Personal Finance Chapter 21

CHAPTER 21
PARTNERSHIPS
TRUE/FALSE

1. Unlike a subchapter C corporation, a partnership is subject to only one level of taxation and can often liquidate in a tax-deferred manner.

ANS: T
A partnership is a flow-through entity subject to only one level of taxation. Liquidation of the partnership is generally tax-deferred.

PTS: 1 REF: p. 21-2 | p. 21-3

2. Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership. An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution.

ANS: T
A contribution of property to a partnership followed by a distribution soon thereafter may
Arnold’s share of partnership items is $37,000  40% = $14,800 and $1,250  40% = $500.

PTS: 1 REF: p. 21-19 | p. 21-20 | Example 20 | Example 41

11. On the first day of the current tax year, Melanie’s basis in her partnership interest was $85,000. Her Schedule K-1 from the partnership reflected the following items for the current year: share of partnership ordinary loss, $95,000; interest income from money market accounts, $6,000. On her personal tax return, Melanie will report a loss from the partnership of $91,000, and interest income of $6,000.

ANS: T
Melanie’s deductible loss from the partnership will be determined as follows under § 704(d):

Basis at beginning of year $85,000
Plus: interest income 6,000 $91,000
Less: allowable share of ordinary loss (91,000)
Ending basis for her partnership interest $ -0-

Melanie’s remaining $4,000 loss is suspended and carried forward to a year in which her basis is adequate to absorb the