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TXX 5771 Test One Available June 30 at 7:45 p.m. Due no later than July 3 at 11 p.m. There are 40 questions worth a total of 100 points. Each question is worth 2.5 points. Please use the posted answer sheet for your answers. Your answer sheet is to be uploaded no later than 11 p.m. Sunday, July 3 to the Test One area by clicking on the Test One link. Be sure your name is on your answer sheet. It is required that you use the answer sheet that will be posted with the exam. Do not submit the whole exam. Submit only your completed answer sheet. In answering the multiple choice questions, only your choice of letter for each answer is to be set forth on the answer sheet. Do not restate or copy over the actual answer. Please read the following carefully. For each question on the exam, unless the question expressly provides to the contrary, you should assume that: 1. all events occurred in \"the current taxable year;\" 2. all persons are United States citizens; 3. there is no tax avoidance purpose for any transaction, and that with respect to any mortgage on any property, there was a bona fide business purpose for incurring or assuming the debt; 4. with respect to each partnership question, the partnership has no hot assets, has no debts or other liabilities, and does not have a Section 754 election in effect; 5. with respect to each partnership question, each partnership is a general partnership; 6. with respect to each partnership question, there are no special allocation provisions contained in any partnership agreement; and 7. there are no at risk or passive activity loss limitation issues. For each exam question, choose the letter for the answer that best answers the question or best completes the sentence. 1. Which, if either, of the following statements is or are true? I. On the formation of a partnership, the contribution by one partner of encumbered property to a partnership when other partners contribute only cash will not result in taxation unless the net debt relief to the contributing partners exceeds the contributor's basis in the contributed property. II. The contribution of accounts receivable to a partnership results in immediate taxation to the contributor to the extent of the fair market value of the receivables on date of contribution. a. b. c. d. I only. II only. Both I and II. Neither I nor II. 2. Under the check-the-box regulations a corporation incorporated under the law of any state can a. b. c. elect to be taxed as a partnership. elect to be taxed as a limited liability company. elect to be taxed as a sole proprietor if there is only one shareholder. d. not be taxed as anything other than a corporation. 3. On January 2, 2015, Henry, Cabot, and Lodge formed a three-person equal partnership with Henry and Cabot each contributing $100,000 and Lodge contributing securities with a basis to him of $60,000 and a fair market value of $100,000. On February 28, 2015, the partnership sold the securities for $130,000. The amount of the gain to be allocated to Lodge is a. b. c. d. e. $70,000. $50,000. $30,000. $23,333. $10,000. 4. Malcolm, a dealer in securities, is a 60 percent owner of the Real Partnership which on July 1, 2015, sold to him Acme Securities which it had held as an investment for three years. The basis of the securities to the Real Partnership was $40,000, and the sales price to Malcolm was $100,000. On his 2015 federal income tax return, Malcolm should report income in the amount and character of a. b. c. d. e. $36,000 long-term capital gain. $36,000 short-term capital gain. $36,000 ordinary income. $18,000 long-term capital gain. $18,100 ordinary income. 5. Bobbie and Fran are partners in the Quick Freeze partnership, owning respectively 60 percent and 40 percent of the partnership's capital and profits. At the beginning of the 2015, their bases in their partnership interests were $18,000 and $12,000, respectively. During the year, the partnership had the following items of income: partnership ordinary income, $30,000; long-term capital gains, $10,000; and tax-exempt income from municipal bond interest, $5,000. The partnership distributed $8,000 to Bobbie and $12,000 to Fran. Their respective bases in their partnership interests at the end of 2015 were: a. b. c. d. e. Bobbie: $45,000; and Fran: $30,000. Bobbie: $42,000; and Fran: $28,000. Bobbie: $37,000; and Fran: $18,000. Bobbie: $34,000; and Fran: $16,000. Bobbie: $33,000; and Fran: $22,000. 6. Jane contributed a building with an adjusted basis to Jane of $50,000 and a fair market value of $150,000 subject to a mortgage of $120,000 in exchange for a 30 percent interest in the LJJL Partnership (LJJL). LJJL will assume the mortgage on the building. What is LJJL's basis in the building? a. b. c. d. $0 $30,000 $50,000 $84,000 7. Which, if either, of the following statements is or are true? I. A partnership Schedule K-1 to Form 1065 must separately state long-term capital gains and losses but not short-term capital gains and losses. II. As a general rule, a partner's initial basis in his or her partnership interest equals the total of the fair market value of his/her property plus money, if any, contributed by the partner to the partnership. a. b. c. d. I only II only Both I and II Neither I nor II 8. Which, if either, of the following statements is or are false? a. b. c. d. I. Tax exempt income received by a partnership, for example, municipal bond interest, does not increase a partner's basis in his/her partnership interest because the income is not taxable. II. A partner who receives a current property distribution (other than cash), made pro rata to all the partners, will not have to report a gain with respect to the distribution. I only II only Both I and II Neither I nor II 9. Rex contributed land to the partnership of Rex, Tex, and Lex Partnership in exchange for a one-third interest in the Partnership. Rex's adjusted basis in the land was $50,000 and its fair market value was $75,000. Rex's Partnership capital account was credited with $75,000. Tex and Lex had each contributed $75,000 cash. Thus, each partner's capital account was $75,000. What is Rex's adjusted basis (outside basis) in his partnership interest? a. b. c. d. $75,000 $50,000 $37,500 cannot be determined from the facts stated 10. On January 1 of the current taxable year, Sam and Barbara formed an equal partnership. Sam made a cash contribution of $60,000 and a contribution of property with an adjusted basis to him of $160,000 and a fair market value of $140,000 in exchange for his interest in the partnership. Barbara contributed property with an adjusted basis to her of $120,000 and a fair market value of $200,000 in exchange for her partnership interest. Which of the following statements is accurate regarding the income tax consequences of this transaction? a. b. c. d. Sam's adjusted basis in his partnership interest is $200,000. The partnership's adjusted basis in the assets contributed by Sam is $140,000. Barbara recognized a gain of $80,000 with respect to her contribution of property. Barbara's adjusted basis in her partnership interest is $120,000. 11. Tina and Betty formed a partnership. Tina received a 40 percent interest in the partnership in exchange for land with an adjusted basis to her of $60,000 and a fair market value of $80,000. Betty received a 60 percent interest in the partnership in exchange for $120,000 of cash. Three years after the date of contribution, the land contributed by Tina was sold by the partnership to an unrelated third party for $90,000. How much gain was required to be allocated to Tina as a result of the sale by the partnership? a. b. c. d. $4,000 $12,000 $24,000 $30,000 12. When inventory that was contributed to a partnership in exchange for a partnership interest is eventually sold by the partnership, how will the character of the income or loss be determined? a. The character of any income or loss will be ordinary regardless of when the contributed property is sold by the partnership and regardless of the character of the asset in the hands of the partnership. b. The character of any income or loss will be ordinary if the contributed property is sold by the partnership within five years after the date of contribution regardless of the character of the asset in the hands of the partnership. c. The character of any income or loss will be based on the character of the asset in the hands of the partnership regardless of when the contributed property is sold by the partnership. d. The character of any income or loss will be ordinary to the extent of the contributing partner's built-in gain or loss in the property at the time of the contribution regardless of when the contributed property is sold, and any balance will based on the character of the asset in the hands of the partnership. 13. Barbara and Bill formed an equal partnership, B&B, a general partnership, on January 1, 2015. Barbara contributed $100,000 in exchange for her one-half interest. Bill contributed land worth $100,000 that had an adjusted basis to him of $30,000 in exchange for his one-half interest. Which of the following statements is accurate with respect to this transaction? a. b. c. d. None of Barbara, Bill, or B&B recognized any gain or loss. Bill recognized gain of $70,000 , but Barbara and B&B did not recognize any gain or loss. B&B recognized gain of $70,000 , but Barbara and Bill did not recognize any gain or loss. Bill and B&B each recognized $70,000 of gain, but Barbara did not recognize any gain or loss. 14. Which of the following decreases a partner's basis in the partner's partnership interest? a. b. c. d. Additional contributions the partner makes during the year The partner's allocable share of tax-exempt income The partner's allocable share of partnership items of income and gain Cash distributions to the partner during the year 15. Jim, one of two equal partners of the JJ Partnership, a general partnership, contributed property used in his trade or business property with an adjusted basis to him of $15,000 and a fair market value of $10,000 to the JJ Partnership. Jim's capital account was credited with $10,000. The property later was sold for $12,000. As a result of this sale, how much gain or loss is allocable to Jim? a. b. c. d. $1,000 gain $1,500 loss $2,000 gain $3,000 loss 16. Ronald and Roy formed an equal partnership, R&R Partnership, a general partnership, on January 1, 2011. Ronald contributed $100,000 in exchange for his one-half interest in R&R partnership. Roy contributed land worth $100,000 and with an adjusted basis to Roy of $30,000 in exchange for his one-half interest in the partnership. Roy is a real estate developer, and at the time of the contribution, the land was inventory in his hands. The land is a capital asset in the hands of R&R Partnership. If R&R Partnership sells the land in 2017 to an unrelated taxpayer for $180,000,how much gain will be recognized by R&R Partnership and what will be the character of the gain? a. b. c. d. $80,000, all of which gain will be ordinary income $150,000, all of which gain will be capital gain $150,000, all of which gain will be ordinary income $150,000, consisting of $80,000 capital gain and $70,000 ordinary income 17. All of the following are separately stated items on a partner's Schedule K-1 except a. b. c. d. short term capital gain. ordinary business income of the partnership. dividends. interest. 18. At the beginning of 2015, Margaret's adjusted basis in her 50 percent interest in MP Partnership, a calendar year general partnership, was $10,000. During 2015, Margaret did not make any additional contributions to MP Partnership, and Margaret's share of MP Partnership liabilities did not change. During 2015, MP Partnership distributed $5,000 to Margaret, and MP Partnership had the following items of partnership income, deduction, gain and loss for 2015: Separately stated taxable income Tax-exempt interest Capital loss $30,000 $10,000 ($20,000) What is Margaret's adjusted basis in her partnership interest in MP Partnership at the end of 2015? a. b. c. 0 $10,000 $15,000 d. $25,000 19. Sam, Sue, and Shelley formed a partnership. Sam received a 50 percent interest in the partnership in exchange for land with an adjusted basis to him of $30,000 and a fair market value of $50,000. Sue received a 25 percent interest in the partnership in exchange for $25,000 of cash. Shelley received a 25 percent interest in the partnership in exchange for $25,000 of cash. Six years after the date of contribution, the land contributed by Sam was sold by the partnership to an unrelated third party for $90,000. How much gain was required to be allocated to Sam as a result of the sale by the partnership? a. b. c. d. $20,000 $30,000 $40,000 $60,000 20. Larry and Moe are equal partners in the capital and profits of The LM Partnership. They are not related. On August 1, 2014, Larry sold 100 shares of Last Chance Mining Corp. stock to the partnership for its fair market value of $7,000. Larry had purchased the stock in 2000 for $10,000. What, if any, is Larry's recognized loss on the sale of this stock? a. b. c. d. $ -0$3,000 long-term capital loss $1,500 long-term capital loss $3,000 ordinary loss 21. Larry and Moe of the partnership in the prior question admit Curly to the partnership which is renamed The LMC Partnership. The total value of the partnership was $120,000 on December 31, 2014. On January 1, 2015, Curly contributed $40,000 to the partnership, and Curly's partnership capital account was credited with $40,000. The partnership's ordinary net income for 2015 was $60,000. As of December 31, 2015, Curly's basis in his partnership interest and his 2015 income taxable income from the partnership were: a. b. c. d. basis and income are both $60,000 basis=$60,000, income=$20,000 basis=$60,000,income=$40,000 basis=$40,000,income =$20,000 22. On July 1, 2015, Lester acquired a 30% interest in Cupcake Bakery, a partnership, by contributing to the partnership property with a an adjusted basis to him of $5,000 and a fair market value of $12,000 subject to a mortgage of $8,000 which was assumed by the partnership. What is Lester's basis in his interest in Cupcake Bakery? a. b. c. d. $4,000 $5,000 $6,400 $-0- 23. On January 1, 2015, Carl, Hank, and Laurie formed a three-person equal partnership with Carl and Hank each contributing $100,000 and Laurie contributing investment property (land) with a basis to her of $60,000 and a fair market value of $100,000. On September 30, 2015, the partnership sold the land for $130,000. The amount of the gain or loss to be allocated to Laurie is: a. $100,000 gain b. $50,000 gain c. $30,000 gain d. $23,333 gain e. $10,000 loss 24. On January 1, 2015, Carl, Hank, and Laurie formed a three-person equal partnership with Carl and Hank each contributing $100,000 and Laurie contributing investment property (land) with a basis to her of $60,000 and a fair market value of $100,000. On September 30, 2015, the partnership sold the land for $45,000. The amount of the gain or loss to be allocated to Laurie is: a. $5,000 loss b. $10,000 loss c. $15,000 loss d. none of the above 25. When property formerly used by a partner for personal purposes is contributed by the partner to the partnership which converts it to business or investment use, the partnership takes as its basis in the property for computing depreciation a. the property's fair market value at date of contribution. b. the lower of the partner's adjusted basis in the property or the property's fair market value at date of contribution. c. the partner's adjusted basis in the property. d. none of the above. 26. On January 1, 2015, Carl, Hank, and Laurie formed a three-person equal partnership with Carl and Hank each contributing $100,000 and Laurie contributing investment property (land) with a basis to her of $60,000 and a fair market value of $100,000. On September 30, 2015, the partnership sold the land for $60,000. The amount of the gain or loss to be allocated to Laurie is: a. 0. b. $40,000 loss. c. $60,000 loss. d. none of the above. 27. Which, if any, of the following statements is or are false? I. If property with a built-in loss is contributed to an \"investment partnership\" that would be treated as an investment company if the partnership instead was a corporation, the loss will be recognized upon contribution. II. A partnership is entitled to deduct a guaranteed payment to a partner if a cash payment of the same amount to an independent party would have been deductible. a. b. c. d. I only. II only II and IV. III only. 28. On January 1, 2015, Carl, Hank, and Laurie formed a three-person equal partnership with Carl and Hank each contributing $100,000 and Laurie contributing investment property (land) with a basis to her of $60,000 and a fair market value of $90,000. On September 30, 2015, the partnership sold the land for $30,000. The amount of the gain or loss to be allocated to Laurie is: a. 0. b. $40,000 loss. c. $30,000 loss. d. $10,000 loss. 29. On July 1, 2015, Clark acquired a 20 percent interest in the D and D Partnership, by contributing a parcel of land for which his basis was $8,000. After the contribution, each of the other two partners owned a 40 percent interest in the D and D Partnership. Upon contribution, the land had a fair market value of $20,000 and was subject to a mortgage of $4,000. Responsibility for the mortgage was assumed by the partnership. Assuming there are no other partnership liabilities, the basis of Clark's interest in the partnership is: a. $4,000. b. $4,800. c. $16,000. d. $16,800. 30. On July 1, 2015, Clark acquired a 20 percent interest in the D and D Partnership, by contributing a parcel of land for which his basis was $8,000. After the contribution, each of the other two partners owned a 40 percent interest in the D and D Partnership. Upon contribution, the land had a fair market value of $20,000 and was subject to a mortgage of $4,000. Responsibility for the mortgage was assumed by the partnership. What, if any, effect did Clark's contribution have on the basis of the partnership interests owned by the other two partners? a. none. b. the other partners' bases in their partnership interests were decreased. c. the other partners' bases in their partnership interests were increased. d. The answer depends on the character of the property in the hands of the partnership. 31. The partners of Martin, Cynthia, Lilly Partnership, that is, Martin, Cynthia, and Lilly, share profits and losses in a ratio of 4:3:1, respectively. The adjusted basis of each partner, as of December 31, 2015, was as follows: Martin, $7,200; Cynthia, $6,000; and Lilly, $2,500. During 2015, the partnership incurred an operating loss of $15,000. The loss is not reflected in the basis figures above. As a result of this loss, what amount is deductible by Martin, Cynthia, and Lilly deduct, respectively, on their individual tax returns for 2015? a. $6,000, $4,500, and $2,500 b. $6,000, $4,500, and $4,500 c. $7,000, $5,500, and $2,500 d. $7,100, $5,400, and $2,500 e. $7,200, $5,625, and $1,875 32. The TR Partnership had an ordinary operating loss of $48,000 for 2015. The partnership had assets of $58,500 and liabilities of $15,000 at the end of the year. Before allocation of the loss, partner Ashford's one-third capital interest had an adjusted basis of $10,000 at the end of 2015. How much may Ashford deduct on his individual tax return as his share of the partnership loss in 2015? a. $14,500 b. $10,000 c. $16,000 d. $15,000 e. None of the above 33. Jim Cash, one of two equal partners, contributed business property with a basis to him of $15,000 and a fair market value of $10,000 to the partnership of which he was a member. His capital account was credited with $10,000. The property later was sold for $16,000. As a result of this sale, how much gain or loss is allocable to Jim? a. $1,000 loss b. $1,000 gain c. $500 gain d. $6,000 loss e. None of the above 34. On July 1, 2015, Bertram acquired a 30 percent interest in Windward Partnership, by contributing property with an adjusted basis of $5,000 and a fair market value of $12,000. The property was subject to a mortgage of $8,000, which was assumed by Windward Partnership. What is Bertram's basis in his interest in Windward Partnership? a. $0 b. $4,000 c. $5,000 d. $6,400 35 . As of January 1, 2015, Jody's adjusted basis in her partnership interest was $25,000. Her share of partnership items 2015 is as follows: dividend income of $6,000 and an ordinary loss of $48,000. She received a distribution from the partnership of $15,000 during the year. She must report the following related to these transactions. a. Dividend income of $6,000, a nontaxable distribution of $15,000, an ordinary loss of $10,000, and a suspended loss of $38,000. b. Dividend income of $6,000, an ordinary loss of $31,000, a suspended loss of $17,000, and a taxable distribution of $15,000. c. Dividend income of $6,000, a nontaxable distribution of $15,000, an ordinary loss of $16,000, and a suspended loss of $32,000. d. Dividend income of $6,000, an ordinary loss of $48,000 and a nontaxable distribution of $15,000. e. Dividend income of $6,000, an ordinary loss of $48,000 and a taxable distribution of $15,000. 36. Robert and Frank are partners in the Quick Freeze partnership, owning respectively 60 percent and 40 percent of the partnership's capital and profits. At the beginning of the year, their bases in their partnership interests were $18,000 and $12,000. During the year, the partnership had the following items of income: partnership ordinary income, $30,000; long-term capital gains, $10,000; and tax-exempt income from municipal bond interest, $5,000. Robert withdrew $8,000 and Frank withdrew $12,000. Their respective bases at the end of the year are: a. Robert: $45,000; and Frank: $30,000. b. Robert: $42,000; and Frank: $28,000. c. Robert: $37,000; and Frank: $18,000. d. Robert: $34,000; and Frank: $16,000. e. Robert: $33,000; and Frank: $22,000. 37. On January 2, 2016, Ralph contributed a plot of land to the Tom and Ralph Partnership. Ralph's adjusted basis for this land was $50,000, and its fair market value was $75,000. Under the partnership agreement, Ralph's capital account was credited with the full fair market value of the land. Tom matched Ralp's contribution with a $75,000 cash contribution to the partnership. Thus, each partner's capital account was credited with $75,000. Tom and Ralph share profits and losses equally. What is the adjusted basis of the partnership in the property it received from Ralph? a. $25,000 b. $37,500 c. $50,000 d. $75,000 38. On December 20, 2014, Jim Cash, one of two partners, contributed inventory with a basis to him of $15,000 and a fair market value of $10,000 to the partnership of which he was a member. His capital account was credited with $10,000. The property, which was a capital asset in the hands of the partnership, was sold on December 1, 2015 for $12,000. As a result of this sale, what is amount and the character of any gain or loss allocable to Jim? a. $1,000 gain b. $1,500 loss c. $2,000 gain d. $3,000 loss e. None of the above 39. On December 22, 2015, Jim Cash, one of two partners, contributed inventory with a basis to him of $15,000 and a fair market value of $30,000 to the partnership of which he was a member. His capital account was credited with $30,000. The property, which was a capital asset in the hands of the partnership, was sold on January 2, 2016 for $18,000. As a result of this sale, what is the amount and character of any gain or loss allocable to Jim? a. $15,000 capital gain b. $1,500 capital gain c. $3,000 ordinary income d. None of the above 40. On December 22, 2008, Jim Cash, one of two partners, contributed capital assets he held for investment with a basis to him of $15,000 and a fair market value of $10,000 to the partnership of which he was a member. His capital account was credited with $10,000. The property, which was inventory in the hands of the partnership, was sold on January 2, 2016 for $18,000. As a result of this sale, what is the character and amount of any gain or loss to be allocated to Jim? a. $1,000 gain b. $4,500 ordinary income c. $2,000 gain d. $3,000 loss e. None of the above