Multiple choice questions

1. Trevor is a 50-percent partner in the Dalmatian Partnership. His basis in his partnership interest is $30,000 at the end of 2014. The partnership gives Trevor a cash distribution of $15,000. What is Trevor’s recognized income due to the $15,000 distribution, and what is his partnership basis after the distribution?

a. $15,000 income; $15,000 basis 

b. $15,000 income; $30,000 basis 

c. No income; $15,000 basis 

d. No income; $30,000 basis 

2. Which of the following circumstances will not cause a partnership to close its tax year early? 

a. The partnership terminates by agreement of the partners.

b. The business activity of the partnership permanently ceases. 

c. 50 percent or more of the total interests in the partnership are sold or exchanged in a 12-month period.

d. A new partner enters the partnership. 

3. Kendra is an attorney and owns 60 percent of a law partnership. Kendra sells land to the partnership for $50,000 in 2014. She bought the land for $100,000 in 2007 when real estate prices were at their peak. How much gain or loss must Kendra recognize on the land sale to the partnership?

a. No gain or loss 

b. $30,000 loss 

c. $50,000 loss 

d. $50,000 short-term capital loss, limited to $3,000 allowed per year 

4. A loss from the sale or exchange of property will be disallowed in which of the following situations? 

a. A transaction between a partnership and a partner who owns 40 percent of the partnership capital 

b. A transaction between a partnership and a partner who has a 40 percent profit interest in the partnership 

c. A transaction between two partnerships owned 40 percent by the same partners 

d. A transaction between two partners with investments in the same partnership 

e. None of the above

5. Mike purchases a rental property for $200,000 and takes out a loan from a lending institution to finance half of the purchase, or $100,000. The loan is considered to be qualified nonrecourse financing. What is Mike’s at-risk amount?

a. $300,000

b. $200,000

c. $100,000 

d. $0

6. Which of the following is considered to be a disadvantage of an LLC? 

a. There is no limit on the numbers or kinds of owners who may have an interest in an LLC. 

b. LLCs are relatively new legal entities compared to partnerships and corporations. 

c. An LLC may elect to be taxed like a partnership while retaining legal liability protection that is more like a corporation. 

d. Unlike a partnership, an LLC can operate with only one member.