WGU D558 Pass-Through Taxation MCQ Study Guide | 100 Practice Questions,
Correct Answers & Detailed Rationales | 2026 OA Exam Prep.
Part I: Partnership Taxation
Question 1
Amara contributes $20,000 cash and property with an adjusted basis of $35,000 and an FMV of
$60,000 to a partnership. No liabilities are involved. What is Amara’s initial outside basis?
A. $20,000
B. $35,000
C. $55,000
D. $80,000
Correct answer: C. $55,000
Rationale: Outside basis equals the cash contributed plus the adjusted tax basis of contributed
property: $20,000 + $35,000 = $55,000. FMV is not used to calculate initial outside basis.
Question 2
Brian contributes property with a $70,000 adjusted basis, $110,000 FMV, and a $40,000 liability
assumed by the partnership. After the contribution, Brian’s share of partnership liabilities is
$10,000. What is his initial outside basis?
A. $30,000
B. $40,000
C. $70,000
D. $80,000
Correct answer: B. $40,000
Rationale: Begin with the $70,000 adjusted basis, subtract the $40,000 liability relief, and add
Brian’s $10,000 post-contribution liability share: $70,000 − $40,000 + $10,000 = $40,000.
Question 3
,Carmen contributes equipment with an adjusted basis of $25,000 and an FMV of $50,000. What
is the partnership’s initial inside basis in the equipment?
A. $0
B. $25,000
C. $50,000
D. $75,000
Correct answer: B. $25,000
Rationale: The partnership generally takes a carryover basis equal to the contributing partner’s
adjusted basis. The $25,000 is inside basis; the $50,000 FMV is relevant to capital accounts and
built-in gain.
Question 4
David contributes property with a $30,000 adjusted basis and $80,000 FMV. How much built-in
gain must generally be tracked under Section 704(c)?
A. $30,000
B. $50,000
C. $80,000
D. $110,000
Correct answer: B. $50,000
Rationale: Built-in gain equals FMV minus adjusted basis: $80,000 − $30,000 = $50,000.
Section 704(c) prevents that precontribution gain from being shifted to another partner.
Question 5
A taxpayer receives a vested partnership capital interest worth $40,000 in exchange for services.
What is the usual tax treatment?
A. No income under Section 721
B. $40,000 ordinary compensation income
C. $40,000 long-term capital gain
D. $40,000 tax-exempt income
Correct answer: B. $40,000 ordinary compensation income
,Rationale: Services are not property for purposes of Section 721. Receipt of a vested capital
interest for services generally produces ordinary compensation income equal to its FMV.
Question 6
Elena has a $60,000 beginning outside basis. She is allocated $20,000 of ordinary income and
$3,000 of tax-exempt interest. She receives a $15,000 cash distribution and is allocated $4,000 of
nondeductible expenses. What is her ending outside basis?
A. $58,000
B. $60,000
C. $64,000
D. $68,000
Correct answer: C. $64,000
Rationale: $60,000 + $20,000 + $3,000 − $15,000 − $4,000 = $64,000. Tax-exempt income
increases basis, while nondeductible expenses decrease it.
Question 7
Frank’s share of partnership liabilities increases by $18,000. How is the increase generally
treated for outside-basis purposes?
A. A deemed cash distribution
B. A deemed cash contribution
C. Ordinary income
D. A guaranteed payment
Correct answer: B. A deemed cash contribution
Rationale: An increase in a partner’s share of partnership liabilities is treated as a deemed
contribution of money and increases outside basis.
Question 8
Grace’s share of partnership liabilities decreases by $12,000. How is the decrease generally
treated?
, A. A deemed cash distribution
B. A deemed cash contribution
C. Tax-exempt income
D. A separately stated deduction
Correct answer: A. A deemed cash distribution
Rationale: A decrease in a partner’s liability share is treated as money distributed to the partner.
It reduces outside basis and can generate gain if deemed and actual cash exceeds basis.
Question 9
Henry has a $15,000 outside basis. He receives $10,000 cash, and his share of partnership
liabilities decreases by $9,000. How much gain does he recognize?
A. $0
B. $4,000
C. $9,000
D. $19,000
Correct answer: B. $4,000
Rationale: Total money received is $10,000 actual cash plus $9,000 deemed cash, or $19,000.
The amount exceeds Henry’s $15,000 basis by $4,000.
Question 10
Which liability is generally allocated according to the partners’ economic risk of loss?
A. Nonrecourse liability
B. Recourse liability
C. Trade payable with no guarantor
D. Qualified dividend liability
Correct answer: B. Recourse liability
Rationale: Recourse liabilities are generally allocated to partners who bear the economic risk of
loss. Nonrecourse liabilities follow a more specialized allocation framework.
Question 11
Correct Answers & Detailed Rationales | 2026 OA Exam Prep.
Part I: Partnership Taxation
Question 1
Amara contributes $20,000 cash and property with an adjusted basis of $35,000 and an FMV of
$60,000 to a partnership. No liabilities are involved. What is Amara’s initial outside basis?
A. $20,000
B. $35,000
C. $55,000
D. $80,000
Correct answer: C. $55,000
Rationale: Outside basis equals the cash contributed plus the adjusted tax basis of contributed
property: $20,000 + $35,000 = $55,000. FMV is not used to calculate initial outside basis.
Question 2
Brian contributes property with a $70,000 adjusted basis, $110,000 FMV, and a $40,000 liability
assumed by the partnership. After the contribution, Brian’s share of partnership liabilities is
$10,000. What is his initial outside basis?
A. $30,000
B. $40,000
C. $70,000
D. $80,000
Correct answer: B. $40,000
Rationale: Begin with the $70,000 adjusted basis, subtract the $40,000 liability relief, and add
Brian’s $10,000 post-contribution liability share: $70,000 − $40,000 + $10,000 = $40,000.
Question 3
,Carmen contributes equipment with an adjusted basis of $25,000 and an FMV of $50,000. What
is the partnership’s initial inside basis in the equipment?
A. $0
B. $25,000
C. $50,000
D. $75,000
Correct answer: B. $25,000
Rationale: The partnership generally takes a carryover basis equal to the contributing partner’s
adjusted basis. The $25,000 is inside basis; the $50,000 FMV is relevant to capital accounts and
built-in gain.
Question 4
David contributes property with a $30,000 adjusted basis and $80,000 FMV. How much built-in
gain must generally be tracked under Section 704(c)?
A. $30,000
B. $50,000
C. $80,000
D. $110,000
Correct answer: B. $50,000
Rationale: Built-in gain equals FMV minus adjusted basis: $80,000 − $30,000 = $50,000.
Section 704(c) prevents that precontribution gain from being shifted to another partner.
Question 5
A taxpayer receives a vested partnership capital interest worth $40,000 in exchange for services.
What is the usual tax treatment?
A. No income under Section 721
B. $40,000 ordinary compensation income
C. $40,000 long-term capital gain
D. $40,000 tax-exempt income
Correct answer: B. $40,000 ordinary compensation income
,Rationale: Services are not property for purposes of Section 721. Receipt of a vested capital
interest for services generally produces ordinary compensation income equal to its FMV.
Question 6
Elena has a $60,000 beginning outside basis. She is allocated $20,000 of ordinary income and
$3,000 of tax-exempt interest. She receives a $15,000 cash distribution and is allocated $4,000 of
nondeductible expenses. What is her ending outside basis?
A. $58,000
B. $60,000
C. $64,000
D. $68,000
Correct answer: C. $64,000
Rationale: $60,000 + $20,000 + $3,000 − $15,000 − $4,000 = $64,000. Tax-exempt income
increases basis, while nondeductible expenses decrease it.
Question 7
Frank’s share of partnership liabilities increases by $18,000. How is the increase generally
treated for outside-basis purposes?
A. A deemed cash distribution
B. A deemed cash contribution
C. Ordinary income
D. A guaranteed payment
Correct answer: B. A deemed cash contribution
Rationale: An increase in a partner’s share of partnership liabilities is treated as a deemed
contribution of money and increases outside basis.
Question 8
Grace’s share of partnership liabilities decreases by $12,000. How is the decrease generally
treated?
, A. A deemed cash distribution
B. A deemed cash contribution
C. Tax-exempt income
D. A separately stated deduction
Correct answer: A. A deemed cash distribution
Rationale: A decrease in a partner’s liability share is treated as money distributed to the partner.
It reduces outside basis and can generate gain if deemed and actual cash exceeds basis.
Question 9
Henry has a $15,000 outside basis. He receives $10,000 cash, and his share of partnership
liabilities decreases by $9,000. How much gain does he recognize?
A. $0
B. $4,000
C. $9,000
D. $19,000
Correct answer: B. $4,000
Rationale: Total money received is $10,000 actual cash plus $9,000 deemed cash, or $19,000.
The amount exceeds Henry’s $15,000 basis by $4,000.
Question 10
Which liability is generally allocated according to the partners’ economic risk of loss?
A. Nonrecourse liability
B. Recourse liability
C. Trade payable with no guarantor
D. Qualified dividend liability
Correct answer: B. Recourse liability
Rationale: Recourse liabilities are generally allocated to partners who bear the economic risk of
loss. Nonrecourse liabilities follow a more specialized allocation framework.
Question 11
