Prentice Hall's Federal Taxation 2011: Corporations, 24e (Pope) Chapter 9 Partnership Formation and Operation

1) Formation of a partnership requires legal documentation filed with the Secretary of State. Answer: FALSE
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$) A partner%s &asis for his partnership interest can &e negati'e. Answer: FALSE
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)) *he holding period of a partnership interest acquired in e+change for a contri&uted capital asset &egins on the date the partner transfers the asset to the partnership. Answer: FALSE
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-) A partnership cannot ma.e charita&le contri&utions. Answer: FALSE

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() A0! Partnership distri&utes 11$2333 to partner Al. Al%s distri&uti'e share of partnership income is 1$32333. Al is ta+ed on 1$32333. Answer: * 4E
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/) A partner%s 6distri&uti'e share6 is the partner%s share of any assets distri&uted &y the partnership. Answer: FALSE
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5) A partner%s share of nonrecourse de&t increases that partner%s share of &asis. Answer: * 4E
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,) A partner%s &asis for his or her partnership interest is increased &y his share of the partnership%s ta+#e+empt income. Answer: * 4E
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") Limited partners must consider the at#ris.2 &asis2 and passi'e loss limitations when determining the amount of their deducti&le loss. Answer: * 4E
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13) 7o gain is recogni8ed on the sale of property &etween a partnership and a more than (39 partner. Answer: FALSE
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11) :uaranteed payments are always ordinary income to the recipient. Answer: * 4E
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1$) A partnership must file Form 13/( only if its income e+ceeds 112333. Answer: FALSE
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1)) ;dentify which of the following statements is true. A) Formation of a partnership requires legal documentation. 1 Copyright 2011 Pearson Education, Inc.

0) An indi'idual engaged in the acti'e conduct of a &usiness must elect not to &e ta+ed as a partnership. !) A partnership e+ists as long as there are at least two indi'iduals or entities engaged in the acti'e conduct of a trade or &usiness or a financial operation and the &usiness is not a trust or a corporation. <) All are false. Answer: !
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1-) *he definition of a partnership does not include A) a syndicate. 0) a group. !) a pool. <) All are included. Answer: <
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1() ;dentify which of the following statements is true. A) All of the partners in a limited partnership ha'e limited lia&ility. 0) A limited partnership must ha'e at least two general partners. !) A limited partnership cannot ha'e a corporate general partner. <) All are false. Answer: <
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1/) =hich of the following is false. A) A large partnership must not &e a ser'ice partnership. 0) A large partnership must ha'e fewer than 133 partners. !) A large partnership must not &e engaged in commodity trading. <) A large partnership is su&>ect to a different system of audits. Answer: 0
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15) Electing large partnership rules differ from other partnership rules in all of the following areas e+cept A) partnership income reporting. 0) partnership termination. !) partnership audits. <) All of the a&o'e are large partnership rule differences. Answer: <
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1,) ?n the first day of the partnership%s ta+ year2 @aren purchases a (39 interest in a general partnership for 1)32333 cash and she materially participates in the operation of the partnership for the entire year. *he partnership has 1-32333 in recourse lia&ilities when @aren enters the partnership. Partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. *here is no minimum gain related to the nonrecourse lia&ility. <uring the year the partnership incurs a 11$32333 loss. Aow much of the loss can @aren report on her ta+ return for the current yearB A) 1)32333 0) 1-32333 !) 1(32333 <) 1/32333 Answer: ! E+planation: !) 0eginning &asis 1)32333 Plus: (39 of &eginning of year lia&ilities $32333 @aren%s Sec. 53-Cd) &asis 1(32333 @aren%s at#ris. &asis 1(32333 (39 of partnership loss C11$32333 D 3.(3) 1(32333 *he loss is deducti&le only to the e+tent of @aren%s at#ris. &asis2 or 1(32333
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1") ;dentify which of the following statements is true. A) <istri&ution of partnership income in the form of cash to partners is generally ta+#free to the partners and the partnership. 0) =hen partners recei'e cash distri&utions from the partnership2 they pay ta+es on those distri&utions. !) ;f money distri&utions e+ceed the partner%s &asis in the partnership interest2 a partner would ha'e to recogni8e gain on a distri&ution from the partnership. Such gain is usually an ordinary gain. <) All are true. Answer: A
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$3) :eorge pays 1132333 for a $39 interest in a general partnership which has recourse lia&ilities of 1$32333. *he partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. :eorge%s &asis in his partnership interest is A) 1132333. 0) 11$2333. !) 11-2333. <) 1)32333. Answer: ! E+planation: !) 0eginning &asis 1132333 Plus: $39 of lia&ilities -2333 :eorge%s &asis 11-2333
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$1) ?n Fanuary 12 Aelmut pays 1$2333 for a 139 capital2 profits and loss interest in a partnership2 which has recourse lia&ilities of 1$32333. *he partners share economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. ;n the same year2 the partnership incurs losses of 1/2333 and the recourse lia&ilities increase &y 1(2333. Aelmut and the partnership use a calendar ta+ year#end. Aelmut%s &asis at year#end is A) 112(33. 0) 1$2333. !) 1)2(33. <) 1)2"33. Answer: < E+planation: <) 0eginning &asis 1$2333 Plus: 139 of Fanuary 1 lia&ilities $2333 Plus: 139 of increase in lia&ilities (33 Ginus: 139 of loss passthrough C /33) 0asis at end of the year 1)2"33
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$$) ;dentify which of the following statements is true. A) A contri&ution of ser'ices for a partnership interest is a ta+#free transaction. 0) For Federal income ta+ purposes2 formation of a partnership is go'erned &y Sec. 5$1. !) =hen a partnership assumes a lia&ility on property contri&uted &y a partner2 the only effect on the contri&uting partner%s &asis in his or her partnership interest is that his or her &asis will &e increased &y the amount of the lia&ility assumed &y the other partners. <) All are false. Answer: 0
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$)) Hong contri&utes a machine ha'ing an ad>usted &asis of 1$32333 and a FGI of 1$(2333 for a 139 partnership interest. Hong had ta.en 1132333 of depreciation prior to the contri&ution. *he partnership has no lia&ilities. As a result of the contri&ution2 Hong must recogni8e A) no gain or loss. 0) 1(2333 Sec. 1$-( gain. !) 1(2333 capital gain. <) 1132333 ordinary income. Answer: A E+planation: A) 7o gain or loss is recogni8ed at the time of the contri&ution
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$-) ;dentify which of the following statements is true. A) A partner%s relief of de&t is treated as if the partner recei'es a cash distri&ution. 0) =hen a partnership assumes any lia&ilities of the transferor2 the transferor has an increase in the &asis of his or her partnership interest. !) :ain recogni8ed &y a contri&uting partner &ecause of the assumption of lia&ilities &y the partnership increases the partnership%s &asis in the contri&uted property. <) All are false. Answer: A
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$() For a $39 interest in partnership capital2 profits and losses2 @asi contri&utes a machine ha'ing a &asis of 1)32333 and a FGI of 1-32333. *he partnership also assumes a 1$-2333 recourse lia&ility secured &y the machine. *he partnership has 1/2333 in recourse lia&ilities immediately preceding @asi%s contri&utions. Partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. @asi%s &asis in the partnership interest is A) 1132,33. 0) 11$2333. !) 11)2$33. <) 1)32333. Answer: 0 E+planation: 0) 0eginning &asis Cmachine &asis) 1)32333 Ginus: Lia&ility assumed &y other partners C1"2$33) Plus: $39 of other partnership lia&ilities 12$33 @asi%s &asis 11$2333
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$/) For a )39 interest in partnership capital2 profits and losses2 !arol contri&utes a machine with a &asis of 1-32333 and a FGI of 1,32333. *he partnership assumes a 1532333 recourse lia&ility on the machine. At the time of the contri&ution2 the partnership had recourse lia&ilities of 1132333. Partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. Following the contri&ution2 !arol has A) a capital loss due to the contri&ution of 1/2333 and a 8ero &asis in the partnership interest. 0) a capital gain due to the contri&ution of 1/2333 and a 8ero &asis in the partnership interest. !) a 1)-2333 &asis in the partnership interest and no gain or loss. <) a 1-)2333 &asis in the partnership interest and no gain or loss. Answer: 0 E+planation: 0) 0eginning &asis Ccarryo'er from machinery) 1-32333 Ginus: Lia&ility assumed &y other partners C-"2333) Plus: Lia&ility assumed &y !arol )2333 *entati'e partnership interest &asis C1 /2333) !apital gain recogni8ed &y !arol 1 /2333 0asis: larger of #3# or C1/2333) 1 #3#
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$5) Stella acquired a $(9 interest in the S*4I Partnership &y contri&uting land ha'ing an ad>usted &asis of 1)$2333 and a fair mar.et 'alue of 11332333. *he land was su&>ect to a 1-,2333 mortgage2 which was assumed &y S*4I. 7o other lia&ilities e+isted at the time of contri&ution. =hat is Stella%s &asis in her partnership interestB A) 13 0) 1)$2333 !) 1($2333 <) 1/-2333 Answer: A
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$,) <a'id contri&utes in'estment land with a &asis of 1$-2333 and a FGI of 1-32333 to a partnership for a 139 interest in partnership capital2 profits and losses. *he land is su&>ect to a 1)32333 recourse lia&ility2 which is assumed &y the partnership. *he partnership has other recourse lia&ilities of 11,2333. Partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. <a'id must recogni8e A) 1)2333 capital gain. 0) 1)2333 capital loss. !) 112$33 capital gain. <) 112$33 capital loss. Answer: ! E+planation: !) 0eginning &asis Ccarryo'er from land) 1$-2333 Ginus: Lia&ility assumed &y other partners C$52333) Plus: Lia&ility assumed &y <a'id 12,33 *entati'e &asis for partnership interest C112$33) !apital gain recogni8ed &y <a'id 1 12$33
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$") ashad contri&utes a machine ha'ing a &asis of 1)32333 and a FGI of 1$(2333 to a partnership in e+change for a $39 interest in partnership capital2 profits and losses. Prior to the contri&ution2 the partnership had recourse lia&ilities of 1$32333. *he partnership assumes a 1$32333 recourse lia&ility that is owed &y ashad on the machine. Partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. ashad%s &asis in his partnership interest is A) 1112333. 0) 11,2333. !) 1$$2333. <) 1)-2333. Answer: 0 E+planation: 0) 0eginning &asis Ccarryo'er from machine) 1)32333 Plus: Share of partnership lia&ilities -2333 Ginus: Lia&ilities assumed &y others partners C1/2333) ashad%s &asis 11,2333
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)3) Al&ert contri&utes a Sec. 1$)1 asset to a partnership on Fune 1 of this year in e+change for a 139 partnership interest. Ae had purchased the asset on Garch 12 $33$. Ais holding period for the partnership interest &egins A) Garch 12 $33$. 0) Garch $2 $33$. !) Fune 1 of the current year. <) Fune $ of the current year. Answer: A
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)1) Gario contri&utes in'entory to a partnership on August 1 of this year in e+change for a $39 partnership interest. Gario had purchased the in'entory on Fuly $ of last year. Ais holding period for the partnership interest &egins A) Fuly $ of last year. 0) Fuly ) of last year. !) August 1 of the current year. <) August $ of the current year. Answer: <
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)$) Allen contri&uted land2 which was &eing held for sale to Allen%s customers2 to a partnership in e+change for a $39 interest. *he partnership uses the land in its &usiness for three years and then sells the property. =hen the property was contri&uted2 it had a &asis in Allen%s hands of 1(332333 and a FGI of 1/332333. *he partnership sells the land for 15332333. *he gain reported &y the partnership is A) 11332333 of ordinary income and 11332333 of Sec. 1$)1 gain. 0) 11332333 of Sec. 1$)1 gain and 11332333 of capital gain. !) 1$332333 of ordinary income. <) 1$332333 of Sec. 1$)1 gain. Answer: ! E+planation: !) Amount reali8ed 15332333 Ginus: Ad>usted &asis C(332333) ?rdinary income 1$332333 Land which is held as in'entory &y Allen retains its character as in'entory in the hands of the partnership for fi'e years after the contri&ution
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))) 0ao had in'estment land that he purchased in 1""3 for 1,32333. *wo years ago2 when the land was contri&uted to a partnership2 the FGI was 1(32333. *he land is in'entory in the hands of the partnership. *he partnership then sells the land in the current year for 1-/2333. *he partnership%s recogni8ed loss is A) a 1)-2333 capital loss. 0) a 1)-2333 ordinary loss. !) a 1)32333 capital loss and a 1-2333 ordinary loss. <) a 1-2333 capital loss and a 1)32333 ordinary loss. Answer: ! E+planation: !) *he 1)32333 precontri&ution loss retains its character as a capital loss2 &ut the loss accrued since the contri&ution date is ordinary loss
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)-) @arl arranges financing for a limited partnership to purchase real estate in e+change for a (39 interest in partnership profits. *wo wee.s later @arl sells the profits interest for 1)32333. ;n this ta+ year2 @arl must recogni8e A) no gain or loss. 0) 1)32333 short#term capital gain. !) 1)32333 ordinary income. <) 1)32333 Sec. 1$)1 gain. Answer: !
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)() ;dentify which of the following statements is true. A) *he contri&ution of Sec. 1$-( property to a partnership triggers recognition of ordinary income &y the contri&utor at the time of the transfer. 0) A partner may not recogni8e ordinary income when recei'ing a capital and profits interest in a partnership in e+change for ser'ices. !) =hen a partnership interest is gi'en to a partner in e+change for ser'ices2 the 7 Copyright 2011 Pearson Education, Inc.

partnership can deduct or capitali8e the FGI of the ser'ices depending on the nature of the ser'ices. <) All are false. Answer: !
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)/) Ali2 a contractor2 &uilds an office &uilding for a construction partnership in e+change for a capital and profits interest in the partnership worth 1(332333. =hich of the following statements is correctB A) Ali recogni8es 1(332333 of ordinary income and the partnership can deduct 1(332333 in the current year. 0) Ali recogni8es no income and the partnership can deduct nothing in the current year. !) Ali recogni8es 1(332333 ordinary income and the partnership deducts the 1(332333 o'er the &uilding%s GA! S reco'ery period as depreciation e+pense. <) Ali recogni8es ordinary income in the current year in an amount equal to the depreciation deduction the partnership claims this year for the 1(332333 capitali8ed amount. Answer: !
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)5) 0o&2 @ara2 and Gar. are partners in the 0@G Partnership. 0o& is a -39 partner and has a Fune )3 ta+ year#end. @ara owns a -39 interest in the partnership and has a Septem&er )3 ta+ year#end2 and Gar. owns the remaining $39 interest and has an ?cto&er )1 ta+ year#end. *he partnership does not ha'e a natural &usiness year. =hat is the required ta+ year#end for the partnership Cif no Sec. --- election is made)B A) Fune )3 0) Septem&er )3 !) ?cto&er )1 <) <ecem&er )1 Answer: A E+planation: A) *he least aggregate deferral for the alternati'e ta+ year#ends is: Fune )3 Septem&er )3 ?cto&er )1 <ecem&er )1
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*he smallest of the four alternati'es is Fune )3

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),) ;dentify which of the following statements is true. A) *he Fisher Partnership is owned equally &y four indi'idual partners. *wo of the partners ha'e fiscal years ending Garch )1 and two partners ha'e fiscal years ending Fune )3. *he partnership has a natural &usiness year. *he partnership must adopt a calendar year for ta+ reporting purposes unless a Sec. --- election is made. 0) Partnerships ma.e most of the ta+ elections for the partnership rather than the partners. !) A partner can elect the depreciation method to &e applied to the partner%s share of the partnership%s deprecia&le assets. <) All are false. Answer: 0
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)") ;dentify which of the following statements is true. A) A partnership cannot ha'e an 7?L carry&ac. or carryforward. 0) A partnership cannot ma.e charita&le contri&utions. !) <i'idends recei'ed &y a partnership from a domestic corporation are included in the partnership%s ordinary income. <) All are false. Answer: A
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-3) ;dentify which of the following statements is true. A) *a+#e+empt interest recei'ed &y a partnership is ta+a&le to the partners if distri&uted. 0) Partnership gains and losses from two different casualty and theft occurrences in one year are passed through to the partners as two separate items. !) *he amount and character of any gainsJlosses is determined at the partnership le'el. <) All are false. Answer: !
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-1) Gatt and Foel are equal partners in the GF Partnership. For the current year ended <ecem&er )12 the partnership has &oo. income of 1,323332 which includes the following deductions: C1) guaranteed payments Csalaries) to partners: Gatt2 1)(2333E and Foel2 1$(2333E and C$) charita&le contri&utions2 1/2333. *he &oo. income amount does not include any sales of capital assets or Sec. 1$)1 assets or any ta+#e+empt income. 0ased on the a&o'e information2 what amount should &e reported as ordinary income on the partnership returnB A) 1/32333 0) 1,32333 !) 1,/2333 <) 11-32333 Answer: ! E+planation: !) 0oo. income 1,32333 Plus: !harita&le contri&utions /2333 ?rdinary income 1,/2333
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-$) ;dentify which of the following statements is true. A) A partner%s distri&uti'e share includes the full amount of partnership ordinary income2 which she must report on her ta+ return plus her share of separately#stated ta+a&le and ta+# e+empt items. 0) Sam has a $39 interest in partnership capital and profits &ut a -39 interest in partnership losses. *he partnership has no special allocations or pre#contri&ution gains or losses. ;n a year in which the partnership reports ordinary income of 11332333 and a capital loss of 1)323332 Sam%s distri&uti'e share is 1$32333 ordinary income and 11$2333 capital loss. !) *he partner%s 6distri&uti'e share6 is the partner%s share of any assets distri&uted &y the partnership. <) All are false. Answer: A
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-)) ;n computing the ordinary income of a partnership2 a deduction is allowed for: A) net Sec. 1$)1 losses. 0) &ad de&ts. !) foreign income ta+es paid. <) charita&le contri&utions. Answer: 0
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--) ;dentify which of the following statements is true. A) *he Aunter Partnership has a net long#term capital gain of 1-2333 and a net short#term capital loss of 112333 for the current ta+ year. *he gain and loss will &e netted and the partners will include their proportionate share of the 1)2333 net long#term capital gain on their return. 0) *he ight Partnership sells a deli'ery truc. and recogni8es a gain of 1$2333 which represents depreciation recaptured under Sec. 1$-(. *he 1$2333 gain will retain its identity as a separately stated item. !) For ta+ purposes2 the partnership ta.es a carryo'er &asis in the contri&uted property that references the contri&uting partner%s &asis. <) All are false. Answer: !
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-() ?n Fanuary $ of the current year2 !alloway and *aylor contri&ute cash equally to form the !* Partnership. !alloway and *aylor share profits and losses in a ratio of 5(9 and $(92 respecti'ely. *he partnership%s ordinary income for the year was 1-32333. !alloway recei'ed a distri&ution of 1(2333 during the year. =hat is !alloway%s share of ta+a&le income for the yearB A) 1(2333 0) 1132333 !) 1$32333 <) 1)32333 Answer: <
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-/) *he KHL Partnership reports the following operating results for the current year: 7et long#term capital loss 7et Sec. 1$)1 loss ?rdinary income C1-32333) C 1/2333) (32333

*ai has a $39 profits interest and a $(9 loss interest in the KHL Partnership. Ais distri&uti'e share of ordinary income is A) 1/2,33. 0) 1,2(33. !) 1132333. <) 11$2(33. Answer: < E+planation: <) Since the partnership has a net loss MC1-32333) N C11/2333) N 1(32333 O C1/2333)P for the year2 *ai%s distri&uti'e share of the 1(32333 of ordinary income is calculated using the $(9 loss interest
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-5) Latoya owns a 139 interest in the A0! Partnership from Fanuary 1 through Fune )3 Cthe 1,1st day of the ta+ year) of the current year Ca non#leap year). ?n Fuly 12 Latoya &uys an additional 139 interest in the partnership. *he KHL Partnership%s ordinary income is 113"2(33 and it is earned e'enly throughout the year. Latoya%s distri&uti'e share of the ordinary income is A) 11/2),3. 0) 11/2-$(. !) 11/2-53. <) 1$12"33. Answer: ! E+planation: !) 113"2(33 D 1,1J)/( D 3.13 O 1 (2-)3 113"2(33 D 1,-J)/( D 3.$3 O 1123-3 *otal 11/2-53
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-,) ?n <ecem&er 12 Antonio2 a mem&er of a three#person partnership2 purchases in'estment securities from the partnership for their 1)52333 FGI. All partners share profits and losses equally. *he securities were acquired &y the partnership for 1$(2333 cash in Garch of the current year. =hat amount and character of gain will Antonio recogni8e &ecause of this transactionB A) 13 gain 0) 1-2333 ordinary income !) 1-2333 short#term capital gain <) 11$2333 ordinary income Answer: ! E+planation: !) C1)52333 # 1$(2333) D 1J) O 1-2333 short#term capital gain from the sale of securities
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-") Geg and A&&y are equal partners in the AG Partnership which earns 1-32333 ordinary income2 1/2333 long#term capital gain CL*!:) and 1$2333 Sec. 1$)1 loss during the current year. =hat is the amount and character of income which must &e reported on A&&y%s ta+ return for this year%s partnership operationsB A) 1$32333 ordinary income2 1)2333 L*!:2 112333 Sec. 1$)1 loss 0) 11"2333 ordinary income2 1)2333 L*!: !) 1$)2333 ordinary income2 112333 Sec. 1$)1 loss <) 1$$2333 ordinary income Answer: A
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(3) ?n <ecem&er )1 of last year2 Ale+ and Fac.son &ecome equal partners in the AF Partnership with assets ha'ing a ta+ &asis and FGI of 11$32333. *he partnership2 which deals in securities2 had no lia&ilities at the end of last year. ;n Fanuary of this year2 Fran.lin contri&utes his in'estment securities with a FGI of 1/32333 Cpurchased two years ago at a cost of 1-(2333) to &ecome an equal partner in the new AFF Partnership. *he securities2 which are in'entory to the partnership2 are sold on <ecem&er 1( of the current year for 1"32333. =hat amount and character of gain from the sale of these securities should &e allocated to Fran.linB A) 1132333 ordinary income 0) 11(2333 capital gain and 1132333 ordinary income !) 1$(2333 capital gain <) 1$(2333 ordinary income Answer: < E+planation: <) Precontri&ution gain 11(2333 Plus: ?ne#third of the postcontri&ution gain 132333 *otal gain recogni8ed &y Fac.son 1$(2333 *here is no special pro'ision to preser'e the capital gain character for Fac.son2 so the entire gain is ordinary income
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(1) At the formation of the 0< Partnership2 0etty contri&utes land with a &asis of 1132333 and a FGI of 1)32333 and <ic. contri&utes cash of 1)32333. 0etty and <ic. share profits and losses equally. =hen the land is sold two years later for 1(323332 0etty must recogni8e a gain of A) 1132333. 0) 1$32333. !) 1)32333. <) 1-32333. Answer: ! E+planation: !) Precontri&ution gain C1)32333 # 1132333) 1$32333 Plus: ?ne#half of the postcontri&ution gain 132333 *otal gain recogni8ed &y 0etty 1)32333
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($) ;dentify which of the following statements if false. A) Fean and 0lossom form an equal partnership. Fean contri&utes 1132333 cash and 0lossom contri&utes property with a 1132333 FGI and a 1(2333 &asis. =hen the partnership sells the property contri&uted &y 0lossom for 1132333 shortly after the formation2 0lossom must include the 1(2333 gain in her income. 0) ;n order to shift incomeJloss &etween partners2 there must &e su&stantial economic effect. !) *he 00 Partnership wants to ma.e a special allocation of 1132333 of long#term capital gain to 0o& and a special allocation of 1132333 of ordinary income to 0riana. *his allocation will ha'e su&stantial economic effect. <) Partners must ma.e up negati'e &alances in their capital accounts upon the liquidation of the partnership. Answer: !
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()) =illiam and ;rene each contri&ute 1$32333 cash to the =; Partnership on Fanuary 1 of last year. =illiam and ;rene share profits and losses equally. Last year2 the partnership reported ta+#e+empt interest income of 1-2333. *his year each partner recei'es 112333 of the ta+#e+empt interest income in a cash distri&ution. *here are no partnership lia&ilities and no other income2 loss2 contri&utions or distri&utions during &oth years. =illiam%s &asis in the partnership interest following these transactions is A) 11"2333. 0) 1$32333. !) 1$12333. <) 1$$2333. Answer: ! E+planation: !) 0eginning &asis 1$32333 Plus: ?ne#half of ta+#e+empt interest income $2333 Ginus: <istri&ution C 12333) Postdistri&ution &asis 1$12333
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(-) Giguel has a (39 interest in partnership capital2 profits and losses. *he &asis for his partnership interest is 1(32333. *he partners share the economic ris. of loss from recourse lia&ilities in the same way they share partnership losses. Giguel recei'es a distri&ution of land that has a FGI of 1-32333 and an ad>usted &asis of 1)32333. *he land is su&>ect to a 11(2333 lia&ility which Giguel assumes. Ais &asis in the partnership interest following the land distri&ution is A) 11$2(33. 0) 1$32333. !) 1$52(33. <) 1)(2333. Answer: ! E+planation: !) Predistri&ution &asis 1(32333 Ginus: <istri&ution C)32333) Ginus: elease from one#half of partnership lia&ility for land C 52(33) Plus: Lia&ility assumed from partnership 1(2333 Postdistri&ution &asis 1$52(33
Page ef.: !:"#$$E E+ample !:"#$/

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(() ;dentify which of the following statements is true. A) A general partner%s share of recourse de&t is &ased on his or her economic ris. of loss and his or her share of nonrecourse de&t is predominantly &ased on his or her share of partnership profits. 0) A partner%s &asis for his or her partnership interest is increased &y his or her share of the partnership%s ta+#e+empt income. !) ;f all ta+#e+empt interest income is distri&uted when recei'ed &y a partnership2 the partners% &ases are the same after the distri&ution as they were &efore the ta+#e+empt interest was recei'ed &y the partnership. <) All are true. Answer: <
Page ef.: !:"#$$2 !:"#$)

(/) ;dentify which of the following statements is true. A) Although a partner%s &asis in the partnership cannot go &elow 8ero2 a partner%s &oo. capital account Cequity) may &e negati'e. 0) *om purchased for cash a -39 capital2 profits and loss interest in the *P :eneral Partnership. Ais 11-32333 &asis in his partnership interest includes his 1-(2333 share of recourse de&t and his 1)32333 of nonrecourse de&t Cthat is not qualified nonrecourse real estate financing). Ais at#ris. &asis cannot &e more than 1/(2333. !) *erri is a limited partner in the S*4 Partnership2 which manufactures children%s toys. 0ecause the partnership is acti'ely in'ol'ed in a trade or &usiness2 *erri%s income from the partnership is classified as acti'e income for the passi'e acti'ity loss rules. <) All are false. Answer: A
Page ef.: !:"#$-

(5) ;dentify which of the following statements is true. A) =hen ad>usting a partner%s &asis in a partnership interest2 the negati'e &asis ad>ustments are made prior to the positi'e &asis ad>ustments. 0) Gartin and !arlos formed an equal partnership to which Gartin contri&uted 1132333 cash and !arlos contri&uted a &uilding worth 1132333 with a &asis of 1$2333. ;n the first year of operation the partnership suffered a 1132333 ordinary loss. Gartin and !arlos can each deduct a 1(2333 loss on their personal ta+ returns. !) Any distri&uti'e share of a loss that cannot &e deducted &y a partner &ecause of the Sec. 53-Cd) &asis loss limitation is permanently lost. <) All are false. Answer: <
Page ef.: !:"#$-2 !:"#$(

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(,) Stan had a &asis in his partnership interest at the &eginning of last year of 1)32333. *here was no change in partnership lia&ilities during the year. Ais share of the partnership%s ordinary loss last year was 1-32333 and the partnership had no separately stated items. *his year Stan has a distri&uti'e share of ordinary income of 1)32333. *he ta+a&le income from the partnership reported on Stan%s personal income ta+ return this year Cignoring the at#ris. and passi'e acti'ity loss limitations) is A) 1132333 ordinary loss. 0) 1$32333 ordinary income. !) 1)32333 ordinary income. <) 1-32333 ordinary income. Answer: 0 E+planation: 0) 1)32333 # 1132333 loss carryo'er O 1$32333 0eginning &asis 1)32333 Ginus: Share of loss deducted last year C)32333) End#of#year &asis Clast year) #3# Plus: Share of current year income )32333 Ginus: Loss carryo'er from last year C132333) End#of#year &asis Cthis year) 1$32333
Page ef.: !:"#$(

(") A partnership has one general partner2 Allen2 who materially participates in the &usiness. Allen had a 1)32333 distri&uti'e share of ordinary losses for this year and the partnership had no separately stated gains or losses. *here are no changes in lia&ilities during this year and there are no additional contri&utions or distri&utions. At the &eginning of this year the Sec. 53( &asis was 1-32333 and the at#ris. &asis was 11(2333. *he &asis on <ecem&er )1 of this year &ased on the a&o'e information is A) 1132333. 0) 11(2333. !) 1$(2333. <) 1-32333. Answer: A E+planation: A) 1-32333 # 1)32333 O 1132333
Page ef.: !:"#$(

/3) Gartin is a limited partner in a card shop. At the end of the partnership%s ta+ year2 Gartin%s &asis in the partnership interest is 1$(2333 C1(2333 cash in'estment plus a 1$32333 share of nonqualified nonrecourse financing). Gartin%s distri&uti'e share of partnership losses for the ta+ year is 1))2333. Gartin has 1)32333 of passi'e income this year from other acti'ities. Aow much of the 1))2333 partnership loss can &e used &y Gartin in the year of the lossB A) 1(2333 0) 1$(2333 !) 1)32333 <) 1))2333 Answer: A E+planation: A) Gartin%s total &asis under Sec. 53-Cd) is 1$(2333. Aowe'er2 his 1(2333 cash in'estment is the only amount for which he is at ris. under the at#ris. rules and sets the limit on his loss deduction since he has 1)32333 of passi'e income
Page ef.: !:"#$/E E+ample !:"#)$

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/1) <a'id purchased a 139 capital and profits interest in a partnership this year. Ae does not participate in the partnership%s &usiness. <a'id has no passi'e income in the current year. Ais distri&uti'e share of the partnership%s loss is 1-32333 for this year. <a'id%s Sec. 53( &asis in the partnership is 1)$2333 and his at#ris. &asis is 11/2333 at the end of the current year. Aow much of the loss can <a'id deduct on his ta+ returnB A) 13 0) 11/2333 !) 1)$2333 <) 1-32333 Answer: A E+planation: A) <a'id%s passi'e loss limitation is 8ero and is the controlling factor
Page ef.: !:"#$5E E+ample !:"#))

/$) Fangyoun sells in'estment land ha'ing a 1)32333 &asis to a partnership in which he has a /39 partnership interest. *he partnership pays 1$/2333 CFGI) for the land. Later the partnership sells the in'estment land to a nonpartner for 1)12333. ?n the sale of the land2 the partnership must recogni8e A) 13 gain or loss. 0) 112333 capital gain. !) 1-2333 capital gain and 112333 Sec. 1$)1 gain. <) 1(2333 capital gain. Answer: 0 E+planation: 0) Amount reali8ed 1)12333 Ginus: 0asis to partnership C$/2333) eali8ed gain 1 (2333 Fangyoun reali8ed a 1-2333 loss C1$/2333 # 1)32333) on the sale of the land to the partnership. *he 1-2333 loss is disallowed in the year of Fangyoun%s sale2 &ut can offset the partnership%s reali8ed gain2 thus reducing it to a 112333 recogni8ed gain. *he gain is capital &ecause the land was held for in'estment purposes &y the partnership
Page ef.: !:"#$,E E+ample !:"#)/

/)) ;dentify which of the following statements is true. A) A partner who performs ser'ices for a partnership is usually not considered an employee of the partnership. 0) ;t may &e necessary for the partnership to capitali8e a partner%s guaranteed payment. !) :uaranteed payments are ordinary income to the recipient. <) All are true. Answer: <
Page ef.: !:"#$,2 !:"#$"

/-) =hen computing the partnership%s ordinary income2 a deduction is allowed for A) contri&utions to charita&le organi8ations. 0) net operating losses. !) net short#term capital losses. <) guaranteed payments to partners. Answer: <
Page ef.: !:"#$"

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/() =hen determining the guaranteed payment which of the following statements is correctB A) ;f the distri&uti'e share is less than the guaranteed minimum amount2 the guaranteed payment is equal to the difference &etween the distri&uti'e share and the guaranteed minimum amount. 0) ;f the distri&uti'e share is greater than the guaranteed minimum amount2 the guaranteed payment is equal to the difference &etween the distri&uti'e share and the guaranteed minimum amount. !) :uaranteed payments are payments determined with regard to the partnership income. <) *he distinction &etween guaranteed payments and distri&uti'e shares is clear in practice. Answer: A
Page ef.: !:"#$"

//) Hee manages Auang real estate2 a partnership in which she is also a partner. She recei'es -39 of all partnership income &efore guaranteed payments2 &ut no less than 1,32333 per year. ;n the current year2 the partnership reports 1-332333 in ordinary income. =hat are Hee%s distri&uti'e share and her guaranteed paymentB A) Distributive Share Guaranteed Payment 1,32333 1,32333 0) Distributive Share Guaranteed Payment 11/32333 3 !) Distributive Share Guaranteed Payment 11/32333 1,32333 <) Distributive Share Guaranteed Payment 11/32333 11/32333 Answer: 0
Page ef.: !:"#$"E E+ample !:"#),

/5) Hee manages Auang real estate2 a partnership in which she is also a partner. She recei'es -39 of all partnership income &efore guaranteed payments2 &ut no less than 1,32333 per year. ;n the current year the partnership reports 11332333 in ordinary income. =hat are Hee%s distri&uti'e share and her guaranteed payment A) Distributive Share Guaranteed Payment 1-32333 3 0) Distributive Share Guaranteed Payment 1-32333 1,32333 !) Distributive Share Guaranteed Payment 1-32333 1-32333 <) Distributive Share Guaranteed Payment 3 1,32333 Answer: !
Page ef.: !:"#$"E E+ample !:"#)"

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/,) ;dentify which of the following statements are true. A) 0o& gi'es his 1/#year#old daughter Gichelle a $39 capital and profits interest in his accounting practice. She does no wor. for the partnership and is not in'ol'ed at all with the operations of the partnership. ;n fact2 she does not .now that her <ad transferred the interest in the partnership to her. ;f the partnership allocates an 1,2333 distri&uti'e share of ordinary income to her2 it is properly reported on Gichelle%s indi'idual ta+ return. 0) Ialid family partnership partners may &e su&>ect to the 6.iddie ta+.6 !) Foan gi'es her daughter2 Sarah2 a $(9 interest in a partnership that operates a steel mill. Sarah2 age 1/2 was allocated 1$32333 from the partnership as her share of the partnership ordinary income. *he ; S will require the income to &e included on Sarah%s return. <) All are false. Answer: 0
Page ef.: !:"#)3

/") ;n Fanuary of this year2 Ar.e'a2 a calendar#year ta+payer2 recei'es 1(32333 guaranteed payment from 7F Partnership. 7F deducted the payment during its ta+ year ending 7o'em&er )3 of last year. =hat ta+ year must Ar.e'a report her guaranteed payment inB A) She may elect either year. 0) last year !) current year <) She does not need to report guaranteed payments on her return. Answer: 0
Page ef.: !:"#$"E E+ample !:"#-3

53) Aenry has a )39 interest in the AGS Partnership%s capital2 profits and losses computed after ta.ing into account his guaranteed payment of 1-32333. ;n the current year2 AGS reports ordinary income of 1)32333 and capital gains of 1/32333 &efore ta.ing into account Aenry%s guaranteed payment. =hat is the amount and character of all income or loss which Aenry must report as a result of partnership acti'itiesB A) 1-32333 guaranteed payment Cordinary income)2 1)2333 ordinary loss2 11,2333 capital gain 0) 1-32333 guaranteed payment Cordinary income)2 11(2333 capital gain !) 1-32333 guaranteed payment Cordinary income)2 1"2333 ordinary income2 1/2333 capital gain <) 11)2333 guaranteed payment Cordinary income)2 1/2331 ordinary income2 1),2,$3 capital gain Answer: A E+planation: A) ?; O 1-32333 guaranteed paymentE ?L O C1)32333 # 1-32333) D 3.)3 O C1)2333)E capital gains O 1/32333 D 3.)3 O 11,2333
Page ef.: !:"#$"E E+ample !:"#-1

1 Copyright 2011 Pearson Education, Inc.

51) 7icholas2 a -39 partner in 7edeau Partnership2 gi'es one#half of his interest to his sister2 Gichelle. <uring the current year2 7icholas performs ser'ices for the partnership for which reasona&le compensation is 1,323332 &ut for which he accepts no pay. 7icholas and Gichelle are each credited with a 11332333 distri&uti'e share2 all of which is ordinary income. =hat are 7icholas% and Gichelles% distri&uti'e shareB A) Nicholas Michelle 11332333 11332333 0) Nicholas Michelle 1 /32333 1 /32333 !) Nicholas Michelle 11,32333 11332333 <) Nicholas Michelle 11-32333 1 /32333 Answer: < E+planation: <) *otal distri&uti'e shares C11332333 D $) 1$332333 Ginus: easona&le compensation for 7icholas ,32333 ;ncome to allocate 11$32333 7icholas% distri&uti'e share MC$39J-39) D 11$32333P N 1,32333 O 11-32333 Gichelle%s distri&uti'e share C$39J-39) D 11$32333 O 1/32333
Page ef.: !:"#)3E E+ample !:"#-$

5$) 0rent is a general partner in 0! Partnership. Ais distri&uti'e share of partnership income and his guaranteed payment for the year are as follows: ?rdinary income 1)32333 Short#term capital gain 11,2333 :uaranteed payment 1)/2333 =hat is his self#employment incomeB A) 1,-2333 0) 1//2333 !) 1-,2333 <) 1)/2333 Answer: 0
Page ef.: !:"#))E E+ample !:"#--

5)) 0rent is a limited partner in 0! Partnership. Ais distri&uti'e share of partnership income and his guaranteed payment for the year are as follows: ?rdinary income 1)32333 Short#term capital gain 11,2333 :uaranteed payment 1)/2333 =hat is his self#employment incomeB A) 1,-2333 0) 1//2333 !) 1-,2333 <) 1)/2333 Answer: <
Page ef.: !:"#))E E+ample !:"#-(

5-) <oug purchases a $39 interest in the Qui+ Partnership for 1132333 on Fanuary 12 $33(2 and &egins to materially participate in the partnership%s &usiness. *he Qui+ Partnership uses the calendar year as its ta+ year. At the time of the purchase2 the Qui+ Partnership has 1-2333 in lia&ilities2 and <oug%s share is $39. =hat is <oug%s &asis in his partnership interest on Fanuary 12 $33"B Answer: Purchase of partnership interest 1132333 Plus: Share of lia&ilities C3.$3 D 1-2333) ,33 1! Copyright 2011 Pearson Education, Inc.

0asis in partnership interest on Fanuary 1 1132,33

Page ef.: !:"#(2 E+ample !:"#1

5() <an purchases a $(9 interest in the Aaymar.et Partnership for 1$32333 on Fanuary 12 $33" and &egins to materially participate in the partnership%s &usiness. *he Aaymar.et Partnership uses the calendar year as its ta+ year. At the time of the purchase2 the Aaymar.et Partnership has 1$2333 in lia&ilities2 and <an%s share is $(9. <uring the year2 the Aaymar.et Partnership incurs 1,2333 in losses and its lia&ilities increase &y 1-333. =hat is <an%s &asis in his partnership interest on <ecem&er )12 $33"B Answer: Purchase of partnership interest 1$32333 Plus: Share of lia&ilities C3.$( D 1$2333) (33 Share of lia&ility increase C3.$( D 1-2333) 12333 Ginus: Share of partnership losses C3.$( D 1,2333) C $2333) 0asis in partnership interest on <ecem&er )1 11"2(33
Page ef.: !:"#(2 E+ample !:"#$

5/) <an purchases a $(9 interest in the Aaymar.et Partnership for 1$32333 on Fanuary 12 $33" and &egins to materially participate in the partnership%s &usiness. *he Aaymar.et Partnership uses the calendar year as its ta+ year. At the time of the purchase2 the Aaymar.et Partnership has 1$2333 in lia&ilities2 and <an%s share is $(9. <uring the year2 the Aaymar.et Partnership incurs 11332333 in losses and its lia&ilities increase &y 1-333. =hat is <an%s &asis in his partnership interest on <ecem&er )12 $33"B Answer: Purchase of partnership interest 1$32333 Plus: Share of lia&ilities C3.$( D 1$2333) (33 Share of lia&ility increase C3.$( D 1-2333) 12333 <ecem&er )1 &asis &efore losses 1$12(33 Ginus: Ga+imum loss to &e deducted C$12(33) 0asis in partnership interest on <ecem&er )1 1 #3# <an is allocated 1$(2333 C3.$( D 11332333) of the partnership losses2 &ut he is limited to the amount of the &asis in his partnership interest &efore deduction for the losses. *he remaining 1)2(33 in losses carry o'er to a su&sequent year and are deducted when he has sufficient &asis in his partnership interest.
Page ef.: !:"#(E E+ample !:"#)

20 Copyright 2011 Pearson Education, Inc.

55) Fane contri&utes land with a FGI of 11332333 and a &asis of 1,32333 to the :reen Partnership in e+change for a $(9 partnership interest. *he partnership assumes the 1-32333 mortgage on the land. Gary has a $(9 share of partnership lia&ilities. *he :reen Partnership has 1,2333 in lia&ilities immediately &efore Fane%s contri&ution. =hat is Fane%s &asis in her partnership interestB Answer: 0asis of contri&uted property 1,32333 Plus: Fane%s share of e+isting partnership lia&ilities C1,2333 D 3.$() $2333 Ginus: Fane%s lia&ilities assumed &y the other partners C1-32333 D 3.5() C)32333) Fane%s &asis in her partnership interest 1($2333 Fane does recogni8e any gain on the partnership%s assumption of her lia&ility &ecause the deemed cash distri&ution from the assumption of her 1)32333) in lia&ilities &y the partnership does not e+ceed her 1,$2333 &asis in the partnership interest immediately preceding the fictional distri&ution.
Page ef.: !:"#5E E+ample !:"#/

5,) Fane contri&utes land with a FGI of 11332333 and a &asis of 1-32333 to the :reen Partnership in e+change for a $(9 partnership interest. *he partnership assumes the 1,32333 mortgage on the land. Gary has a $(9 share of partnership lia&ilities. *he :reen Partnership has 1,2333 in lia&ilities immediately &efore Fane%s contri&ution. =hat is Fane%s &asis in her partnership interestB Answer: 0asis of contri&uted property 1-32333 Plus: Fane%s share of e+isting partnership lia&ilities C1,2333 D 3.$() $2333 Ginus: Fane%s lia&ilities assumed &y the other partners C1,32333 D 3.5() C/32333) Fane%s &asis in her partnership interest 1 #3# *he cash deemed distri&uted in e+cess of Fane%s predistri&ution &asis causes her to recogni8e an 11,2333 C1/32333 # 1-$2333) gain. Fane reduces her &asis to 8ero since a partner%s &asis in the partnership interest can ne'er &e less than 8ero.
Page ef.: !:"#5

5") 0o& contri&utes cash of 1-32333 and !arol contri&utes land with a &asis of 1$(2333 and a FGI of 1-32333 to &ecome equal partners in the 0! Partnership. *he partnership immediately o&tains a 1)32333 mortgage on the land and the partners will share the economic ris. of loss equally. =hat are the two partners% &ases in the partnership after these transactions are completedB Answer: ob 0asis of contri&uted property Plus: Share of partnership%s lia&ility 0asis in partnership interest
Page ef.: !:"#5

Carol 1$(2333 1(2333 1-32333

1-32333 1(2333 1((2333

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,3) @ay and Larry each contri&ute property to &ecome equal partners in the @L :eneral Partnership. @ay contri&utes office furniture with an ad>usted &asis of 1-32333 and a FGI of 1(32333 which she has depreciated using GA! S. Larry contri&utes land with a &asis of 1/32333 and a FGI of 1(32333 which he had &een holding as an in'estment. *he partnership will use the land as a par.ing lot for their &usiness. a. =hat is the partnership%s &asis in each of the two pieces of propertyB &. ;f the land that Larry contri&uted is sold four years after the contri&ution for 1-(23332 what is the amount and character of the gain or loss which Larry should reportB Answer: a. *he partnership &asis for the two assets is a carryo'er &asis from the contri&utor partners. *he office furniture has a &asis of 1-32333 and the land has a &asis of 1/32333. &. Precontri&ution loss of 1132333 is allocated to Larry2 and it is a capital loss &ecause Larry held the land as a capital asset prior to its contri&ution. !apital loss property retains its character for fi'e years after a contri&ution to a partnership. *he 1(2333 postcontri&ution loss is di'ided equally &etween the partners. Since this loss accrued while the partnership held the land as Sec. 1$)1 property2 Larry%s 1$2(33 share of this loss is a Sec. 1$)1 loss.
Page ef.: !:"#"

,1) Sarah purchased land for in'estment in $335 for 1,32333. ;n $33, when the FGI of the land was only 15323332 she contri&uted it to the SL Partnership2 which is in the &usiness of de'eloping and selling lots. SL Partnership de'eloped the contri&uted land and sold it in $33" for 1(32333. =hat is the amount and character of the gain or lossB Answer: *here is a 1)32333 loss C1(32333 # 1,32333). *he 1132333 loss that accrued while Sarah held the asset retains its character and is a capital loss. *he remaining 1$32333 of loss is an ordinary loss as the land was part of the partnership%s in'entory.
Page ef.: !:"#"E E+ample !:"#11

,$) :eorge recei'es a 139 limited partnership interest Ccapital and profits interest) in the A;F Partnership in return for managing the partnership%s rental property. *he partnership interest has a FGI of 1)(2333. =hat is the amount and character of the income Cif any) that :eorge must report as a result of &ecoming a partnerB Answer: :eorge recogni8es 1)(2333 of ordinary income &ecause the partnership interest is property that he recei'ed in e+change for his ser'ices.
Page ef.: !:"#13

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,)) *he * Limited Partnership incurs the following e+penses during the time that the partnership is &eing organi8ed. Attorneys% fees: For drawing up the partnership agreement 1132333 For ad'ice on mar.eting the partnership interests on a stoc. e+change 1-2333 Accountants% fees: For esta&lishing the accounting system For the first quarter%s &oo..eeping /2333 /33

=hat is the ma+imum amount that the partnership can deduct as an organi8ation and syndication e+pense for the first year in which the partnership &egins &usiness2 assuming the &usiness &egan on ?cto&er 1B Answer: *he attorney%s fees for drawing up the partnership agreement and the accountant%s fees for esta&lishing the accounting system are eligi&le to &e amorti8ed as organi8ation and syndication e+penses. 1(2333 of the e+penses can &e deducted in the first year and the remainder amorti8ed o'er 1,3 months2 resulting in a 1/1 deduction per month C1112333 R 1,3). *he total e+pense is 1(21,) M1(2333 N C/1 D ))P. *he accountant%s fees for &oo..eeping are deducti&le as trade or &usiness e+penses under Sec. 1/$. *he attorney%s ad'ice is deducted when the partnership terminates or is liquidated.
Page ef.: !:"#1$

,-) !harles Fordan files his income ta+ return on a calendar#year &asis. Ae is a principal partner in a partnership using a ta+ year ending Fune )3. Fordan%s share of the partnership%s ordinary income was 1$-2333 for the fiscal year ending Fune )3 of last year and 15$2333 for the fiscal year ending Fune )3 of the current year. Assume the partnership earned its income e'enly throughout the year. Aow much should Fordan report on his Form 13-3 for last year as his share of the partnership%s ordinary incomeB Answer: 1$-2333 of partnership ordinary income from the partnership return for the year ending Fune )3 of last year. 7one of the income for the Fuly 1 # <ecem&er )1 portion of the partnership return for the year ending Fune )3 of this year is included in the partner%s return for last year.
Page ef.: !:"#1$

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,() *he KHL Partnership is held &y ten partners who ha'e the following capital and profits ownership of the partnership. *he ta+ year#end used &y each of the ten partners is also indicated. Assume each partner has used this year#end for at least fi'e years.

Partner A 0 ! < E F : A ; @

O!nership ,9 ,9 ,9 139 139 139 139 1$9 1$9 1$9

Partner"s #a$ %ear&'nd 1$J)1 /J)3 "J)3 /J)3 /J)3 13J)1 "J)3 1$J)1 /J)3 /J)3

=hat is the required year#end for the KHL Partnership assuming that the &usiness has no natural &usiness year and has not filed a Sec. --- electionB Answer: *he partnership%s required year#end under Sec. 53/ is Fune )3 &ecause a ma>ority of the partnership interests C($9) are held &y partners C02 <2 E2 ;2 and @) with that year#end.
Page ef.: !:"#1-

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,/) A* Pet spa is a partnership owned equally &y *ra'is and Ashley. *he partnership had the following re'enues and e+penses this year. =hich of the following items are separately statedB 7onseparately statedB =hat is each partner%s distri&uti'e share of ordinary incomeB e'enues 1(332333 Salary e+pense Cnonpartners) $(32333 Supplies -32333 ;nsurance (32333 <epreciation Cno Sec. 15" amounts) 132333 <i'idend income $2333 Long#term capital gain )32333 Answer: Separately#stated items are the di'idend income2 long#term capital gain and the partnership%s ordinary income. *he remaining items are nonseparately stated. *he partnership%s ordinary income is: e'enues 1(332333 Salary e+pense Cnonpartners) $(32333 Supplies -32333 ;nsurance (32333 <epreciation Cno Sec. 15" amounts) 132333 )(32333 Partnership ordinary income 11(32333
Page ef.: !:"#15

,5) *he =E Partnership reports the following items for its current ta+ year. (tem )mount (ncome ?perating income 1"32333 ental income 1(2333 ;nterest income: *a+#e+empt municipal &onds $2333 !orporate &onds -2333 Sec. 1$)1 gain $32333 Sec. 1$-( gain 1,2333 Long#term capital gain 52333 '$penses ental e+penses 1$2333 Salaries paid to employees Cnot partners) )32333 !harita&le contri&utions (2333 ;nterest paid related to &orrowings used to finance municipal &onds )2333 =hat is the =E Partnership%s ordinary income for the current yearB Answer: *he income items2 which are ordinary2 total 113,2333 C1"32333 operating income N 11,2333 Sec. 1$-( gain). *he only ordinary e+pense is the 1)32333 of salaries. Accordingly2 partnership ordinary income totals 15,2333 C113,2333 # 1)32333).
Page ef.: !:"#15

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,,) Eli>ah contri&utes securities with a 1"32333 FGI Cpurchased in 1""( at a cost of 1(32333) to &ecome a one#third partner in the EF@ Partnership on Fanuary 1 of the current year. *he securities are sold on <ecem&er 1( of the current year for 113(2333. Aow much of the partnership%s capital gain from the sale of these securities should &e allocated to Eli>ahB Answer: C1"32333 # 1(32333) N MC113(2333 # 1"32333) D 3.)))P O 1-(2333.
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,") !lar. and Lewis are partners who share the profits and losses of the !SL Partnership /39 and -392 respecti'ely. *he ta+ &asis of each partner%s interest in the partnership as of <ecem&er )12 of last year was as follows: !lar.2 11-2333E Lewis2 11$2333. <uring the current year2 the partnership had ordinary income of 1$32333 and a long#term capital loss of 1132333 from the sale of securities. *he partnership made cash distri&utions proportionately to the two partners during this year totaling 1$32333. =hat is the amount of Lewis%s ta+ &asis of his partnership interest on <ecem&er )1 of the current yearB Answer: Lewis%s &asis O 11$2333 N C3.-3 D 1$32333) # C3.-3 D 1132333) # 1,2333 distri&utions O 1,2333.
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"3) *he partners of the G!L Partnership2 Gartin2 !lar.2 and Lewis2 share profits and losses in a ratio of -:):)2 respecti'ely. *he ta+ &asis of each partner2 as of <ecem&er )1 of the current year2 is as follows: Gartin2 152$33E !lar.2 1/2333E and Lewis2 1$2(33. <uring the current year the partnership incurred an ordinary loss of 11(2333. *he loss is not reflected in the ta+ &asis figures presented a&o'e. 7othing else occurs during the year which would affect the partners% &ases. As a result of this loss2 what amount should Gartin2 !lar.2 and Lewis report on their indi'idual ta+ returns for the current yearB =hat limitations Cother than the Sec. 53-Cd) loss limitations) may pre'ent them from deducting their losses in the current yearB Answer: *he loss allocation is: Gartin: 11(2333 D 3.-3 O 1/2333 !lar.: 11(2333 D 3.)3 O 1-2(33 Lewis: 11(2333 D 3.)3 O 1-2(33 Gartin and !lar. are limited to deducting 1/2333 and 1-2(332 respecti'ely2 &y their allocation of the partnership loss and not &y their &ases for their partnership interests under Sec. 53-Cd). Lewis2 on the other hand2 has his 1-2(33 share of the partnership loss limited &y his 1$2(33 &asis for the partnership interest under Sec. 53-Cd). *hese amounts may &e further restricted &y the at#ris. rules and the passi'e acti'ity limitations.
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"1) *he *roi.a Partnership has an ordinary loss of 1-,2333 for the year. 0efore allocation of the loss at the end of the year2 Shaad%s one#third limited partnership interest has an ad>usted &asis of 1(2333. Shaad%s only other income or loss is his 1)32333 salary from a factory >o&. =hat amount can Shaad deduct on his ta+ return as his share of the partnership%s lossB Answer: Shaad%s distri&uti'e share of loss is 11/2333 C1-,2333 D 3.)))). Ais loss deduction is first limited to his 1(2333 ad>usted &asis under Sec. 53-Cd). Ais loss is further restricted &y the passi'e loss rules and2 since he has no passi'e income2 he cannot deduct any of the loss from this partnership.
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"$) Edward owns a 539 interest in the capital2 profits2 and losses of the Edward and Goore Partnership. <uring the year2 Edward purchases surplus in'entory from the partnership for 1(2333. ?n the date of the sale the in'entory has an ad>usted &asis to the partnership of 1,2333. For the year the partnership%s ordinary income is 1(32333 after including the loss on the sale of the in'entory to Edward. Assuming that there are no other partnership items to &e separately stated2 what is Edward%s distri&uti'e share of the partnership%s ordinary income for the yearB Answer: *he loss will not &e recogni8ed &y the partnership &ecause Edward owns greater than (39 of the partnership capital or profits interests and is considered a related party under Sec. 535C&). *he partnership has ordinary income of 1()2333 C1(32333 N 1)2333) of which Edward%s share is 1)52133 C3.53 D 1()2333).
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")) ;n Fanuary2 <aryl and Louis form a partnership with each contri&uting 15(2333 in cash. *he partnership agreement pro'ides that <aryl would recei'e a guaranteed payment for salary of 1$32333 and that partnership profits and losses Ccomputed after deducting <aryl%s salary) would &e shared equally. For the year the partnership%s operations result in an 11,2333 ordinary loss after payment of <aryl%s guaranteed payment. *he partnership has no outstanding lia&ilities at year#end. =hat is the &asis amount of <aryl%s partnership interest at year#endB Answer: <aryl%s &asis would &e unaffected &y the guaranteed payment. ;t would &e reduced &y 1"2333 for the portion of the ordinary loss that he is allocated and would total 1//2333 C15(2333 # 1"2333).
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"-) Feremey is a partner in the FimFmey partnership. =hy does he need to .now his &asis in his partnership interestB Answer: Feremey needs to .now the &asis of his partnership interest in order to determine the amount of partnership losses that he can deduct and the ta+a&ility of distri&utions made to him &y the partnership. Ae also needs to .now his &asis to determine the gain or loss if he sells his partnership interest.
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"() E+plain the difference &etween partnership distri&utions and distri&uti'e shares. Answer: Partnership distri&utions represent the receipt of earnings that ha'e already &een ta+ed to the partners. *hey reduce the partner%s &asis in his or her partnership interest and generally are ta+#free. ;f the distri&ution e+ceeds the partner%s &asis in his or her partnership interest2 the partner will recogni8e gain equal to the amount of the e+cess. A partner%s distri&uti'e share is the portion of the partnerships ta+a&le and nonta+a&le items that are allocated to the partner for a gi'en partnership year. Each partner must report and pay ta+es on his or her distri&uti'e share. *he partner%s distri&uti'e share is normally determined &y the terms of the partnership agreement. ;f the partnership agreement is silent2 all of the facts and circumstances are considered when determining the partner%s o'erall interest in the partnership. Actual partnership distri&utions allocated to a partner may &e more or less than his or her distri&uti'e share for that partnership year.
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"/) <oes the contri&ution of ser'ices to a partnership in e+change for an unrestricted partnership interest qualify for Sec. 5$1 nonta+a&le treatmentB Answer: 7o. *he ser'ice partner recogni8es income to the e+tent of the FGI of the partnership interest recei'ed less and cash or other property contri&uted &y the partner.
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"5) E+plain the ta+ consequences for &oth the ser'ice partner and the partnership when a contri&ution of ser'ices is made to the partnership. Answer: *he ser'ice partner has income to the e+tent of the FGI of an undi'ided interest in the partnership assets is deemed to ha'e &een recei'ed. *he ser'ice partner%s &asis in their partnership interest equals the amount of income recogni8ed &y the ser'ice partner. *he partnership recogni8es a gainJloss on the assets deemed transferred. *he partnership ad>usts its &asis for the portion of the assetCs) deemed transferred. *his ad>ustment reflects the gainJloss recogni8ed &y the partnership on the deemed asset transfer. *he partnership will also ha'e a deduction or capital e+penditure for the partnership%s outlay.
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",) =hat are the three rules and their order when determining a partnership ta+ yearB Answer: First2 the partnership ta+ year will &e the ma>ority partnerCs)% Cown in aggregate more than (39) ta+ year. ;f the first rule is not applica&le2 then the ta+ year of all principal partners C(9 or more partners). ;f neither of the preceding rules is applica&le2 then the ta+ year that allows the least aggregate deferral.
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"") 0riefly e+plain the aggregate and entity theories as they relate to partnerships. Answer: *he aggregate theory of partnerships holds that the partnership is merely an aggregate of its partners2 thus the partnership%s income flows through to its partners. *he entity theory 'iews a partner%s separate entity from its partners2 thus the partnership ma.es elections at the entity le'el.
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133) =hat is included in partnership ta+a&le incomeB Answer: Partnership ta+a&le income includes &oth the separately stated items and the partnership%s ordinary income or loss. *he ordinary income or loss is the sum of all ta+a&le items that are not separately stated.
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131) 4nder what conditions will a special allocation of partnership depreciation &e recogni8edB Assume the partnership has no nonrecourse lia&ilities. Answer: A special allocation must &e stated in the partnership agreement or the amount will &e allocated in accordance with the partners% interest in the partnership. ;n addition2 the allocation must ha'e su&stantial economic effect. *o ha'e economic effect the allocation must meet all of the following requirements throughout the term of the partnership: T !apital accounts must &e maintained under the capital account maintenance rules of the Sec. 53- regulations. T 4pon liquidation of the partnership2 liquidating distri&utions must &e made in accord with positi'e capital accounts. T ;f a partner has a deficit capital account &alance after all ad>ustments for the year of liquidation2 that partner must &e unconditionally o&ligated to restore the deficit. C*he regulations pro'ide some alternati'es to an unconditional o&ligation to restore the deficit2 &ut the alternati'es are not co'ered in this introductory te+t&oo.. ) For the economic effect of the special allocation to &e considered su&stantial2 there must &e a reasona&le possi&ility that the allocation will su&stantially affect the dollar amounts to &e recei'ed &y the partners independent of any ta+ consequences.
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13$) E+plain the three different limitation pro'isions that a partner must satisfy &efore a loss can &e deducted. Answer: ;n the order of application2 these limitations are C1) adequate partnership &asis under Sec. 53-Cd)2 C$) the at#ris. loss limitations2 and C)) the passi'e acti'ity limitations.
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13)) =hat is the ta+ impact of guaranteed payments on the partner and the partnershipB Answer: *he partner recogni8es ordinary income in the partner%s ta+ year during which the partnership ta+ year ends regardless of when the payment is recei'ed. *he partnership deducts or capitali8es the guaranteed payments since it is treated as if it were made to an outsider.
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13-) Iictor and @ristina decide to form I@ Partnership. *hey will &e equal partners. Iictor contri&utes a &uilding with a 11(32333 FGI and a 113(2333 ad>usted &asis to the partnership. *he &uilding has a 1/32333 mortgage2 which the partnership assumes. @ristina contri&utes land with a 1532333 FGI and a 1"(2333 ad>usted &asis. @ristina will manage the day to day acti'ities of the partnership. She will &egin to recei'e a guaranteed payment for her wor. starting in the second year of operations and continuing on as long as she manages the operations of the partnership. Iictor and @ristina ha'e agreed that the guaranteed payment will &e 1132333 per year. =hat ta+ issues should Iictor2 @ristina2 and the partnership consider with respect to the formation and operation of the partnershipB Answer: T <oes Iictor recogni8e any gain on the formationB =hen will his precontri&ution gain &e recogni8edB T =hat is Iictor%s &asis and holding period for his partnership interestB T <oes @ristina recogni8e any loss on the contri&ution of property in e+change for her partnership interestB =hen will her precontri&ution loss &e recogni8edB =hat will the character of the loss &eB T =hat is @ristina%s &asis and holding period for the partnership interest she recei'ed in e+change for propertyB T =hat &asis and holding period does the partnership ha'e in the property recei'edB T =hat happens to the depreciation recapture for the &uildingB T <id @ristina recei'e any of her partnership interest for ser'icesB T ;f so2 what gainJlossJdeductions must the partnership recogni8eB T =hat income must @ristina recogni8eB Iictor must determine his &asis in the partnership interest C15(2333 O 113(2333 # 1/32333 N 1)32333 share of lia&ilities) and his holding period for his interest in the partnership C&egins with his ownership of the office &uilding). Since Iictor recogni8es no gain or loss2 he does not ha'e to &e concerned with any recapture potential under Sec. 1$(3. Iictor will ha'e to recogni8e precontri&ution gain on the office &uilding at a future date. @ristina must determine her &asis in the partnership interest C11$(2333 O 1"(2333 N 1)32333 share of lia&ilities) and her holding period for her interest in the partnership C&egins with her ownership of the land). @ristina recogni8es no loss at the time of the partnership formation. ;f the land was a capital asset to @ristina and the land is sold &y the partnership within fi'e years of @ristina%s contri&ution2 the loss will &e a capital loss up to 1$(23332 and that capital loss will &e allocated to @ristina as a precontri&ution loss. After fi'e years2 the character of the loss will &e determined &y the character of the land to the partnership2 &ut @ristina will still ha'e to report any precontri&ution loss. :uaranteed payments will &e reported as ordinary income. *he partnership must &e concerned with the &asis and holding period of the assets it recei'es Ccarryo'er for &oth &asis and holding period). *he partnership can deduct from ordinary income the guaranteed payments made to @ristina.

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An additional ta+ issue must &e addressed. Iictor contri&uted property with a net 'alue of 1"32333 for a one#half interest in the partnership while @ristina contri&uted property with a net 'alue of only 1532333 for a one#half interest in the same partnership. *he total partnership has a net 'alue of 11/32333 C11(32333 N 1532333 # 1/32333 lia&ility). *here must &e some e+planation. ?ne possi&ility is that 0o& has made a 1132333 gift to @ristina. ;f this is so2 &oth partners% &ases must &e ad>usted to reflect the gift. Alternati'ely2 the facts suggest that @ristina may &e recei'ing some of her partnership interest in e+change for her ser'ices in managing the &usiness for the first year while recei'ing no guaranteed payment. ;f this is so2 @ristina must recogni8e ordinary income and increase her &asis for the 'alue of the partnership interest she recei'ed in e+change for ser'ices. ;f @ristina is recei'ing some of her partnership interest for ser'ices2 the partnership must recogni8e gain or loss in the partnership assets she is deemed to recei'e and must ad>ust the &asis of the assets for her deemed re#contri&ution. *he partnership also must deduct the guaranteed payment.
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13() =hen the P<Q Partnership formed2 it .new it had a good product2 &ut it was a &it short on cash. After seeing the product2 Fim2 a !PA2 said that he would set up an accounting system for the partnership in e+change for a 1(9 profits interest in the partnership. *he partners agreed to this as Fim was recei'ing only a profits interest and not a capital interest in the partnership. Fim%s usual fee for this type of ser'ice would &e appro+imately 1(2333. =hat ta+ issues should Fim and the P<Q Partnership consider with respect to the payment made for the ser'icesB Answer: T ;s the receipt of a profits interest in the P<Q Partnership in e+change for Fim%s ser'ices a ta+a&le e'entB T ;f it is a ta+a&le e'ent2 what is the amount of character of the income recogni8edB T =hat is Fim%s &asis and holding period for his partnership interestB *he receipt of the partnership interest is not a ta+a&le e'ent. 4nder e'. Proc. ")#$5 C1"")# $ !. 0. )-))2 the receipt of a profits interest is ta+a&le only under circumstances where the FGI of the interest can &e readily determined. *his situation does not fit into one of the three e+ceptions contained in the re'enue procedure guidelines as &eing a ta+a&le e'ent.
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13/) Fason2 a lawyer2 pro'ided legal ser'ices for the employees of the A0! Partnership during the first si+ months of the current year. ;n e+change2 he recei'ed a $9 capital and profits interest in the partnership. *he 'alue of the interest is 1(2333. =hat are the ta+ consequences to Fason2 the A0! Partnership2 and the employees of A0!B Answer: Fason must include the 1(2333 in his current year gross income. *he legal ser'ices were a fringe &enefit to the employees and therefore2 not ta+a&le to them. *he A0! Partnership can deduct the 1(2333 in the current year and will allocate the 1(2333 e+pense to all partners other than Fason.
Page ef.: !:"#11E E+ample !:"#1)

31 Copyright 2011 Pearson Education, Inc.

135) <inia has agreed to pro'ide ser'ices 'alued at 1)32333 to the L#G Partnership. ?n Fanuary 1 of the current year2 she is gi'en a $39 capital and profits interest in the partnership in e+change for her ser'ices. *he partnership has no lia&ilities at the time &ut has assets with a &asis of 1(32333 and a FGI of 1532333. =hat are the ta+ consequences to <inia and the partnershipB Answer: *he transaction is ta+ed as if <inia recei'ed a one#fifth interest in each asset. She is ta+ed on the 1)32333 FGI of the assets and ta.es a 1)32333 &asis in the partnership in the partnership interest. *he partnership must recogni8e 1-2333 of gain M3.$3 D C1532333 FGI # 1(32333 &asis)P on the assets deemed paid to <inia. *he partnership calculates gain or loss for each asset it holds2 and the character of each asset determines the character of the gain or loss recogni8ed. *he partnership%s original &asis in its assets C1(32333) is increased &y the 1-2333 recogni8ed gain.
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13,) Gary and Gartha2 who had &een friends for years2 decided to open a retail store to sell .itchen and &ath items. ;n Fune2 they spent 1(33 loo.ing for a suita&le location. *hey paid an attorney 112(33 to ha'e their partnership agreement drawn up2 and they paid an accountant 1-33 to set up their accounting system. <uring Fuly2 they searched for 'endors for the merchandise they planed to carry and stoc.ed their shel'es. *he store opened in August and was immediately successful. *hey paid the accountant 1)33 to prepare an income statement for August. =hat ta+ issues should the partnership consider with regard to &eginning this &usinessB Answer: T =hat items qualify as organi8ational e+penses2 which are start#up e+penses2 and what items can &e e+pensed nowB T <oes the partnership want to amorti8e organi8ational e+penses andJor start#up e+pensesB ;f so2 o'er what time period does the amorti8ation occurB T =hen does the partnership &usiness &eginB *he partnership must first characteri8e each e+pense as an organi8ational e+pense2 a start# up e+pense C!hapter !))2 another e+pense to &e capitali8ed or as a current period e+pense. *he costs of drawing up the partnership agreement and of esta&lishing the accounting system are organi8ational e+penses. *he e+penses of searching for a location is a start#up e+pense2 and the e+pense of ha'ing an income statement prepared is a current period e+pense. A partnership can elect to deduct the first 1(2333 of organi8ational e+penses and amorti8e the e+cess o'er 1,3 months. ;f the amount of organi8ation e+penses e+ceeds 1(323332 the total amount &y which the organi8ation e+penses e+ceed 1(32333 reduces the 1(2333 deduction limit. Prior to ?cto&er $)2 $33-2 organi8ational e+penses were amorti8ed o'er /3 months at the election of the ta+payer. Another issue the partnership must face is when is the partnership is considered to &egin &usiness. egulation Sec. 1. 53"#$Cc) states that &usiness &egins when the partnership 6starts the &usiness operation for which it was organi8ed.6 Amorti8ation of &oth the organi8ational e+penses and the start#up e+pense &egins with the month in which &usiness &egins.
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32 Copyright 2011 Pearson Education, Inc.

13") *racy has a $(9 profit interest and a $39 loss interest in the <upont Partnership. *he <upont Partnership reports the following income and loss items for the current year. 7et long#term capital loss 1(32333 7et Sec. 1$)1 gain -(2333 ?rdinary income 1132333 =hat is *racy%s distri&uti'e shareB Answer: *he partnership has a 113(2333 C11132333 N 1-(2333 # 1(32333) net profit for the year. *racy%s distri&uti'e share is calculated using her profits interest percentage2 $(9. 7et long#term capital loss 11$2(33 7et Sec. 1$)1 gain 112$(3 ?rdinary income $52(33 *he loss percentage is only used in years in which the partnership has a net loss.
Page ef.: !:"#1,E E+ample !:"#$3

113) Gi.e and Fennifer form an equal partnership. Gi.e contri&utes cash of 11(2333 and Fennifer contri&utes land ha'ing a 11(2333 FGI and a &asis of 1(2333. ;f the partnership sells the land three years later for 11,2333 what are the ta+ consequences to Gi.e and FenniferB Answer: *he precontri&ution gain of 1132333 C11(2333 # 1(2333) is allocated only to Fennifer. *he 1)2333 gain that accrued while the partnership held the land C11,2333 # 11(2333) is allocated equally to Gi.e and Fennifer. Fennifer%s total gain is 1112(33 and Gi.e%s gain is 11(2333.
Page ef.: !:"#1"E E+ample !:"#$)

111) Ferry2 has a 139 interest in the E@: Partnership capital2 profits and losses. Ae is a limited partner. At the &eginning of the current year2 his &asis in his partnership interest is 1132333. *he partnership earned 1$32333 of ordinary income this year and repaid a 11(32333 nonrecourse lia&ility. =hat ta+ issues should Ferry consider with respect to reporting the results of this year%s acti'ities for the E@: Partnership on his personal returnB Answer: T =hat is Ferry%s &asis in his partnership interestB T <oes the repayment of the partnership lia&ility cause an ad>ustment to Ferry%s &asis in his partnership interestB T ;s the repayment of the nonrecourse lia&ility a ta+a&le e'ent for FerryB ;f so2 what is the amount and character of the income reportedB epayment of partnership lia&ilities are treated as distri&utions to the partners. A distri&ution made to a partner that e+ceeds their &asis for the partnership interest produces a ta+a&le gain. *he gain can &e calculated as follows: 0asis at the &eginning of the year Plus: :eorge%s share of income C3.13 D 1$32333) :eorge%s &asis &efore the distri&ution Ginus: :eorge%s deemed distri&ution from repayment of partnership lia&ility C3.13 D 11(32333) :eorge%s recogni8ed gain
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1132333 $2333 11$2333 C1(2333) 1 )2333

11$) Samantha wor.s -3 yours a wee. as a cler. in the mall and earns 1$,2333. ;n addition2 she wor.s fi'e hours each wee. in the KHL Partnership%s office. Samantha2 a 1(9 limited partner in the KHL Partnership2 has &een allocated a 1-2333 loss from the partnership for the current year. *he &asis for her interest in KHL &efore accounting for current operations is 152333. =hat ta+ issues should Samantha consider with respect to her interest in2 and employment &y2 the KHL PartnershipB 33 Copyright 2011 Pearson Education, Inc.

Answer: T =hat is Samantha%s deducti&le loss from her partnership in'estmentB T =hat is Samantha%s Sec. 53-Cd) &asis in her partnership interestB T =hat is Samantha%s at ris. &asis in her partnership interestB T ;s the loss from the KHL Partnership a passi'e lossB T <oes Samantha ha'e passi'e income from this in'estment or other in'estmentsB ;f so2 can she deduct her lossesB ;f not2 do the losses carryo'er to later yearsB As a limited partner2 Samantha is presumed not to materially participate in the partnership. *herefore2 &ecause it is a loss from a passi'e acti'ity2 her loss cannot &e deducted unless she has passi'e income from other in'estments2 or she terminates her interest in the limited partnership. ;f no such income e+ists2 the losses carry o'er to later years.
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11)) At the &eginning of the current year2 *erry has a 1-32333 &asis for his general partnership interest in the *@E Partnership. Ae materially participates in the &usiness acti'ities of the partnership. ?n 7o'em&er 12 he recei'es a 1-2333 distri&ution. Ais distri&uti'e share of *@E%s current items is a 1(2333 not long#term capital gain and a 1(32333 ordinary loss. =hat amount will he include in his current year%s ta+ returnB Answer: *erry has a 1-12333 C1-32333 N 1(2333 # 1-2333) &asis in his partnership interest at the end of the year &efore including the ordinary loss. Ais loss deduction is limited to his &asis. *herefore2 he will include the 1(2333 long#term capital gain and 1-12333 of the ordinary loss. *he remaining 1"2333 ordinary loss can &e deducted in the following year if he has sufficient &asis in his partnership interest.
Page ef.: !:"#$-E E+ample !:"#$"

11-) Fanice has a )39 interest in the Fansen Partnership. She is to recei'e a guaranteed payment for deducti&le ser'ices of 1(32333. *he partnership reports 1)32333 of ordinary income and a 11332333 long#term capital gain &efore deducting the guaranteed payment. =hat is her income from the partnershipB Answer: Fanice will report the guaranteed payment of 1(32333.She will also report her distri&uti'e share of the partnership%s ordinary loss2 1/2333 M3.)3 D C1)32333 # 1(32333)P and her distri&uti'e share of the partnership%s long#term capital gain2 1)32333 C3.)3 D 11332333).
Page ef.: !:"#$"E E+ample !:"#-3

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11() 0ud has de'oted his life to his &usiness2 the 0@ Partnership in which he owns an ,(9 capital and profits interest. 0ecause he has wor.ed so hard all his life2 he ne'er married and has no children. Ae is has decided to gi'e a $(9 capital and profits interest to 0erry2 a close friend2 if 0erry will wor. in the &usiness for fi'e years. 0erry will recei'e guaranteed payments for his wor.. 0ud de'otes all his time to the partnership2 &ut he ta.es no salary. =hat ta+ issues should 0ud and 0erry consider with respect to the gift of the partnership interest and 0ud%s employment arrangement with partnershipB Answer: T <o the family partnership rules apply when there is no family relationshipB T <oes reasona&le compensation need to &e paid to 0ud for his ser'icesB T ;f so2 what is reasona&le compensation for 0ud%s ser'icesB T <oes 0erry need to &e recogni8ed as a partner in the 0@ PartnershipB T ;f so2 what is 0erry%s alloca&le share of the partnership incomeB T =hat is 0ud%s alloca&le share of the partnership incomeB *he family partnership rules are written in terms of the donor#donee relationship. Accordingly2 they apply in this situation. 0oth 0ud and 0erry would &e allocated a reasona&le compensation amount. *hen2 the remainder of the income originally allocated to 0ud and 0erry would &e reallocated to them &ased on their relati'e capital interests.
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