Taxation of Business Entities: Chapter Study Questions

May 26th, 2016
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Chapter 8: Consolidated Tax Returns

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TAXATION OF BUSINESS ENTITIES: CHAPTER 9 PRACTICE QUIZ, PARTNERSHIPSALL CORRECT ANSWERS ARE HIGHLIGHTED1. Can a recourse debt of a partnership increase the basis of a limited partner's partnershipinterest? Explain.A.No, because a limited partner normally has no economic risk for recourse debt.B.Yes, because a limited partner normally has a large economic risk for recourse debt.C.Yes, because a limited partner's basis in his or her partnership interest is dependent upon any debt or income thepartnership acquires.D.No, because a limited partner's basis in his or her partnership interest is based primarily on the profit ratio.2. An existing partner wants to contribute property having a basis less than its FMV for anadditional interest in a partnership.a.Should he contribute the property to the partnership?b.What are his other options?c.Explain the tax implications for the partner of these other options.a. Should he contribute the property to the partnership?A.No, because an existing partner can contribute the property tax-free but Sec. 704(c) requires that the taxattributes from contributed property be allocated to the partner that contributes the property, meaning thedifference between the property's FMV and its tax basis is allocated to the existing partner who contributed theproperty only.B.Yes, because contributing property to a partnership has no consequences, tax or otherwise, to an existng partner.C.Yes, because an existing partner can

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