Glen and Michael Are Equal Partners in Trout Enterprises, a Calendar

question 102

Multiple Choice

Glen and Michael are equal partners in Trout Enterprises, a calendar year partnership. During the year, Trout Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $60,000. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael.

• A) Trout pays tax on $0 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
• B) Trout pays tax on $280,000 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
• C) Trout pays tax on $0 income, Glen's taxable income increases by $200,000, and Michael's taxable income increases by $200,000.
• D) Trout pays tax on $0 income, Glen's taxable income increases by $140,000, and Michael's taxable income increases by $140,000.
• E) None of the above.

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Definitions:

Capitalist Income

Income generated through the ownership of capital assets like businesses, stocks, or real estate, often distinguishing the earnings of capitalists from laborers.

Economic Rent

The excess payment or profit made over the minimum amount required to bring a factor of production into use.

Pure Rate of Interest

The rate of return on a risk-free investment, theoretically excluding the effects of inflation, default risk, and other factors.

Residual Claimants

Individuals or entities entitled to a share of an organization’s income only after all other claims, such as debts and taxes, have been satisfied.