Individual O Owned a Sole Proprietorship with a Net Value

question 34

Multiple Choice

Individual O owned a sole proprietorship with a net value of $400,000.At the beginning of the current year, O created a partnership by giving a 20% interest in the business to his best friend M, and a 30% interest in the business to his daughter D.During the current year, O performed services for the partnership worth $20,000, although he chose not to bill the partnership for his work.The partnership's operating income for the year is $160,000.Based on these facts, the maximum amount of this income allocable to M and D is:

• A)Any amount as long as the allocation has substantial economic effect within the meaning of § 704(b).
• B)The maximum allocations to M and D respectively are $28,000 and $42,000.
• C)The maximum allocation to D is $42,000; any amount may be allocated to M as long as the allocation has substantial economic effect.
• D)The maximum allocation to D is $48,000; any amount may be allocated to M as long as the allocation has substantial economic effect.
• E)The maximum allocations to M and D respectively are $32,000 and $48,000.

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Definitions:

Back-Substitution

A method used in algebra, specifically in solving systems of equations, where you first solve one of the equations for one variable and then substitute that solution back into another equation to solve for another variable.

Linear Equations

Represent relationships between variables with a degree of one, forming a straight line when graphed.

Position Equation

A mathematical equation that describes an object's position in terms of time and other variables, often used in physics.

Distance

The length of the shortest path between two points, often measured in units such as meters or miles.