550 MODULE 35 TAXES: 'PARTNERSHIPS
9. (b) The requirement is to determine the maximum
amount of filing fees and accounting fees that Basic could
deduct on the 2009 partnership retum. The filing fees inci-
dent to the creation of the partnership are organizational
expenditures. A partnership may deduct up to $5,000 of
organizational expenditures (or the tax year in which the
partnership begins business, with any remaining expendi-
tures deducted ratably over the 180-month period beginning
with the month in which the partnership begins business.
Here, since the organizational expenditures total only
$3,600, they can be fully deducted for 2009.
The accounting fees to prepare the representations in
offering materials are considered syndication fees. Syndica-
tionfees include thecosts connected with the issuing and
marketing of partnership interests such as commissions,
professional fees, and printing costs. These costs must be
capitalized and can neither be amortized nor depreciated.
C. Partnership Income and Loss
10. (c) The requirement is to determine the amount of
loss that Thompson can deduct as a result of his interest in
the' Starlight Partnership. A partner's distributive share of
partnership losses is generally deductible to the extent of the
tax basis for the partner's partnership interest at the end of
the year. All positive basis adjustments and all reductions
for distributions must be taken into account before deter-
mining the amount of deductible loss. Here, Thompson's
basis of $60,000 at the beginning of the year would be in-
creased by the $15,000 of net long-term capital gain, re-
duced by the $20,000 cash distribution, to $55,000. As a
result, Thompson' s deduction of the ordinary loss for the
current year is limited to $55,000 which reduces the basis
for his partnership interest to zero. He cannot deduct the
remaining $10,000 of ordinary loss currently, but will carry
it forward and deduct it when he has sufficient basis for his
partnership interest.
11. (d) The requirement is to determine the item that is
deductible in the computation of the ordinary income of a
partnership. Guaranteed payments to partners are always
deductible in computing a partnership's ordinary income.
Contributions to recognized charities and short-term capital
losses cannot be deducted in computing a partnership's ordi-
nary income because they are subject to special limitations
and must be separately passed through' so that any applicable
limitations can be applied at the partner level. Similarly,
dividends are an item of portfolio income and must be sepa-
rately passed through to partners in order to retain its char-
acter as portfolio income when reported on partners' returns:
12. (c) The requirement is to determine whether the at-
risk and passive activity loss limitations apply in determin-
ing a partner's deduction for that partner's share of partner-
ship losses. A partner's distributive share of partnership
losses is generally deductible by the partner to the extent of
the partner's basis in the partnership at the end of the taxable
year. Additionally, the deductibility of partnership losses is
limited to the amount of the partner's at-risk basis, and will
also be subject to the passive activity loss limitations if they
are applicable. Note that the at-risk and passive activity loss
.limitations apply at the partner level, rather than at the part-
'nership level.
13. (b) The requirement is to determine the amount to
be reported as ordinary income on the partnership'S return
given partnership book income of $100,000. The $60,000 of
guaranteed payments to partners were deducted in comput-
ing partnership book income and are also deductible in com-
puting partnership ordinary income. However, the $1,000
charitable contribution deducted in arriving at partnership
book income must be separately passed through to partners
on Schedule K-1 and cannot be deducted in computing part-
nership ordinary income. Thus, the partnership's ordinary
income is $100,000 + $1,000 = $101,000.
14. (a) 'The requirement is to determine the amount and
type of partnership loss to be deducted on Clark's individual
return. Since a partnership functions as a pass-through en-
tity, the nature of a loss as an ordinary loss is maintained
when passed through to partners. However, the amount of
partnership loss that can be deducted by a partner is limited
to a partner's tax basis in the partnership at the end of the
partnership taxable year. Thus, Clark'sdistributive share of
_ the ordinary loss ($42,000) is only deductible to the extent
of $36,000. The remaining $6,000 of loss would be carried
forward by Clark and could be deducted after his partnership
basis has been increased.
15. (a) The requirement is to determine the ordinary
income of the partnership. Income from operations is con-
sidered ordinary income. The net rental income and the
dividends from foreign corporations are separately allocated
to partners and must be excluded from the computation of
the partnership's ordinary income, Tax-exempt income
remains tax-exempt and must also be excluded from the
computation of ordinary income. Thus, ordinary income
only consists of the income from operations of $156,000.
D. Partnership Agreements
16. (a) The requirement is to determine the correct
statement(s) concerning agreements for guaranteed pay-
ments. Guaranteed payments are payments made to a part-
ner for services or for the use of capital if the payments are
determined without regard to the amount of partnership
income. Guaranteed payments are deductible by a partner-
ship in computing its ordinary income or loss from trade or
business activities, and must be reported as self-employment
income by the partner receiving payment. A payment that
represents a 25% interest in partnership profits could not be
classified as a guaranteed payment because the payment is
conditioned on the partnership having profits.
17. (a) The requirement is to determine the amount of
income that Chris should report as a result of her 25% part-
nership interest. A partnership is a pass-through entity and
its items of income and deduction pass through to be re-
ported on partners' returns even though not distributed. The
amount to be reported by Chris' consists of her guaranteed
payment, plus her 25% share of the partnership's business
income and capital gains. Since Chris's $20,000 guaranteed
payment is for deductible services rendered to the partner-
ship, it must be subtracted from the partnership'S net busi-
ness income before guaranteed payments of $80,000 to de-
termine the amount of net business income to be allocated
among partners. Chris's reportable income from the part-
nership includes
Guaranteed payment .
Business income [($80,000 - $20,000) x 25%] $20,000
Net long-term capital gain ($10,000 x 25%) 15,000
2.500
$31.5QQ