MGMT 343 Fall 2020

Name_______________

Exam #3

1. (10 points) Discuss the difference between the aggregate and entity treatment of a
partnership. Discuss a provision consistent with each treatment:

Aggregate treats partner(s) as owner(s) that is undivided interest of assets and operations.
Entity treats the partner(s) as separate entities with no interest in assets & operations

2. (10 points) Why is debt included in the basis of a partnership interest, but not the basis of
S Corporation stock?
The owners need to claim the profits or losses on their personal tax return. If the partner
borrows money they have to put that on their return not the S-corp because the corp
didn’t borrow it.

3. (10 points) Jack contributes the following asset to a new partnership: Land – FMV
$200,000; Mortgage $80,000; Tax Basis $100,000. How much cash should Jill contribute
to make this an equitable 50/50 partnership? $280,000

4. (10 points) In Problem #3, what is Jack’s partnership interest basis? What is Jill’s
partnership interest basis? Jack: $180,000 Jill: $280,000

5. (10 points) In Problem #3, the partnership sells the land. What is the tax result to each
partner? What is each of their bases following the sale of the land?

Each $100k if it is sold at its FMV of $200k. Jack:280k Jill: 380k

 6. (10 points) The B&B Partnership is on the cash method of accounting. It sells a large
amount of inventory generating a great deal of Accounts Receivable. If a partner sells his
or her interest, describe the primary tax issue to the partner in this situation.
This is income not capital gain. They pay taxes on the share from the company for being
a partner. No income is recognized yet because it still needs to be received.

7. (10 points) Allison, Keesha, and Steven each own equal interests in KAS Partnership, a
calendar year-end, cash-method entity. On January 1 of the current year, Steven’s basis in
his partnership interest is $25,000. During January and February, the partnership
generates $30,000 of ordinary income and $6,000 of tax-exempt income. On March 1,
Steven sells his partnership interest to Juan for a cash payment of $50,000. The
partnership has the following assets and no liabilities at the sale date:

 
Tax
    Basis   FMV
Cash $ 30,500   $ 30,500
Land held for investment   30,500     62,500
Totals $ 61,000   $ 93,000

What is Steven’s gain on sale of the partnership interest?

25K+10k(30k/3)+2k(6k/3)=37k outside basis 50k-37k=13k capital gain

8. (10 pts) What are the three potential allocation components of a partnership interest (hint:
look at the Schedule K-1)?
Depreciation, depletion and amortization

9. (10 points) Coy and Matt are equal partners in the Matcoy Partnership. Each partner has
a basis in his partnership interest of $30,000 at the end of the current year, prior to any
distribution. On December 31 they each receive an operating distribution. Coy receives
$11,200 cash. Matt receives $3,340 cash and a parcel of land with a $7,860 fair market
value and a $4,400 basis to the partnership. Matcoy has no debt or hot assets. What are
Coy and Matt’s basis in their partnership interest following the distribution:

Coy: $30,000-11,200=$18,800k Matt: $30,000-3,340-4,400=$22,260

10. (10 points) Kathy contributes the following property to the K&L partnership for a 50%
partnership interest: Land-FMV $70K Tax Basis $40K; Cash $50K. The partnership
earns $300K in Year 1, obtains a bank loan of $70K, and distributes $20,000 to each
partner. What is Kathy’s basis at the end of Year 1?
$50k-20k=30k