1. Which of the following partnership allocations may lack substantial economic effect?

Question options:

Allocating built in gain to the contributing partner for tax purposes upon the sale of the asset but allocating only taxable gain equal to book gain to the other partners Allocating 60% of the book and taxable income to a partner who owns only 40% of the capital. Allocating taxable income and book income that differ because of accounting methods equally to two 50% profits partners Allocating 50% of the book income to two equal partners but allocating 20% of the taxable income to one partner and 80% of the taxable income to the other.

2. Which of the following situations may require a gain recognized by a partner?

Question options:

Partner contributes property with a value of $60,000 and a basis of $10,000 for a 20% partnership interest (for profits, losses, and liability sharing). Property is encumbered by a recourse liability of $45,000. Partner contributes property with a value of $60,000 and a basis of $10,000 for a 25% partnership interest. Property is encumbered by a recourse liability of $10,000 assumed by the partnership. A valuable service employee of a LLC receives a partnership interest that entitles her to a future profits only interest of 3% of the profits. A partner receives a current (nonliquidating) distribution of inventory with an inside basis of $30,000 and a fair market value of $50,000. The partner's outside basis is $40,000.

3. Which of the following will result in a loss to a partner on the distribution?

Question options:

A nonliquidating distribution to a partner with an outside basis of $10,000 before the distribution. The distribution consists of cash and liability release of $5,000 and securities with an inside basis of $3,000 A nonliquidating distribution to a partner with an outside basis of $10,000 before the distribution. The distribution consists of cash and liability release of $12,000. A fully liquidating distribution to a partner with an outside basis of $10,000 before the distribution. The distribution consists of cash and liability release of $6,000 and inventory (Classified as a Section 751 Asset) with an inside basis of $2,000. No other property is received. A fully liquidating distribution to a partner with an outside basis of $10,000 before the distribution. The distribution consists of cash and liability release of $6,000 and securities with an inside basis of $3,000. No other property is received.

4. Which of the following would be separately stated on the Partnership Schedule K and a Partner's Schedule K-1 and would not be part of ordinary business (or rental) income. SEE THESE SCHEDULES AS POSTED.

Question options:

Net Long-term Capital loss Ordinary income recapture on sale of equipment Wages expense to partnership employees Charitable contributions Section 179 deduction

USE THE FOLLOWING INFORMATION FOR QUESTIONS 5 and 6.

At the beginning of the year, Charles is a 20% partner in the LMC Partnership. His outside basis at that time is $250,000. Included in that amount is his 20% share of partnership recourse liabilities in the amount of $100,000.

During the year, Charles receives a guaranteed payment of $100,000 for services to the partnership. His share of ordinary partnership income for the year is $80,000. He is allocated $5,000 of capital loss from the sale of investments by the partnership and he is also allocated $2,000 of tax exempt interest from state and local bonds owned by the partnership.

On the last day of the partnership tax year, Charles receives a cash distribution of $120,000. The partnership also agrees to reallocate $40,000 of recourse liabilities away from him and to other partners. These moves are made in partial liquidation of his partnership interest in that he has a smaller share of the partnership afterward.

5. What is Charles' outside basis after all of these events?

6. Assume that the basis of Charles' original contribution was equal to its partnership book value and that all items of income, deduction, gain, and loss of the LMC Partnership have the same values for both partnership book and tax purposes. What is the ending value of Charles' capital account?

(HINT: IF ALL ALLOCATIONS OF BOOK AND TAXABLE INCOME ARE THE SAME AMOUNTS AND CHARLES DOES NOT HAVE ANY DIFFERENCES BETWEEN HIS OUTSIDE BASIS AND CAPITAL ACCOUNT DUE TO BUILT-IN GAINS OR LOSSES, THEN WHAT IS THE ONLY DIFFERENCE BETWEEN THE COMPUTATION OF OUTSIDE BASIS AND THE CAPITAL ACCOUNT?)

7. Martina contributes property with a $60,000 basis and a $100,000 value to a partnership in exchange for a 5% partnership interest. Two weeks later she receives a $50,000 cash distribution from the partnership.

Select the best answer from the list below.

(See partnership handout #2)

Question options:

After these events, she would not be liable for any gain on the contribution and distribution. After these events, she would have a $10,000 outside basis This transaction looks very much like a possible disguised sale and the usual contribution and distribution rules can't be followed. This transaction should be characterized as a partial taxable sale and partial contribution. none of the above