000

            Depreciation (MACRS – includes $9,000

§179 Expense) 41,888

            Interest expense 5,220

            Taxes and licenses 15,548

            Meals and entertainment (100%) 15,257

Auto 5,254

Insurance (non-partner health) 6,000

            Accounting and legal 2,800

Repairs 1,200

Charitable contributions 2,500

Payroll penalties 500

                        Total Expenses $268,167

Net Income $ 87,259

a. Calculate the ordinary income for the partnership and prepare page 1 of Form 1065.

b. Prepare page 3 of Form 1065?

c. What is the ending basis for Phil Williams?

d. What is the ending basis for Liz Johnson?