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1 Feb 2019

10-4 Out on a Limb

Foreign Company (FC) is a 10% partner in a NY partnership. FC has no direct activities in the US. Is the NY partnership subject to the branch profits tax (BPT)? What about FC? If FC makes the sec 897(i) election, would it still be subject to the BPT?

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3 Feb 2019

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11. Bread Corporation is a C corporation with earnings of $150,000. It paid $60,000 of dividends to its sole shareholder, Gerald. Gerald also owns 100% of Butter, an S Corporation. Butter had net taxable income of $40,000 and made a $30,000 distribution to Gerald. What total income will Gerald report from Bread and Butter’s activities?

$90,000

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12. At the first of the year, Arch and Bean contribute cash equally to form the JK partnership. Arch and Bean share profits and losses in a ratio of 75% to 25% respectively. For the current year, the partnership's ordinary income was $40,000. A distribution of $5,000 was made to Arch during the current year. What amount of ordinary income should Bean report from the JK partnership?

$5,000

$20,000

$10,000

$40,000

13. Identify which of the following statements is true.
All cash distributions from a partnership require the partners to pay taxes on those distributions.

Distribution of partnership income in the form of cash to partners is generally taxable to the

partners as long as there is sufficient basis.

If property distributions exceed the partner's basis in the partnership interest, a partner would not have to recognize gain on a distribution from the partnership.

All of the above are true.

14. Stan had a basis in his 50% partnership interest at the beginning of this year of $20,000 in a partnership in which he actively participates. There was no change in partnership liabilities during the year. The partnership's ordinary loss this year was $60,000 and the partnership had no separately stated items. The deductible loss from the partnership reported on Stan's personal income tax return this year is

$20,000

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$30,000

15. The Qualified Business Income Deduction applies to individuals who own an interest in a:

C Corporation

Both a Partnership and an S Corporation

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S Corporation

Business law Agency and partnership 1.The creation of an agencyalways required a written document authorizing the agent to act forthe principal and signed by both the principal and the agent.T/F

2.No consideration is required to create an agency relationship.T/F

3.Failure to notify partner with whom an agent has dealt of hertermination can create liability to those parties under the theoryof apparent authority. T/F

4.Liability for the tortious acts of an agent will depend uponhow much control the principle had over the agent. T/F

5.General partner stand only to lose their investment in thepartnership if the partnership goes broke. T/F

6.Under the doctrine of respondent superior the principal isliable for any harm caused by his agent, when the agent is actingwithin the scope of his authority. T/F

7.If the partners fail to write down the proportional ownershipinterest then they will be presumed to be equal partners. T/F

8.In the absence of a written agreement, any partner can refuseto allow anyone to become a partner in his partnership, since it isa voluntary relationship. T/F

9.What is known by the agent is presumed to be known by theprincipal. T/F

10.A limited partnership only has limited partners. T/F

11.Limited partners have a limited right to manage thepartnership affairs. T/F

12.Partners cannot use the general partnership agreement to denythe claims of creditors of the partnership; if the assets of thepartnership are not enough to the debt of the partnership thenpartners are personally liable for the debts of the partnership.T/F

13.A partnership is not a tax paying entity, but must file a taxreturn. T/F

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It is early January 2015. Your brother-in-law, Sam Sneed, has been working at the accounting firm (Indiana Accounting Associates, LLC – a partnership for tax purposes) for 15 years now in auditing and is excited to report to you that he has been offered a promotion to partner effective as of January 1st, 2015. The managing partner has just taken him to lunch and discussed Sam’s increased responsibilities and his targets for billable hours and new clients as a partner. Sam informed you that he will be offered a profits interest. At the time of receipt, the partner’s liquidation value in the interest received is zero, so Sam has been told he does not have a capital interest and no research is needed on capital interest. He is excited and wants to stay with the partnership for many years.


Sam has been told he will receive a vested profits interest of $50,000 in 2015 which, upon receipt, supposedly may be taxable. You are told to assume that the receipt would be W-2 wages as he was an employee when he received the profits interest if taxable. It will not be treated as a guaranteed payment.


Sam also indicated that there was some chatter in his tax department that the law was unclear on this matter and that he would have to evaluate his tax situation two ways; 1) as if he met a so called safe-harbor; and 2) as if he did not meet the safe-harbor.


Sam asks you for guidance on whether the receipt of the profits interest will be taxable or could it be classified as nontaxable. With any potential tax deductions he may get from the partnership now that he is a partner, Sam is not sure it matters. But he trusts you and wants your advice.


You have your own accounting practice and have prepared his tax returns for many years. You should support the brother-in-law. Why?

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