9

Taxation of
Partnerships and Partners

Test Bank

True or False

1. Under the “check the box” regulations, any unincorporated business having two or more owners
and that does not elect to be taxed as a corporation will be treated as a partnership.

2. Owners of investment property can elect that Subchapter K not apply to their ventures if each
owner retains a separate and undivided ownership interest in the acquisition, operation, and
disposition of the property.

3. It is possible for a business to be taxed as a partnership even though one of its partners is a
corporation.

4. General partnerships are owned solely by two or more general partners, and limited partnerships
are owned solely by two or more limited partners.

5. A limited partner, by definition, may not participate in the management of the limited
partnership.

6. A contributing partner’s holding period for an interest in a partnership begins on the date the
partnership interest is acquired.

7. B contributes her business property to AB Partnership. This property has a market value of
$2,000 and a basis to B of $1,500. The entity theory applies in this situation. Accordingly, the
basis of the property to the partnership is $2,000, and B recognizes a $500 gain.

8. When noncash assets are contributed to a partnership, the entity theory usually applies and,
therefore, gain or loss is recognized.

9. The partnership’s holding period for assets contributed to the partnership by a partner begins
with the date the assets are contributed.

10. A partner’s share of liabilities is generally based on her or his economic risk of loss in the case of
recourse debt and loss-sharing ratio in the case of nonrecourse debt.

9-1
9-2 Chapter 9 Taxation of Partnerships and Partners

11. When a partner’s share of debt is decreased, the reduction is treated as a cash distribution from the
partnership to the partner.

12. The contribution of depreciated property in a tax-free exchange for a partnership interest does not
trigger the § 1245 or § 1250 depreciation recapture provisions.

13. Partners may agree to specially allocate any existing revenue, expense, or other partnership item in
any way they wish when (a) they have owned their interest in the partnership for the entire year, and
(b) the allocation has a substantial economic effect. (Assume all partners contributed cash for their
capital interests.)

14. Special allocations of depreciation, depletion, gain, and loss accrued at the date property is
contributed to a partnership is optional.

15. An individual who contributes services in exchange for an unrestricted capital interest in a partnership
has includible ordinary income equal to the fair market value of the capital interest.

16. Organization costs of a partnership can be deducted when incurred or paid, or they can be amortized
on a straight-line basis over a period not to exceed 60 months, provided the partnership files the
proper election.

17. Syndication fees paid by a partnership may be amortized on a straight-line basis over a period of
60 months or longer.

18. Form 1065 and Schedule K-1 are prepared according to the aggregate theory; however, special tax
elections usually reflect the entity theory.

19. An individual who contributes services in exchange for an interest in the future profits of a newly
formed partnership does not recognize current year income on the receipt of the interest.

20. S owns a 30 percent interest in the capital and profits of ST partnership. S sold land ($5,000 basis) to
ST for its fair market value of $3,000. S’s $2,000 loss will be disallowed to him.

21. A has been a partner in the ABC Partnership for only four months. During the current year, the
partnership sold investment land that it purchased six years ago and recognized a $100,000 gain. A’s
distributive share of this gain is long-term capital gain.

22. A 70 percent partner has a $5,000 recognized loss when he sells equipment with a basis of $35,000 to
the partnership at its FMV of $30,000.

23. In most instances, a new partnership should use a January 31 year-end in order to maximize deferral
of partnership income for calendar year partners.

24. W, B, and G, the sole owners of a partnership, use different tax years for their individual returns.
They agree to adopt concurrent tax years for their personal returns. The partnership may also change
its tax year to coincide with those of the partners without approval from the IRS.

25. For purposes of determining a year-end for the partnership, a principal partner is defined as one who
owns 50 percent or more of the partnership.

26. The portion of a partner’s distributive share of losses that exceeds the partner’s basis may be carried
forward indefinitely and deducted in a later year or years when that partner’s basis is increased.

27. The flow-through of partnership losses is considered to be the last event to occur during a
partnership’s taxable year.
 Test Bank 9-3

28. Dividend and interest income are considered passive activity income to a partner.

29. Any portion of a partner’s distributive share of current year partnership loss that is a nondeductible
passive activity loss does not reduce the partner’s outside basis in the partnership interest.

30. A guaranteed payment from a partnership always represents current ordinary income to the recipient
partner.

Multiple Choice

31. Which of the following is not considered a partnership for Federal income tax purposes?
a. Trust
b. Pool
c. Syndicate
d. Joint venture
e. Limited Liability Company
32. Which of the following is not a legal characteristic of a general partnership?
a. Unlimited liability of partners for partnership recourse debt
b. Restricted transferability of partnership interests
c. Centralized management
d. Limited life
e. All of the above are legal characteristics of partnerships.
33. Based on the entity concept of partnerships, which of the following statements is false?
a. A partnership may enter into taxable transactions with partners.
b. A partnership is legally liable for debts of the partners.
c. A partnership must file an annual tax return (Form 1065) reporting the results of operations.
d. A partnership is required to make tax elections for partnership activities that are applicable to all
partners.
e. A partnership may hold title to property in its own name.
34. Which of the following transactions between partnerships and partners are reported based on the
entity concept?
a. A partner exchanges appreciated land for a partnership capital interest.
b. A partnership makes a charitable contribution.
c. A partner sells appreciated equipment to the partnership.
d. Both b. and c. follow the entity concept.
e. All of the above follow the entity concept.
35. An individual received a 70 percent capital interest in a general partnership by contributing the
following:

Investment land purchased 10 years ago for $40,000 and valued at $90,000. There was a
$50,000 nonrecourse debt on the land that was also transferred to the partnership.

Services to organize the partnership valued at $22,500.

Business inventory purchased nine months ago for $10,000 and valued at $8,000.

This general partner’s basis in the partnership after the contribution is

a. $0
b. $22,500
c. $35,000
d. $57,500
e. $72,500
9-4 Chapter 9 Taxation of Partnerships and Partners

36. T transfers a building ($90,000 market value, $40,000 basis), plus a $60,000 nonrecourse debt on the
building, to a partnership in exchange for a 30 percent capital interest valued at $30,000. The
partnership has no other debt. T’s basis in his partnership interest is
a. $0
b. $2,000
c. $12,000
d. $30,000
e. $40,000
37. On January 1, 2011, F exchanged proprietorship equipment ($102,000 market value and $84,000
basis) for a 20 percent capital interest in a partnership. The calendar year partnership’s 2011 and 2012
tax depreciation deductions for this equipment total $8,400 (10% of contributed basis). How much of
the $8,400 should be allocated to F?
a. $1,680
b. $800
c. $240
d. $232
38. R exchanged a proprietorship parking lot ($23,000 market value and $15,000 basis) for a 10 percent
capital interest in a partnership. The partnership uses the property for four years and then sells it for
$25,000. R must recognize income from the sale of
a. $10,000
b. $8,200
c. $1,000
d. $200
39. An accountant performed services for EZ partnership and, in lieu of her normal fee, accepted a
10 percent unrestricted capital interest in the partnership with a fair market value of $7,500. How
much income from this arrangement should the accountant report on her tax return?
a. $7,500
b. $5,000
c. $2,500
d. $0
40. Individual D contributes $15,000 cash and investment land (FMV $35,000 and basis $22,000) and
Individual E contributes business assets (FMV $50,000 and basis $60,000) to create the new DE
Partnership. Which of the following statements is accurate?
a. Both D and E have initial capital balances of $50,000. D’s outside basis in his interest is $37,000
and E’s outside basis in his interest is $60,000.
b. Both D and E have initial capital balances of $50,000. D’s outside basis in his interest is $22,000
and E’s outside basis in his interest is $60,000.
c. Both D and E have initial capital balances and outside bases in their interests of $50,000.
d. D’s initial capital account balance and outside basis in his interest are $37,000 and E’s initial
capital account balance and outside basis in his interest are $60,000.
e. Because D and E have equal capital account balances, they must share partnership profits and
losses equally.
41. V is to perform services in exchange for a 20 percent capital interest in a partnership. Both the services
and the capital interest are valued at $30,000. However, the agreement between V and the partnership
states that the capital interest is forfeited if V violates any part of the service contract during the next
five years. V believes the market value of the interest at the end of the fifth year will be $70,000.
(Assume this $70,000 value is accurate when choosing among the answers below.) V has a choice of
recognizing

a. $0 now or $70,000 at the end of the fifth year

b. $30,000 now or $40,000 at the end of the fifth year
c. $70,000 now or $0 at the end of the fifth year
d. $0 now or $70,000 when the capital interest is sold
e. None of the above
 Test Bank 9-5

42. In return for services rendered to it by C, the ABC partnership transfers a one-fourth capital interest
to C when it only has one asset, a tract of land with a basis of $20,000 and fair market value of
$30,000. The partnership has no liabilities. As a result, ABC’s recognized gain and basis in the land,
respectively, are
a. $10,000 and $30,000
b. $2,500 and $22,500
c. $2,500 and $27,500
d. $10,000 and $20,000
43. QT Partnership, which operates a retail clothing store, had the following information at year-end:

Gross sales $580,000

Cost of goods sold 377,000
Repairs 1,500
Depreciation 2,000
Employee salaries 32,000
Charitable contributions ,500
Section 1231 gain ,200
Short-term capital gain , 350
Dividends , 750

What is QT Partnership’s ordinary income for the year?

a. $167,500
b. $167,700
c. $167,850
d. $168,050
e. $168,300
44. Which of the following is not used to calculate ordinary income (loss) on Form 1065?
a. Business interest income
b. Ordinary income from other partnerships and fiduciaries
c. Payments to Keogh or IRA plans for partners
d. Cost of goods sold
e. Guaranteed payments to partners
45. Items that may be subject to special tax treatment and that are reported separately on Schedule K of
the partnership return include all of the following except
a. Dividends
b. Capital gains and losses
c. Charitable contributions
d. Tax credits
e. Business bad debts
46. For the current year, Gamma Partnership has $60,000 net operating revenues before consideration of
any payment to its two equal partners, G and H. During the year, Gamma made a $25,000
guaranteed payment to Partner G. It also distributed $5,000 cash to both G and H. Gamma and its
two partners all use the calendar year for tax purposes. Based on these facts, how much partnership
income should G and H report on their current year individual returns?
a. Both G and H should report $30,000 of partnership income.
b. Both G and H should report $17,500 of partnership income.
c. Both G and H should report $12,500 of partnership income.
d. G should report $42,500 and H should report $17,500 of partnership income.
e. G should report $37,500 and H should report $12,500 of partnership income.
9-6 Chapter 9 Taxation of Partnerships and Partners

47. At the beginning of the current year, K’s basis in her partnership interest was $35,000. At the end of
the year, K received a K-1 from the partnership that showed the following:
Increase in share of partnership liabilities $8,700
Cash withdrawal 20,000
Partnership taxable income 13,500
Dividend income 5,000
Short-term capital loss 1,400
Charitable contribution ,500
Special allocation of depreciation 1,800

Based on these facts, compute K’s basis in her partnership interest at the beginning of the next year.

a. $31,200
b. $42,200
c. $31,700
d. $38,500
e. $39,900
48. Two years ago, J contributed a capital asset (FMV $10,000 and basis $16,000) to the JKL
Partnership. The asset was a nondepreciable § 1231 asset to the partnership. During the current year,
the partnership sold the asset for $8,000. As a result of the sale, the partnership should recognize:
a. An $8,000 § 1231 loss
b. A $6,000 capital loss and a $2,000 § 1231 loss
c. An $8,000 capital loss
d. A $2,000 § 1231 loss
e. A $2,000 capital loss
49. Z has a 40% interest in the profits and a 20% interest in the losses of the Lytton Partnership. Z’s
outside basis in his interest at the beginning of the year was $100,000. During the year the partnership
borrowed $80,000 on a fully recourse basis and took out a $200,000 nonrecourse mortgage on real
estate owned by the partnership. Based on these facts, which of the following statements is accurate?
a. If Z is a general partner, he may increase the basis in his partnership interest by a total of $96,000
because of the increased partnership debt.
b. If Z is a limited partner, he may increase the basis in his partnership interest by a total of $80,000
because of the increased partnership debt.
c. If Z is a general partner, he may increase the basis in his partnership interest by a total of $56,000
because of the increased partnership debt.
d. If Z is a limited partner, he may increase the basis in his partnership interest by a total of $16,000
because of the increased partnership debt.
e. Both a. and b. are accurate.
50. At the beginning of the current year, Corporation M had a $50,000 basis in its 50% interest in the
M&N Partnership. For the year, M&N incurred a $168,000 net operating loss and a $32,000 capital
loss and received $20,000 of dividend income. The amount of the partnership’s debts did not change
during the year and it made no distributions to its partners. Based on these facts, what amount of
M&N’s ordinary loss and capital loss may M recognize during the current year?
a. $42,000 ordinary loss and $8,000 capital loss
b. $50,000 ordinary loss
c. $50,400 ordinary loss and $9,600 capital loss
d. $54,000 ordinary loss and $16,000 capital loss
e. $60,000 ordinary loss
51. Which of the following is not a requirement for “substantial economic effect” within the meaning of
§ 704(b)?
a. Tax allocation of profits must be in the same ratio as the partners’ capital accounts.
b. Tax allocations of profit and loss must be reflected in the partners’ book capital accounts.
c. Liquidating distributions must be made on the basis of ending capital account balances.
d. Tax allocations of profits and losses must be in the same ratio.
e. Answers a. and d. are not requirements for “substantial economic effect.”
 Test Bank 9-7

52. Which of the following is false regarding a guaranteed payment?

a. It is recognized as income by the recipient partner in the taxable year received.
b. It is either a deductible expense or a capital expenditure to the partnership.
c. It is ordinary income to the partner receiving the payment.
d. It is determined without regard to partnership income.
e. It is added to a partner’s distributive share of ordinary income in calculating self-employment income.
53. Partner A owns a 60% interest in the capital and profits of the ABC Partnership. During the year A
sells marketable securities to the partnership for their FMV of $30,000. The partnership intends to
hold the securities as an investment. Based on these facts, which of the following is accurate?
a. If A’s basis in the securities was $25,000, A must recognize a $5,000 ordinary gain on the sale.
b. If A’s basis in the securities was $25,000, A recognizes no gain on the sale.
c. If A’s basis in the securities was $40,000, A may recognize a $10,000 capital loss on the sale.
d. If A’s basis in the securities was $40,000, A recognizes no loss on the sale.
e. None of the above is accurate.
54. Partner J, a cash basis taxpayer, is a 75% partner in the cash basis J&D Partnership. During the current
year, J lends the partnership $50,000, receiving a properly executed note from the partnership bearing the
market rate of interest. J&D used the loan proceeds as working capital. Which of the following is accurate?
a. Because J owns more than a 50% interest in J&D, the interest payment will be treated as a
guaranteed payment made by J&D to J.
b. Because J owns more than a 50% interest in J&D, the interest payment will be treated as a
distributive share of partnership taxable income to J.
c. The interest paid on the note will be ordinary interest income to J and a current interest deduction
to J&D in the year paid.
d. Because J owns more than a 50% interest in J&D, the interest payment will be treated as a
guaranteed payment made by J&D to J.
e. Because J owns more than a 50% interest in J&D, the interest payment will be a nondeductible
expense to J&D.
55. Unrelated individuals P, Q, R, and S are partners in PQRS Partnership. The partnership experienced
an operating loss of $5,000 during the year. Based on the following information, how much loss can
the partners deduct on their respective individual tax returns?

Basis in Partnership
Distributive Determined before
Partner Profit and Loss % Loss Distribution
P 40 $10,000
Q 25 8,000
R 25 1,000
S 10 1,000
100% $20,000

The following answer choices are arranged in partner order of P, Q, R, and S.

a. $2,000, $1,250, $1,250, $500
b. $2,000, $1,250, $1,000, $500
c. $2,000, $1,250, $0, $500
d. $5,000, $3,000, $0, $0
e. $4,000, $2,500, $2,500, $1,000
56. G and H are individual partners in GH Partnership and share equally in its profits and losses. G had a
basis of $5,000 in the partnership, before considering the $14,000 ordinary loss reported by GH for
2011. In 2012, the partnership reports a $6,000 ordinary gain on Form 1065. What income or loss
should G properly report on his 2012 individual return? Assume that there are no other transactions
that affect G’s basis in the partnership for 2011 and 2012.
a. $0
b. $2,000 loss
c. $1,000 income
d. $2,000 income
e. $3,000 income
9-8 Chapter 9 Taxation of Partnerships and Partners

57. X has the following income and loss items for the current year:

Salary from an unrelated corporation $100,000

Interest income 1,000
Loss from a general partnership in which X materially participated (20,000)
Loss from a limited partnership (10,000)

X’s A.G.I. for the current year is

a. $101,000
b. $70,000
c. $81,000
d. $80,000
e. $71,000
58. Which of the following partnership interests is not a § 469 passive activity?
a. A 20% limited interest in a partnership that operates a profitable restaurant business. The owner
of the interest is an individual.
b. A 20% limited interest in a partnership that operates a profitable restaurant business. The owner
of the interest is a publicly traded corporation.
c. A 20% general interest in a partnership that operates a profitable restaurant business. The owner
of the interest is an individual who does not materially participate in the day-to-day operations of
the business.
d. A 20% limited interest in a partnership that rents single family houses and duplexes. The owner of
the interest is an individual.
e. A 20% limited interest in a partnership that operates a profitable restaurant business. The owner
of the interest is a trust.
59. Before consideration of his $8,000 distributive share of Jedi Partnership’s current year loss, individual
C’s basis in his partnership interest was $5,000 and his at-risk amount was only $2,500. C has no
passive activity income for the current year. Based on these facts:
a. If C’s interest in Jedi is a passive activity, he cannot deduct any of the $8,000 distributive share
and will have a basis in his partnership interest of $5,000.
b. If C’s interest in Jedi is not a passive activity, he can deduct $2,500 of the $8,000 distributive
share and will have a basis in his partnership interest of $2,500.
c. If C’s interest in Jedi is not a passive activity, he can deduct $5,000 of the $8,000 distributive
share and will have a basis in his partnership interest of zero.
d. If C’s interest in Jedi is a passive activity, he cannot deduct any of the $8,000 distributive share
and will have a basis in his partnership interest of zero.
e. Both c. and d. are correct answers.
60. O purchased a 20% interest in the OOPS partnership for $20,000 on January 1, 2012. He purchased
another 10% interest in OOPS for $10,000 on December 1, 2012. As of January 1, 2013, what is O’s
holding period in his partnership interest?
a. One year
b. One month
c. One year for 50% of his interest and one month for 50% of his interest
d. One year for 67% of his interest and one month for 33% of his interest
61. G is a 50% general partner and L is a 50% limited partner in the GL limited partnership. The
partnership’s ordinary business income for the year is $60,000. G receives a guaranteed payment of
$15,000 for managing the partnership and L receives a guaranteed payment of $5,000 for helping to
arrange some financing for GL. How much of this income is subject to the self-employment tax?
a. $30,000 for G and $30,000 for L
b. $45,000 for G and $35,000 for L
c. $45,000 for G and $5,000 for L
d. $15,000 for G and $5,000 for L
 9
Taxation of
Partnerships and Partners

Solutions to Test Bank

True or False

1. True. Unless the business organization with two or more owners is incorporated or elects to be taxed
as a corporation, it will be treated as a partnership for federal income tax purposes. (See p. 9-3.)

2. True. Each owner must retain a separate and undivided ownership interest in order for the election to
be valid. (See p. 9-3.)

3. True. There are no restrictions placed on who or what qualifies as a partner. The Code and Regulations
simply state that the word partner “means a member of a partnership.” [See p. 9-2 and § 761(b).]

4. False. All partnerships must have at least one general partner. (See p. 9-4.)

5. True. If a limited partner does participate in management, he or she may be converted to general
partner status. (See p. 9-4.)

6. False. If a partner contributes either § 1231 or capital assets to a partnership, the holding period for
the partner’s interest in the partnership includes the period of time the partner owned the contributed
assets. [See Example 2, pp. 9-5 and 9-1, and § 1223(1).]

7. False. The aggregate theory applies when a partner contributes property to a partnership in exchange
for a partnership interest. In this case, B recognizes no gain and the partnership takes a $1,500
carryover basis in the contributed property. (See Example 2, pp. 9-5 and 9-6, and §§ 721 and 722.)

8. False. The aggregate theory applies. Consequently, when noncash assets are exchanged for an interest
in a partnership, the transfer is usually considered to be tax-free at both the partnership and partner
levels. (See p. 9-5 and §§ 721, 722, and 723.)

9. False. The partnership’s holding period includes the period of time the contributing partner held the
assets. [See p. 9-5 and § 1223(2).]

10. False. Each partner’s share of liabilities is based on his or her economic risk of loss for recourse debt,
but it is based on the profit-sharing ratio for nonrecourse debt. (See Examples 6 and 7, p. 9-8 through
9-10, and § 752.)

11. True. This is the statutory rule of § 752(b). (See p. 9-8.)

9-9
9-10 Chapter 9 Taxation of Partnerships and Partners

12. True. In such instances, potential recapture of depreciation is transferred to the partnership. (See p. 9-5.)

13. True. This freedom of allocation, however, is not available for precontribution income, gain, or loss when
noncash assets are contributed. [See Examples 28 and 29, pp. 9-31 through 9-32, and § 704(c).]

14. False. The special allocation is mandatory. [See pp. 9-31 through 9-33, and § 704(c).]

15. True. The tax-free exchange provisions apply to property contributed to a partnership but not to services
contributed. (See Example 13, p. 9-13, and § 721.)

16. False. Organization costs must be capitalized. If an election is made, up to $5,000 of organization
expenses can be deducted (assuming total organization expenses do not exceed $50,000). Remaining
organization expenses must be amortized over 180 months. [See p. 9-18 and § 709(b).]

17. False. Syndication fees paid or accrued by a partnership remain on the books as intangible assets until the
partnership is liquidated. (See p. 9-18 and § 709.)

18. True. Section 703 specifies that most elections must be made at the partnership level and that all partners
are required to use the same methods for reporting their share of partnership income, deductions, credits,
and losses. (See p. 9-16.)

19. True. The current liquidation value of a future profits interest is zero. (See Example 17 and p. 9-15.)

20. False. Such losses are disallowed only to a partner who directly or indirectly owns 50 percent or more of
the capital or profits interest in a partnership. [See p. 9-40 and § 707(b)(1)(A).]

21. True. The character of the gain (short-term or long-term) is determined at the partnership level. [See
pp. 9-19 and 9-25 and § 702(b).]

22. False. The entity concept does not apply to transactions between a partnership and a partner who directly
or indirectly owns more than 50 percent of the capital or profits interest of the partnership if the
transaction results in a loss. Such a partner cannot recognize the loss. [See p. 9-40 and § 707(b)(1)(A).]

23. False. A partnership must adopt the taxable year of those partners owning a majority interest in the
partnership. If the majority of the partners do not have the same taxable year, the partnership must adopt
the taxable year of its principal partners. If the principal partners do not have the same year, the
partnership must adopt the fiscal year resulting in the least aggregative deferral of partnership income. A
partnership may select another taxable year, subject to IRS approval. Normally the IRS will approve
another taxable year, such as a January 31 fiscal year, only if the taxpayer can establish a valid business
purpose. [See Example 18, pp. 9-17 and 9-18, and § 706(b).]

24. True. A partnership may adopt the tax year of its majority owners without IRS approval. [See p. 9-17 and
§ 706(b).]

25. False. In this context, a principal partner is one who owns 5 percent or more of the partnership. (See p. 9-17.)

26. True. Any losses that exceed a partner’s basis may be carried over indefinitely to be deducted when the
basis is increased. [See Example 34, pp. 9-34 and 9-35, and § 704(d).]

27. True. All distributions, contributions, and changes in partnership liabilities are considered to occur before
the flow-through of partnership losses. (See p. 9-28 and § 705.)

28. False. Dividends and interest are classified as portfolio income. Passive activity income is received from a
business in which the partner does not materially participate. [See pp. 9-36 and 9-37 and § 469(e).]

29. False. Basis reduction for a distributive share of partnership loss occurs regardless of the application of
§ 469 to that loss. (See Example 38 and p. 9-36.)

30. True. This is the statutory rule of § 707(c). (See pp. 9-39 through 9-40.)
 Solutions to Test Bank 9-11

Multiple Choice

31. a. For income tax purposes, trusts, estates, and corporations are not classified as partnerships. However,
such organizations may own interests in partnerships. (See pp. 9-2 and 9-3 and § 761.)

32. c. A partnership is not characterized by centralized management because all general partners have the legal
right to participate in management decisions. [See p. 9-3 and Reg. § 301. 7701-2(a).]

33. b. According to the entity concept, a partnership has no responsibility for its partner’s debts. (See p. 9-4.)

34. c. The aggregate/conduit concept applies to the other transactions. The entity concept applies to c, with all
gain recognized by the partner, and the partnership treats the equipment in the same way as it would if the
purchase had been from an unrelated individual. [See pp. 9-38 to 9-39 and § 707(a).] The gain in a is not
recognized. (See Example 2, pp. 9-5 through 9-6, and § 721.) The contribution in b flows through the
partnership to the partners and is deductible by them. (See pp. 9-25 and 9-26.)

35. d. The basis in the interest equals $57,500 [$40,000 land basis þ $22,500 ordinary income recognized on
performance of services þ $10,000 inventory basis  $15,000 net relief of debt (30% of $50,000)]. (See
pp. 9-5 through 9-13 and §§ 722 and 752.)

36. c. T is treated as retaining responsibility for the portion of the debt that exceeds his basis in the property
($60,000  $40,000 ¼ $20,000). The remaining portion of the debt ($40,000) is treated as a partnership
liability. T’s basis is computed as follows:
Basis of contributed property $40,000
Retained share of debt 20,000
Share of partnership debt ($40,000  30%) 12,000
Reduction in personal debt (60,000)
Total basis $12,000

(See Example 12 and pp. 9-10 through 9-12.)

37. c. The other partners should be allocated their 80 percent share based on 10% of the $102,000 contributed
value: $8,160 ($10,200  80%). F is allocated the remaining tax depreciation of $240 ($8,400  $8,160).
[See Example 30, pp. 9-31 through 9-33, and § 704(c).]

38. b. R must be allocated income equal to the appreciation at the time the property is contributed to the
partnership of $8,000 ($23,000  $15,000) plus 10 percent of the income equal to the appreciation that
occurred while the partnership held the property of $200 ($25,000  $23,000 ¼ $2,000  10%). [See
Example 29, pp. 9-31 through 9-33, and § 704(c).]

39. a. Because the accountant received an unrestricted capital interest in exchange for services, the FMV of that
interest is includible ordinary income to her and becomes her basis in the partnership. [See Example 13,
p. 9-13, and Reg. § 1.721-1(b)(1).]

40. a. Capital accounts are credited with the fair market value of contributed property while outside basis equals
the tax basis of contributed property. (See Example 2 and pp. 9-5 and 9-6.)

41. e. Per § 83, V may elect to recognize the $30,000 FMV of the interest in the year of receipt or to defer
recognition of the projected $70,000 FMV until the end of the fifth year. (See Examples 14 and 15 and
pp. 9-13 and 9-14.)

42. b. ABC is treated as having sold a one-fourth interest in the land for $7,500 ($30,000/4). ABC must recognize
a gain of $2,500 [$7,500  ($20,000 basis/4 ¼ $5,000)]. The partnership’s basis in the land is $22,500
[($20,000  3/4 ¼ $15,000) þ $7,500]. (See Example 16 and pp. 9-14 and 9-15.)
9-12 Chapter 9 Taxation of Partnerships and Partners

43. a. Charitable contributions, dividends, § 1231 gains, and capital gains are stated separately and are not used
to calculate ordinary income. QT’s ordinary income is calculated as follows:

Gross sales $580,000

Cost of goods sold (377,000)
Gross income $203,000
Repairs (1,500)
Depreciation (2,000)
Employee salaries (32,000)
$167,500

(See Exhibit 9-2, pp. 9-26, and § 702.)

44. c. These payments are reported separately. (See Exhibit 9-2 and pp. 9-25.)

45. e. Bad debts are reported as a deduction on Form 1065. (See Exhibit 9-2 and pp. 9-25.)

46. d. The partnership taxable income after deduction of G’s guaranteed payment is $35,000 which is allocated
equally between G and H. G must also report his $25,000 guaranteed payment as ordinary income. [See
Example 41, pp. 9-38 and 9-39, and § 707(c).]

47. d. K’s basis equals the $35,000 beginning basis increased by her distributive share of ordinary and dividend
income ($18,500) and by the increase in her share of partnership liabilities ($8,700) and decreased by her
distributive share of capital loss, charitable contributions, and depreciation ($3,700) and her $20,000 cash
withdrawal. (See Example 23, p. 9-28, and §§ 705, 733, and 752.)

48. b. The $6,000 excess of the asset’s basis over FMV at date of contribution must be recognized as capital loss.
The $2,000 remaining loss is a § 1231 loss. (See Example 20, p. 9-26, and § 724.)

49. e. If Z is a general partner, he may increase his outside basis by 20% of the recourse debt ($16,000) and 40%
of the nonrecourse debt ($80,000) for a total increase of $96,000. If Z is a limited partner, he may increase
his outside basis by 40% of the nonrecourse debt ($80,000). (See Examples 6 and 7, pp. 9-8 through 9-10,
and § 752.)

50. c. Corporation M may increase its $50,000 basis by its $10,000 distributive share of partnership dividend
income. It may then deduct a total of $60,000 of its distributive shares of partnership net operating loss
($84,000) and capital loss ($16,000). The $50,000 deduction is allocated proportionally between the two
categories of losses. [See Example 35, pp. 9-34 and 9-35, and § 704(d).]

51. e. There is no requirement that allocations of partnership profits and losses reflect the relative capital
contributions of the various partners. Similarly, partners may agree to allocated partnership profits and
losses in different ratios. (See p. 9-5.)

52. a. A partner recognizes a guaranteed payment in his or her taxable year that includes the last day of the
partnership taxable year in which the partnership accounted for the guaranteed payment. [See Example 43,
p. 9-39, and § 707(c).]

53. d. Per § 707(b), a partner who owns more than a 50% interest in a partnership may not recognize loss upon
the sale of property to the partnership. (See Example 44 and p. 9-40.)

54. c. This transaction is treated as a loan between unrelated parties, so that J must recognize interest income
upon receipt, and J&D may take an interest deduction upon payment. [See pp. 9-38 and 9-39 and § 707(a).]

55. b. The amount of loss is limited to the partner’s adjusted basis in the partnership.

P/L%  Loss ¼ Distributive share

P 40%  $5,000 ¼ $2,000
Q 25%  $5,000 ¼ $1,250
R 25%  $5,000 ¼ $1,250 (but limited to $1,000 basis)
S 10%  $5,000 ¼ $500
 Solutions to Test Bank 9-13

R will carry over the disallowed loss ($250) to be deducted in a later year or years to the extent that R has
increased his basis in the partnership. [See Example 34, pp. 9-34 and 9-35, and § 704(d).]
56. c. G’s share of the loss in 2011 is $7,000 (50% of $14,000). However, since G’s basis before loss distribution
is only $5,000, G’s deduction on his 2011 return is limited to $5,000. Thus, G starts 2012 with a beginning
basis of $0. In 2012, G’s share of profits is $3,000. G’s unused 2011 distributed loss of $2,000 is subtracted
from G’s 2012 $3,000 share of profits and results in net partnership income of $1,000 for G to report in
2012. Note that G has a basis in GH Partnership of $1,000 after the receipt of his distributive share of the
2012 partnership profit ($3,000). [See Example 34, pp. 9-34 and 9-35, and § 704(d).]

57. c. Active income of $80,000 ($100,000  $20,000) plus portfolio income of $1,000 is included in A.G.I. The
limited partnership loss of $10,000 is a passive loss and will be carried forward to offset passive income in
future years or deducted when the partnership interest is disposed of. (See Example 38, p. 9-36, and § 469.)

58. b. Publicly traded (widely held) corporations are not subject to § 469. (See Example 39, p. 9-37.)

59. d. The allocation of $8,000 of partnership loss to C reduces the outside basis in his interest to zero. However,
none of the loss can be deducted because C has no passive activity income for the year. (See Examples 37
and 38 and pp. 9-36 and 9-37.)

60. d. When a partner acquires his partnership interest at different times, holding period is apportioned to the
interest based on the fair market value of the interest purchased. As of January 1, 2013, O has a one-year
holding period in two-thirds of his partnership interest ($20,000/$30,000, and a one-month holding period
for one-third ($10,000/$30,000) of his interest. (See pp. 9-5 and 9-6.)

61. c. All guaranteed payments receive by partners, whether general or limited, in return for services rendered
are included in self-employment income. A general partner's distributive share of income is also self-
employment income, but a limited partner's share is usually not. Thus, G has $45,000 of self-employment
income ($30,000 þ $15,000) and L has $5,000. (See p. 9-27.)
 9
Taxation of
Partnerships and Partners

Comprehensive Problems

FACTS FOR COMPREHENSIVE PROBLEMS

Duo Limited Partnership was formed on February 1, 2012, with individuals Y and Z making the following
contributions:

Y: Cash of $100,000
Z: Land with $100,000 fair market value and $80,000 basis

Y and Z share profits and losses equally. Duo started business operations on February 1, 2012. The following
current year’s figures were prepared by Duo’s controller, using the cash method of accounting. Y is a general
partner and materially participates in business operations, and Z is a limited partner.

Gross sales $700,000

Costs of goods sold 400,000
Salaries to employees 150,000
Payroll taxes for employees 10,000
Guaranteed payment to Y 51,000
Operating expenses 150,000
Charitable contributions 20,000
Accounts payable 40,000
Nonrecourse debt 100,000
Legal fees (paid January 15, 2012 to
write the partnership agreement) 2,000

COMPREHENSIVE PROBLEMS
1. Calculate the following amounts (show your work).

a. Y’s basis in the partnership at February 1, 2012

b. Z’s basis in the partnership at February 1, 2012
c. The partnership’s basis in the land at February 1, 2012
d. Organizational costs that can be deducted in 2012 (assume amortization over the shortest period
possible)

9-15
9-16 Chapter 9 Taxation of Partnerships and Partners

2. Calculate the following amounts (show your work).

a. Duo’s taxable income for 2012

b. The items allocated to Y for 2012
c. The items allocated to Z for 2012

3. Calculate the following amounts (show your work).

a. Y’s basis in the partnership at the end of 2012

b. Z’s basis in the partnership at the end of 2012
c. Y’s adjusted gross income if her only other source of income during 2012 is $10,000 interest
 Solutions to Comprehensive Problems 9-17

Solutions to Comprehensive Problems

1. a. $100,000, equal to her cash contribution

b. $80,000, equal to his basis in the land contributed
c. $80,000, which is the carryover basis from Z
d. The legal fees are organizational costs. Since the total is less than $5,000, the entire $2,000 of
organizations costs can be deducted in 2012

2. a. Sales $ 700,000
Cost of goods sold (400,000)
Salaries to employees (150,000)
Payroll taxes for employees (10,000)
Guaranteed payment to Y (51,000)
Operating expenses (150,000)
Organizational expenses (2,000)
Net income (loss) $ (61,000)

b. Net loss ($61,000  50%) $30,500.00

Guaranteed payment $51,000.00
Charitable contributions (50%) $10,000.00

c. Net loss ($61,000  50%) $30,500.00

Charitable contributions (50%) $10,000.00

3. a. Original contribution $100,000.00

Net loss (30,500.00)
Charitable contribution (10,000.00)
Recourse debt (100%) 40,000.00
Nonrecourse debt (50%) 50,000.00
December 31, 2012 basis $149,500.00

b. Original contribution $ 80,000.00

Net loss (30,500.00)
Charitable contribution (10,000.00)
Nonrecourse debt 50,000.00
December 31, 2012 basis $ 89,500.00

c. Interest income $ 10,000.00

Guaranteed payment 51,000.00
Partnership loss (30,500.00)
Adjusted gross income $ 30,500.00
 9
Taxation of
Partnerships and Partners

Solutions to Tax Return Problems

The solutions to 9-56 and 9-57 are on the following pages.

9-19
9-20 Chapter 9 Taxation of Partnerships and Partners

9-56 P & K General Partnership Tax Return

 Solutions to Tax Return Problems 9-21

9-56 P & K General Partnership Tax Return - continued

9-22 Chapter 9 Taxation of Partnerships and Partners

9-56 P & K General Partnership Tax Return - continued

 Solutions to Tax Return Problems 9-23

9-56 P & K General Partnership Tax Return - continued

9-24 Chapter 9 Taxation of Partnerships and Partners

9-56 P & K General Partnership Tax Return - continued

 Solutions to Tax Return Problems 9-25

9-56 P & K General Partnership Tax Return - continued

9-26 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return

 Solutions to Tax Return Problems 9-27

9-57 Slattery’s General Partnership Tax Return - continued

9-28 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return - continued

 Solutions to Tax Return Problems 9-29

9-57 Slattery’s General Partnership Tax Return - continued

9-30 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return - continued

 Solutions to Tax Return Problems 9-31

9-57 Slattery’s General Partnership Tax Return - continued

9-32 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return - continued

 Solutions to Tax Return Problems 9-33

9-57 Slattery’s General Partnership Tax Return - continued

1065 U.S. Return of Partnership Income OMB No. 1545-0099

2011
Form For calendar year 2011, or tax year beginning , 2011, ending , 20 .
Department of the Treasury ▶
Internal Revenue Service See separate instructions.
A Principal business activity Name of partnership D Employer identification number

SERVICE P & K GENERAL PARTNERSHIP 24 3897625

B Principal product or service Number, street, and room or suite no. If a P.O. box, see the instructions. E Date business started
COMPUTER Print
3010 EAST APPLE STREET MARCH 1, 2006
CONSULTING or
C Business code number type. City or town, state, and ZIP code F Total assets (see the

541510 ATLANTA, GA 30304 instructions)

$ 162,500
G Check applicable boxes: (1) Initial return (2) Final return (3) Name change (4) Address change (5) Amended return
(6) Technical termination - also check (1) or (2)
H Check accounting method: (1) Cash (2) Accrual (3) Other (specify) ▶
I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year ▶
J Check if Schedules C and M-3 are attached . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Caution. Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information.

1a Merchant card and third-party payments (including amounts

reported on Form(s) 1099-K). For 2011, enter -0- . . . . 1a 238,500
b Gross receipts or sales not reported on line 1a (see instructions) 1b -0-
c Total. Add lines 1a and 1b . . . . . . . . . . . 1c 238,500
d Returns and allowances plus any other adjustments to line 1a
(see instructions) . . . . . . . . . . . . . . 1d
Income

e Subtract line 1d from line 1c . . . . . . . . . . . 1e

2 Cost of goods sold (attach Form 1125-A) . . . . . . 2
3 Gross profit. Subtract line 2 from line 1e . . . . . . . . . . . . . . . . . 3
4 Ordinary income (loss) from other partnerships, estates, and trusts (attach statement) . . 4
5 Net farm profit (loss) (attach Schedule F (Form 1040)) . . . . . . . . . . . . 5
6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797) . . . . . . . . 6
7 Other income (loss) (attach statement) . . . . . . . . . . . . . . . . . 7
8 Total income (loss). Combine lines 3 through 7 . . . . . . . . . . . . . . 8 238,500
9 Salaries and wages (other than to partners) (less employment credits) . . . . . . . 9 50,000
(see the instructions for limitations)

10 Guaranteed payments to partners . . . . . . . . . . . . . . . . . . . 10 60,000

11 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . 11 5,800
12 Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
13 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14,000
14 Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . 14 13,800
15 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16,600
16a Depreciation (if required, attach Form 4562) . . . . . . 16a
b Less depreciation reported on Form 1125-A and elsewhere on return 16b 16c 25,500
Deductions

17 Depletion (Do not deduct oil and gas depletion.) . . . . . . . . . . . . . 17

18 Retirement plans, etc. . . . . . . . . . . . . . . . . . . . . . . . 18
19 Employee benefit programs . . . . . . . . . . . . . . . . . . . . . 19
20 Other deductions (attach statement) . . . . . . . . . . . . . . . . . . 20 9,000
21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20 . 21 194,700
22 Ordinary business income (loss). Subtract line 21 from line 8 . . . . . . . . . 22
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my
knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member manager)
Sign is based on all information of which preparer has any knowledge.
May the IRS discuss this return with the
Here preparer shown below (see
▲

instructions)? Yes No
Signature of general partner or limited liability company member manager Date
Print/Type preparer’s name Preparer’s signature Date PTIN
Paid Check if
self- employed
Preparer
Firm’s name ▶ Firm's EIN ▶
Use Only
Firm’s address ▶ Phone no.
For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z Form 1065 (2011)
9-34 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return - continued

Form 1065 (2011) Page 2

Schedule B Other Information
1 What type of entity is filing this return? Check the applicable box: Yes No
a Domestic general partnership b Domestic limited partnership
c Domestic limited liability company d Domestic limited liability partnership
e Foreign partnership f Other ▶
2 At any time during the tax year, was any partner in the partnership a disregarded entity, a partnership (including
an entity treated as a partnership), a trust, an S corporation, an estate (other than an estate of a deceased partner),
or a nominee or similar person? . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 At the end of the tax year:
a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or
tax-exempt organization, or any foreign government own, directly or indirectly, an interest of 50% or more in the
profit, loss, or capital of the partnership? For rules of constructive ownership, see instructions. If “Yes,” attach
Schedule B-1, Information on Partners Owning 50% or More of the Partnership . . . . . . . . . . .
b Did any individual or estate own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of
the partnership? For rules of constructive ownership, see instructions. If “Yes,” attach Schedule B-1, Information
on Partners Owning 50% or More of the Partnership . . . . . . . . . . . . . . . . . . . .
4 At the end of the tax year, did the partnership:
a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of
stock entitled to vote of any foreign or domestic corporation? For rules of constructive ownership, see
instructions. If “Yes,” complete (i) through (iv) below . . . . . . . . . . . . . . . . . . . . .
(i) Name of Corporation (ii) Employer Identification (iii) Country of (iv) Percentage
Number (if any) Incorporation Owned in Voting Stock

b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss,
or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial
interest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (v) below . .
(ii) Employer (v) Maximum
Identification
(iii) Type of (iv) Country of Percentage Owned in
(i) Name of Entity
Number (if any) Entity Organization Profit, Loss, or Capital

Form 1065 (2011)

 Solutions to Tax Return Problems 9-35

9-57 Slattery’s General Partnership Tax Return - continued

Form 1065 (2011) Page 3

Yes No
5 Did the partnership file Form 8893, Election of Partnership Level Tax Treatment, or an election statement under
section 6231(a)(1)(B)(ii) for partnership-level tax treatment, that is in effect for this tax year? See Form 8893 for
more details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 Does the partnership satisfy all four of the following conditions?
a The partnership’s total receipts for the tax year were less than $250,000.
b The partnership’s total assets at the end of the tax year were less than $1 million.
c Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including
extensions) for the partnership return.
d The partnership is not filing and is not required to file Schedule M-3 . . . . . . . . . . . . . . .
If “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065;
or Item L on Schedule K-1.
7 Is this partnership a publicly traded partnership as defined in section 469(k)(2)? . . . . . . . . . . . .
8 During the tax year, did the partnership have any debt that was cancelled, was forgiven, or had the terms
modified so as to reduce the principal amount of the debt? . . . . . . . . . . . . . . . . . .
9 Has this partnership filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide
information on any reportable transaction? . . . . . . . . . . . . . . . . . . . . . . . .
10 At any time during calendar year 2011, did the partnership have an interest in or a signature or other authority over
a financial account in a foreign country (such as a bank account, securities account, or other financial account)?
See the instructions for exceptions and filing requirements for Form TD F 90-22.1, Report of Foreign Bank and
Financial Accounts. If “Yes,” enter the name of the foreign country. ▶
11 At any time during the tax year, did the partnership receive a distribution from, or was it the grantor of, or
transferor to, a foreign trust? If “Yes,” the partnership may have to file Form 3520, Annual Return To Report
Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See instructions . . . . . . . . .
12a Is the partnership making, or had it previously made (and not revoked), a section 754 election? . . . . . .
See instructions for details regarding a section 754 election.
b Did the partnership make for this tax year an optional basis adjustment under section 743(b) or 734(b)? If “Yes,”
attach a statement showing the computation and allocation of the basis adjustment. See instructions . . . .
c Is the partnership required to adjust the basis of partnership assets under section 743(b) or 734(b) because of a
substantial built-in loss (as defined under section 743(d)) or substantial basis reduction (as defined under section
734(d))? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions.
13 Check this box if, during the current or prior tax year, the partnership distributed any property received in a
like-kind exchange or contributed such property to another entity (other than disregarded entities
wholly-owned by the partnership throughout the tax year) . . . . . . . . . . . . . . . . . ▶
14 At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other
undivided interest in partnership property? . . . . . . . . . . . . . . . . . . . . . . . .
15 If the partnership is required to file Form 8858, Information Return of U.S. Persons With Respect To Foreign
Disregarded Entities, enter the number of Forms 8858 attached. See instructions ▶
16 Does the partnership have any foreign partners? If “Yes,” enter the number of Forms 8805, Foreign Partner’s
Information Statement of Section 1446 Withholding Tax, filed for this partnership. ▶
17 Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, attached
to this return. ▶
18a Did you make any payments in 2011 that would require you to file Form(s) 1099? See instructions . . . . .
b If “Yes,” did you or will you file all required Form(s) 1099? . . . . . . . . . . . . . . . . . . .
19 Enter the number of Form(s) 5471, Information Return of U.S. Persons With Respect To Certain Foreign
Corporations, attached to this return. ▶
Designation of Tax Matters Partner (see instructions) N/A
Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return:
▲

▲ ▲

Name of
designated Identifying
TMP number of TMP
▲

If the TMP is an
entity, name Phone number
of TMP representative of TMP
▲

Address of
designated
TMP
Form 1065 (2011)
9-36 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return - continued

Form 1065 (2011) Page 4

Schedule K Partners’ Distributive Share Items Total amount
1 Ordinary business income (loss) (page 1, line 22) . . . . . . . . . . . . . 1 43,800
2 Net rental real estate income (loss) (attach Form 8825) . . . . . . . . . . . 2
3a Other gross rental income (loss) . . . . . . . . 3a
b Expenses from other rental activities (attach statement) 3b
c Other net rental income (loss). Subtract line 3b from line 3a . . . . . . . . . 3c
60,000
Income (Loss)

4 Guaranteed payments . . . . . . . . . . . . . . . . . . . . . 4
5 Interest income . . . . . . . . . . . . . . . . . . . . . . . . 5 1,400
6 Dividends: a Ordinary dividends . . . . . . . . . . . . . . . . . 6a
b Qualified dividends . . . . . . 6b
7 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8 Net short-term capital gain (loss) (attach Schedule D (Form 1065)) . . . . . . . 8
9a Net long-term capital gain (loss) (attach Schedule D (Form 1065)) . . . . . . . 9a
b Collectibles (28%) gain (loss) . . . . . . . . . 9b
c Unrecaptured section 1250 gain (attach statement) . . 9c
10 Net section 1231 gain (loss) (attach Form 4797) . . . . . . . . . . . . . 10
11 Other income (loss) (see instructions) Type ▶ 11
Employ- Deductions

12 Section 179 deduction (attach Form 4562) . . . . . . . . . . . . . . . 12

13a Contributions . . . . . . . . . . . . . . . . . . . . . . . . 13a 1,500
b Investment interest expense . . . . . . . . . . . . . . . . . . . 13b
c Section 59(e)(2) expenditures: (1) Type ▶ (2) Amount ▶ 13c(2)
d Other deductions (see instructions) Type ▶ 13d
14a Net earnings (loss) from self-employment . . . . . . . . . . . . . . . 14a 103,800
ment

b Gross farming or fishing income . . . . . . . . . . . . . . . . . . 14b

Self-

c Gross nonfarm income . . . . . . . . . . . . . . . . . . . . . 14c

15a Low-income housing credit (section 42(j)(5)) . . . . . . . . . . . . . . 15a
b Low-income housing credit (other) . . . . . . . . . . . . . . . . . 15b
Credits

c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468) . . . . 15c
d Other rental real estate credits (see instructions) Type ▶ 15d
e Other rental credits (see instructions) Type ▶ 15e
f Other credits (see instructions) Type ▶ 15f
16a Name of country or U.S. possession ▶
b Gross income from all sources . . . . . . . . . . . . . . . . . . . 16b
Foreign Transactions

c Gross income sourced at partner level . . . . . . . . . . . . . . . . 16c

Foreign gross income sourced at partnership level
d Passive category ▶ e General category ▶ f Other ▶ 16f
Deductions allocated and apportioned at partner level
g Interest expense ▶ h Other . . . . . . . . . . ▶ 16h
Deductions allocated and apportioned at partnership level to foreign source income
i Passive category ▶ j General category ▶ k Other ▶ 16k
l Total foreign taxes (check one): ▶ Paid Accrued . . . . . . . . 16l
m Reduction in taxes available for credit (attach statement) . . . . . . . . . . 16m
n Other foreign tax information (attach statement) . . . . . . . . . . . . .
17a Post-1986 depreciation adjustment . . . . . . . . . . . . . . . . . 17a
Other Information Minimum Tax
(AMT) Items

b Adjusted gain or loss . . . . . . . . . . . . . . . . . . . . . . 17b

Alternative

c Depletion (other than oil and gas) . . . . . . . . . . . . . . . . . . 17c

d Oil, gas, and geothermal properties—gross income . . . . . . . . . . . . 17d
e Oil, gas, and geothermal properties—deductions . . . . . . . . . . . . . 17e
f Other AMT items (attach statement) . . . . . . . . . . . . . . . . . 17f
18a Tax-exempt interest income . . . . . . . . . . . . . . . . . . . . 18a
b Other tax-exempt income . . . . . . . . . . . . . . . . . . . . 18b
c Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . 18c
19a Distributions of cash and marketable securities . . . . . . . . . . . . . 19a
b Distributions of other property . . . . . . . . . . . . . . . . . . . 19b
20a Investment income . . . . . . . . . . . . . . . . . . . . . . . 20a 1,400
b Investment expenses . . . . . . . . . . . . . . . . . . . . . . 20b
c Other items and amounts (attach statement) . . . . . . . . . . . . . .
Form 1065 (2011)
 Solutions to Tax Return Problems 9-37

9-57 Slattery’s General Partnership Tax Return - continued

Form 1065 (2011) Page 5

Analysis of Net Income (Loss)
1 Net income (loss). Combine Schedule K, lines 1 through 11. From the result, subtract the sum of
Schedule K, lines 12 through 13d, and 16l . . . . . . . . . . . . . . . . . . 1 103,700
2 Analysis by (ii) Individual (iii) Individual (v) Exempt (vi)
(i) Corporate (iv) Partnership
partner type: (active) (passive) organization Nominee/Other
a General partners 103,700
b Limited partners
Schedule L Balance Sheets per Books Beginning of tax year End of tax year
Assets (a) (b) (c) (d)
1 Cash . . . . . . . . . . . . . 12,000 22,000
2a Trade notes and accounts receivable . . .
b Less allowance for bad debts . . . . .
3 Inventories . . . . . . . . . . .
4 U.S. government obligations . . . . .
5 Tax-exempt securities . . . . . . .
6 Other current assets (attach statement) . .
7a Loans to partners (or persons related to partners)
b Mortgage and real estate loans . . . .
8 Other investments (attach statement) . . .
9a Buildings and other depreciable assets . . 150,000 190,000
b Less accumulated depreciation . . . . 38,000 112,000 63,500 126,500
10a Depletable assets . . . . . . . . .
b Less accumulated depletion . . . . .
11 Land (net of any amortization) . . . . .
12a Intangible assets (amortizable only) . . .
b Less accumulated amortization NOTE FROM
. . . .
13 PARTNER
Other assets (attach statement) . . . . 14,000 14,000
14 Total assets . . . . . . . . . . . 138,000 162,500
Liabilities and Capital
15 Accounts payable . . . . . . . . . 20,000
16 Mortgages, notes, bonds payable in less than 1 year
17 Other current liabilities (attach statement) . 36,000 30,000
18 All nonrecourse loans . . . . . . . . 58,000 67,200
19a Loans from partners (or persons related to partners)
b Mortgages, notes, bonds payable in 1 year or more 44,000 45,300
20 Other liabilities (attach statement) . . . . 138,000 162,500
21 Partners’ capital accounts . . . . . .
22 Total liabilities and capital . . . . . .
Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return
Note. Schedule M-3 may be required instead of Schedule M-1 (see instructions).
1 Net income (loss) per books . . . . 43,700
6 Income recorded on books this year not included
on Schedule K, lines 1 through 11 (itemize):
2 Income included on Schedule K, lines 1, 2, 3c,
5, 6a, 7, 8, 9a, 10, and 11, not recorded on a Tax-exempt interest $
books this year (itemize):
3 Guaranteed payments (other than 7 Deductions included on Schedule K, lines
health insurance) . . . . . . . 60,000 1 through 13d, and 16l, not charged
4 Expenses recorded on books this year against book income this year (itemize):
not included on Schedule K, lines 1 a Depreciation $
through 13d, and 16l (itemize):
a Depreciation $ 8 Add lines 6 and 7 . . . . . . . .
b Travel and entertainment $ 9 Income (loss) (Analysis of Net Income
5 Add lines 1 through 4 . . . . . . 103,700 (Loss), line 1). Subtract line 8 from line 5 . 103,700
Schedule M-2 Analysis of Partners’ Capital Accounts
1 Balance at beginning of year . . . 44,000 6 Distributions: a Cash . . . . . . 42,400
2 Capital contributed: a Cash . . . b Property . . . . .
b Property . . 7 Other decreases (itemize):
3 Net income (loss) per books . . . . 43,700
4 Other increases (itemize): 8 Add lines 6 and 7 . . . . . . . . 42,400
5 Add lines 1 through 4 . . . . . . 87,700 9 Balance at end of year. Subtract line 8 from line 5 45,300
Form 1065 (2011)
9-38 Chapter 9 Taxation of Partnerships and Partners

9-57 Slattery’s General Partnership Tax Return - continued

651111
Final K-1 Amended K-1 OMB No. 1545-0099
Schedule K-1
(Form 1065) 2011 Part III Partner’s Share of Current Year Income,
Deductions, Credits, and Other Items
Department of the Treasury For calendar year 2011, or tax 1 Ordinary business income (loss) 15 Credits
Internal Revenue Service
year beginning , 2011 26,280
ending , 20 2 Net rental real estate income (loss)

Partner’s Share of Income, Deductions, 3 Other net rental income (loss) 16 Foreign transactions
Credits, etc. ▶ See back of form and separate instructions.

Part I Information About the Partnership 4 Guaranteed payments

A Partnership’s employer identification number 30,000

24 : 3897625 5 Interest income
B Partnership’s name, address, city, state, and ZIP code 840
P & K GENERAL PARTNERSHIP 6a Ordinary dividends

3010 EAST APPLE STREET 6b Qualified dividends

ATLANTA, GA 30304
7 Royalties
C IRS Center where partnership filed return
ATLANTA 8 Net short-term capital gain (loss)

D Check if this is a publicly traded partnership (PTP)

9a Net long-term capital gain (loss) 17 Alternative minimum tax (AMT) items
Part II Information About the Partner
E Partner’s identifying number 9b Collectibles (28%) gain (loss)
403-16-5610
F Partner’s name, address, city, state, and ZIP code 9c Unrecaptured section 1250 gain

MR. P 10 Net section 1231 gain (loss) 18 Tax-exempt income and

1521 SOUTH ELM STREET nondeductible expenses

ATLANTA, GA 30304 11 Other income (loss)

G General partner or LLC Limited partner or other LLC

member-manager member

H Domestic partner Foreign partner

19 Distributions

I What type of entity is this partner? INDIVIDUAL 12 Section 179 deduction

J Partner’s share of profit, loss, and capital (see instructions):
Beginning Ending 13 Other deductions

Profit % 60 % 900 20 Other information

Loss % 60 %
Capital % 60 %
840
K Partner’s share of liabilities at year end:
Nonrecourse . . . . . . $ 18,000 14 Self-employment earnings (loss)
Qualified nonrecourse financing . $ 52,230 56,280
Recourse . . . . . . . $

L Partner’s capital account analysis:

Beginning capital account . . . $
28,000 *See attached statement for additional information.

Capital contributed during the year $ -

Current year increase (decrease) . $ 26,220
25,400
For IRS Use Only

Withdrawals & distributions . . $ ( )

Ending capital account . . . . $ 28,820
Tax basis GAAP Section 704(b) book
Other (explain)

M Did the partner contribute property with a built-in gain or loss?

Yes No
If “Yes,” attach statement (see instructions)

For Paperwork Reduction Act Notice, see Instructions for Form 1065. Cat. No. 11394R Schedule K-1 (Form 1065) 2011