Deck 10: Partnership Distribution Dispositions of Partnership Interests, and Partnership Terminations

Question 1

The entity theory of partnerships predominates in the Subchapter K Code sections dealing with the tax consequences of cash and property distributions made by partnerships to partners.

Answer 1

False

Question 2

The death of a partner closes the partnership taxable year with respect to that partner.

Answer 2

True

Question 3

When a general partner's capital interest in a service partnership is retired, liquidating distributions can include payment for goodwill and unrealized receivables if the partnership agreement so specifies.

Answer 3

False

Question 4

If a partnership satisfies a $50,000 guaranteed payment obligation by distributing property to the partner with a fair market value of $50,000 and an adjusted basis of $40,000, the partner receiving the payment must recognize $10,000 of gain.

Question 5

If a liquidating distribution results in a capital gain or loss to the recipient partner, the partnership must make a positive or negative adjustment to the basis of its remaining capital or § 1231 assets equal to such gain or loss.

Question 6

If a partner receives a property distribution consisting of partnership inventory, and in a subsequent year sells the distributed property at a gain, such gain must always be recognized as ordinary income.

Question 7

A partner never recognizes loss upon the receipt of a current distribution from a partnership.

Question 8

A retiring partner who receives a liquidating distribution of cash as payment for her share of partnership substantially appreciated inventory must recognize ordinary income equal to the excess of the FMV of her proportionate share of the inventory over her proportionate share of the inside basis of the inventory.

Question 9

A partnership that distributes an asset the FMV of which exceeds its inside basis must recognize gain equal to the excess.

Question 10

Proportionate liquidating distributions of noncash partnership assets cannot result in recognized gain, but may result in the recipient partner recognizing loss.

Question 11

The purchaser of a partnership interest takes an outside basis in the interest equal to his proportionate share of the inside basis of partnership assets plus any amount of partnership debt apportionable to the purchased interest.

Question 12

When an interest in a partnership with appreciated assets is sold and no § 754 election is made, the new partner's outside basis exceeds his inside basis due to the applicability of the entity concept.

Question 13

The tax effects are identical whether a partner sells his or her interest to another partner, the partnership, or a person who has not been a partner, assuming the amount of cash to be received is the same.

Question 14

Partner Z received a current distribution from the XYZ Partnership consisting of $3,000 cash and partnership inventory (FMV $10,000 and basis $7,800).The distribution did not change Z's profit and loss sharing ratio.Immediately prior to the distribution, Z's outside basis in his partnership interest was $11,000.Because of the distribution Z must:

A)Recognize a $2,000 gain and reduce outside basis to zero
B)Recognize no gain or loss and reduce outside basis to $8,000
C)Recognize no gain or loss and reduce outside basis to zero
D)Recognize no gain or loss and reduce outside basis to $200
E)Recognize a $200 loss and reduce outside basis to zero

Question 15

The exchange of partnership interest can usually qualify for the like-kind exchange rules, provided all requirements of the like-kind exchange provisions are met and proper elections are made at the partnership level.

Question 16

Current cash distributions from partnerships are nontaxable unless they exceed the partner's basis in the partnership.

Question 17

The seller of a partnership interest may recognize ordinary gain on the sale, but will never recognize ordinary loss.

Question 18

Whenever a partnership is dissolved under state law, it is terminated for federal tax purposes.

Question 19

When a partner's basis in his partnership interest is less than the partnership's basis in a distributed asset, the partner's basis in his partnership interest is allocated among the assets according to their relative fair market values.

Question 20

Section 751 assets ("hot" assets) include (but are not limited to) amounts due from the performance of services that have not previously been reported as income and recapture of depreciation.

Question 21

Partner E is retiring from the EFGH Partnership.The partnership agreement provides that E will be paid $64,000 for his 15% net interest in partnership property (excluding goodwill) plus an additional $36,000 retirement bonus.In addition, E will be immediately relieved of any personal liability for partnership debts.The $100,000 cash will be paid to E in 10 annual $10,000 installments, beginning in the current year.Immediately prior to his retirement, E's outside basis in his partnership interest is $28,000; this basis includes $20,000 of EFGH's debt.In the current year, E will:

A)Recognize ordinary income of $9,000 and no capital gain.
B)Recognize ordinary income of $3,600 and no capital gain.
C)Recognize capital gain of $2,000.
D)Recognize ordinary income of $3,600 and capital gain of $6,400.
E)Recognize ordinary income of $9,000 and capital gain of $21,000.

Question 22

Which of the following statements concerning a § 754 election is accurate?

A)The election can be made by any partner who purchases an interest or who inherits an interest from a deceased partner.
B)The election is effective only for the partnership taxable year (or years) specifically stated in the election.
C)The election has potential tax consequences only to a partner who purchases an interest or who inherits an interest from a deceased partner.
D)The election can only result in an increase in the basis of partnership assets.
E)None of the above is accurate.

Question 23

Corporation J sells its 10% limited interest in the Nelson Partnership for $100,000.J's outside basis in the interest is $85,000; no partnership debt is included in this basis.At date of sale, Nelson has inventory worth $980,000 with an inside basis of $770,000.Based on these facts, Corporation J should recognize:

A)A $15,000 ordinary gain
B)A $15,000 capital gain and a $21,000 ordinary gain
C)A $6,000 capital loss and a $21,000 ordinary gain
D)A $21,000 ordinary gain
E)A $ 15,000 ordinary gain

Question 24

A partnership's records show: $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Cash }&\$ 4,000 & \$ 4,000 \\\text { Inventory }&16,000 & 30,000 \\\text { Land }&8,000 & 10,000\\\text { Equipment }&72,000&60,000\\\text { Total assets }&\$100,000&\$104,000\end{array}$ D's basis in her interest in this partnership is $18,000.She receives 20 percent of all partnership assets as a current distribution.D's basis for the equipment is

A)$12,000
B)$12,400
C)$13,500
D)$14,400

Question 25

In 2012, Corporation C contributed land (FMV $100,000 and basis $60,000) to Beta Partnership in exchange for a 25% interest in Beta.In 2012, Beta distributed the land to individual partner P, thereby terminating P's 30% interest in Beta.Immediately prior to distribution, the land was worth $110,000 and P's outside basis in his interest was $200,000.Which of the following is the correct set of tax consequences of the distribution?

A)There are no consequences to Corporation C.P takes a $200,000 basis in the land.
B)There are no consequences to Corporation C.P takes a $110,000 basis in the land.
C)There are no consequences to Corporation C.P takes a $100,000 basis in the land.
D)Corporation C must recognize a $50,000 gain and increase the basis in its partnership interest by $50,000.P takes a $200,000 basis in the land.
E)Corporation C must recognize a $40,000 gain and increase the basis in its partnership interest by $40,000.P takes a $200,000 basis in the land.

Question 26

Generally, capital will be considered a material income-producing factor for the following types of businesses except

A)An equipment manufacturer
B)A wholesale bakery
C)A retail drugstore
D)A household maid service
E)A commercial building contractor

Question 27

CDE Partnership has the following assets on its balance sheet. $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Cash }&\$ 5,000 & \$7,000 \\\text { Accounts receivables }&20,000&20,000\\\text { Inventory }&70,000&85,000\\\S 1231 \text { assets }&90,000&50,000\\\text { Accumulated depreciation }&(40,000)&-\\\text { Land }&200,000&280,000\\&\$345,000&\$440,000\end{array}$

A)CDE has no § 751 hot assets.
B)CDE has $40,000 of unrealized receivables.
C)CDE has $20,000 of unrealized receivables.
D)CDE has substantially appreciated inventory items worth $85,000.
E)CDE has substantially appreciated inventory items worth $105,000.

Question 28

Partner L received a $55,000 cash distribution from the KLM Partnership in liquidation of his 25% interest.Immediately prior to distribution, L's outside basis was $48,000.KLM had the following balance sheet: $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Cash }&\$ 57,000 & \$57,000 \\\text { Inventory }&45,000 & 53,000 \\\S 1231 \text { and capital assets }&90,000&122,000\\&\$192,000&\$232,000\\\text { Debt }&\$32,000&\$32,000\\\text { Capital: Partner L }&40,000&40,000\\\text { Others }&120,000&150,000\\&\$192,000&\$232,000\end{array}$ Because of the distribution, L should recognize:

A)$15,000 capital gain
B)$10,000 capital gain and $5,000 ordinary income
C)$8,000 capital gain and $7,000 ordinary income
D)$10,000 capital gain
E)$8,000 capital gain and $2,000 ordinary income

Question 29

K owns 25 percent of a partnership.K's basis in the partnership was $12,000 before she received a current proportionate distribution of equipment with a basis of $14,000 and a liability against it of $6,000.How much is K's basis in the partnership after the distribution?

A)$1,500
B)$2,000
C)$2,500
D)$4,500
E)$0

Question 30

T receives a liquidating distribution of investment land with a partnership basis of $18,000 and a FMV of $40,000 when her basis in the partnership is $15,000.If a § 754 election is in effect, the bases of the partnership's remaining assets will be increased by

A)$0
B)$15,000
C)$22,000
D)$3,000
E)None of the above

Question 31

A partnership's records show: $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Cash }&\$ 4,000 & \$ 4,000 \\\text { Inventory }&16,000 & 30,000 \\\text { Land }&8,000 & 20,000\\\text { Equipment }&72,000&60,000\\\text { Total assets }&\$100,000&\$114,000\end{array}$ D's basis in her 25% interest in this partnership is $26,000.She receives 25 percent of all partnership assets as a liquidating distribution.Compute D's basis in each distributed asset.

A)Inventory $4,000, land $2,000, and equipment $18,000
B)Inventory $4,000, land $5,000, and equipment $16,000
C)Inventory $4,000, land $3,000, and equipment $18,000
D)Inventory $4,500, land $2,250, and equipment $19,250
E)None of the above

Question 32

Which of the following statements concerning § 751(b) disproportionate distributions is accurate?

A)Both the distributing partnership and the recipient partner may recognize taxable gain because of a disproportionate distribution.
B)A disproportionate distribution can trigger the recognition of either ordinary gain or loss to the recipient partner.
C)A disproportionate distribution can only occur if the partnership has failed to make a valid § 754 election.
D)The disproportionate distribution rules of § 751(b) reflect the entity theory of partnerships.
E)None of the above is accurate.

Question 33

A partnership is owned by a mother (60%) and her son (40%).Their capital accounts are maintained in the same ratio.The son received his ownership interest as a gift from his mother several years ago.Partnership income for the current year was $50,000.Although the mother performed services valued at $10,000, there was no entry on the partnership books and she received no cash for her services.To avoid a reallocation by the IRS, what amount of current year income should be allocated to the mother?

A)$20,000
B)$30,000
C)$34,000
D)$40,000
E)$50,000

Question 34

Partnership records show: $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Inventory }&\$12,000 & \$28,000 \\\text { Land }&48,000 & 70,000\\\text { Equipment }&32,000&42,000\\\text { Total assets }&\$92,000&\$140,000\end{array}$ R is a 50 percent partner.The equipment has $10,000 of § 1245 recapture potential.R's predistribution outside basis is $46,000.The partnership liquidates by distributing the land to R and the inventory and equipment to her partner.R's recognized gain on the liquidation is

A)$0
B)$13,000 ordinary income
C)$24,000 capital gain
D)$11,000 capital gain
E)$13,000 ordinary income and $11,000 capital gain

Question 35

Partner R received a current distribution from the RST Partnership consisting of $20,000 cash, $6,000 of partnership zero basis accounts receivables, and a capital asset (FMV $7,000 and basis $1,500).The distribution did not change R's profit and loss sharing ratio.Immediately prior to the distribution, R's outside basis in his partnership interest was $25,000.After the distribution, what basis does R have in the receivables, the capital asset, and his partnership interest?

A)Receivables $0, capital asset $1,500, and interest $3,500
B)Receivables $0, capital asset $5,000, and interest $0
C)Receivables $2,500, capital asset $2,500, and interest $0
D)Receivables $6,000, capital asset $7,000, and interest $12,000
E)Receivables $0, capital asset $1,500, and interest $23,500

Question 36

Partnership records show: $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Inventory }&\$12,000 & \$28,000 \\\text { Land }&48,000 & 70,000\\\text { Equipment }&32,000&42,000\\\text { Total assets }&\$92,000&\$140,000\end{array}$ R is a 50 percent partner.The equipment has $10,000 of § 1245 recapture potential.R sells her entire interest in the partnership for $70,000.Her basis in the partnership is $50,000.R's $20,000 recognized gain on the sale is

A)All ordinary income
B)All capital gain
C)$8,000 of ordinary income and $12,000 of capital gain
D)$13,000 of ordinary income and $7,000 of capital gain
E)$24,000 of ordinary income and $4,000 of capital loss

Question 37

Summa Partnership distributed $10,000 cash and a capital asset (FMV $5,000 and basis $3,400) to partner D in complete liquidation of her interest in Summa.Immediately prior to the distribution, D's outside basis in her interest was $7,500.If Summa has a § 754 election in effect, which of the following statements is accurate?

A)Summa may increase the basis in its capital and § 1231 assets by $2,500.
B)Summa may increase the basis in its capital and § 1231 assets by $5,000.
C)Summa may increase the basis in its capital and § 1231 assets by $3,400.
D)Summa may increase the basis in its capital and § 1231 assets by $5,900.
E)The property distribution has no effect on the basis of Summa's assets.

Question 38

Mega Partnership distributed inventory (FMV $50,000 and basis $19,000) to partner Q in complete liquidation of her interest in Mega.Immediately prior to the distribution, Q's outside basis in her interest was $27,500.If Mega has a § 754 election in effect, which of the following statements is accurate?

A)Mega must recognize a $31,000 ordinary gain on the distribution of its inventory.
B)Mega may increase the basis in its remaining inventory by $31,000.
C)Mega must decrease the basis in its capital and § 1231 assets by $8,500.
D)Mega must decrease the basis in its remaining inventory by $8,500.
E)The property distribution has no effect on the basis of Mega's assets because the inventory retains its $19,000 basis in Q's hands.

Question 39

K owns 25 percent of a partnership.K's basis in the partnership was $12,000 before she received a current proportionate distribution of equipment with a basis of $14,000 and a liability against it of $6,000.By what total amount would the remaining partners need to reduce their bases?

A)$1,500
B)$2,500
C)$3,500
D)$4,500
E)$5,500

Question 40

Partnership records show: $\begin{array}{ll}&\text { Inside Basis }&FMV\\\text { Inventory }&\$12,000 & \$28,000 \\\text { Land }&48,000 & 70,000\\\text { Equipment }&32,000&42,000\\\text { Total assets }&\$92,000&\$140,000\end{array}$ R is a 50 percent partner.The equipment has $10,000 of § 1245 recapture potential.R and her partner each received a distribution from the partnership of a one-half interest in the land.If R's predistribution outside basis was $46,000, R's recognized gain is:

A)$0
B)$5,000 ordinary gain
C)$5,000 capital gain
D)$20,000 ordinary gain
E)$20,000 capital gain

Question 41

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.

Question 42

Individuals T, U, and V formed the calendar year Trio Partnership in 1981 as equal partners.On June 2, 2012, T died and his interest was inherited by his grandson G, whom U and V welcomed as a new equal partner in their business.On November 13, 2012, V sold his interest to individual B.On January 19, 2013, B sold this same interest to Corporation C.Which of the following statements is accurate?

A)The original Trio partnership is still in existence for federal tax purposes.
B)The original Trio partnership terminated for federal tax purposes on June 2, 2012 because T's death dissolved the partnership under state law.
C)The original Trio partnership terminated for federal tax purposes on November 13, 2012.
D)The original Trio partnership terminated for federal tax purposes on December 31, 2012.
E)The original Trio partnership terminated for federal tax purposes on January 19, 2013.

Question 43

M and E are equal partners in the ME Partnership.E decides to leave the partnership and receives a liquidating distribution of $15,000 cash and two items of inventory.Inventory R has a basis of $1,000 and a fair market value of $7,000 and inventory S has a basis of $2,000 and a fair market value of $5,000.E's adjusted basis for her partnership interest is $40,000.In addition to the cash and inventory, E also receives two parcels of land that are investments assets.Parcel A has a basis to the partnership of $12,000 and a fair market value of $16,000.Parcel B has a basis to the partnership of $20,000 and a fair market value of $18,000.What is E's basis in Parcel A and Parcel B? Assume that this distribution is proportionate.

A)Parcel A's basis is $8,800; Parcels B's basis is $13,200.
B)Parcel A's basis is $12,000; Parcels B's basis is $20,000.
C)Parcel A's basis is $12,000; Parcels B's basis is $18,000.
D)Parcel A's basis is $11,000; Parcels B's basis is $11,000.

Question 44

Individuals W, X, Y, and Z are all calendar year taxpayers.W and X both own a 15% interest and Y and Z both own a 35% interest in the Theta Partnership, which has a May 31 fiscal year end.On November 30, 2012, the Theta Partnership was dissolved into two new partnerships: W and X contributed their interests in Theta to become equal partners in WX Partnership, while Y and Z contributed their interests in Theta to become equal partners in YZ Partnership.As a result of this division:

A)All four Theta partners must include their shares of Theta's income from June 1, 2011 through November 30, 2012 in their 2012 taxable incomes.
B)All four Theta partners will include only their shares of Theta's income from June 1, 2011 through May 31, 2012 in their 2012 taxable incomes.
C)W and X must include their shares of Theta's income from June 1, 2011 through November 30, 2012 in their 2012 taxable incomes.Y and Z will include only their shares of Theta's income from June 1, 2011 through May 31, 2012 in their 2012 taxable incomes.
D)W and X must include their shares of Theta's income from June 1, 2011 through November 30, 2012 in their 2012 taxable incomes.Y and Z will not include any Theta income in their 2012 taxable incomes.
E)Both the WX and the YZ Partnerships must adopt a taxable year, subject to the restrictions of § 706(b).