Question 1

Lori, a partner in the JKL partnership, received a proportionate current (nonliquidating) distribution of $10,000 cash, unrealized receivables with a basis of $0 and a fair market value of $15,000, and land with a basis of $6,000 and a fair market value of $10,000. Her basis in the partnership interest immediately before the distributions was $14,000. She will recognize $0 gain on the distribution, and her basis in the receivables and land will be $0 and $4,000, respectively.

Accepted Answer

Lori's basis in the partnership interest is greater than the total fair market value of the distribution, so she will not recognize any gain. Her basis in the receivables and land will be equal to their fair market values, minus any portion of the distribution allocated to cash. Therefore, her basis in the land will be $4,000.

Question 2

Scott owns a 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate current (nonliquidating) distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognizes no gain or loss and his basis in the land is $10,000.

Accepted Answer

The answer of Scott owns a 30% interest in the...

Question 3

Carl's basis in his LLC interest is $10,000. In a current (nonliquidating) distribution, Carl receives land (basis = $10,000? fair market value = $12,000)? and inventory (basis = $6,000? fair market value = $8,000). Carl takes a $10,000 basis in the land and a $0 basis in the inventory, and has a $0 basis in the LLC interest.

Accepted Answer

Carl's basis in the land would indeed be $10,000, as the basis of distributed property to a partner is the partnership's basis in the property. However, Carl would not have a $0 basis in the inventory. Instead, Carl would allocate the remaining $6,000 of his original $16,000 basis in the LLC interest (after allocating $10,000 to the land) to the inventory, giving the inventory a basis of $6,000. Carl's basis in the LLC interest would be reduced to $0 after the distribution.

Question 4

Randi owns a 40% interest in the capital and profits of the RAY Partnership. Immediately before she receives a proportionate current (nonliquidating) distribution from RAY, the basis for her partnership interest is $60,000. The distribution consists of $45,000 in cash and land with a fair market value of $72,000. RAY's adjusted basis in the land immediately before the distribution is $36,000. As a result of the distribution, Randi recognizes a gain of $57,000.

Accepted Answer

The gain recognized by Randi is calculated as follows:
Distribution received: $45,000 cash + $72,000 land = $117,000
Randi's share of the distribution: 40% x $117,000 = $46,800
Her basis in the partnership interest before the distribution was $60,000, so the amount of gain recognized is: $46,800 - $60,000 = -$13,200, which is a loss, not a gain. Therefore, the statement is false.

Question 5

Matt, a partner in the MB Partnership, receives a proportionate, current (nonliquidating) distribution of property having a fair market value of $16,000 and a partnership basis of $23,000. Matt's basis in the partnership is $10,000 before the distribution. In this situation, Matt will recognize no gain or loss. He takes a $10,000 basis in the property, and his basis in the partnership interest is reduced to zero.

Accepted Answer

Matt's basis in the distributed property is equal to his basis in the partnership interest immediately before the distribution. Since his basis in the property is $10,000 and its fair market value is $16,000, he does not recognize any gain or loss. His basis in the partnership interest is reduced to zero because the distribution exceeded his basis in the partnership interest.

Question 6

The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated: $25,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $5,000, fair market value of $15,000). James's basis in his partnership interest was $85,000 immediately before the distribution. James will allocate bases of $40,000 to parcel A and $20,000 to parcel B, and he will have no remaining basis in his partnership interest.

Accepted Answer

James received a total of $70,000 ($25,000 cash + $30,000 fair market value of parcel A + $15,000 fair market value of parcel B). His new basis in the distributed assets will be $60,000 ($40,000 allocated to parcel A + $20,000 allocated to parcel B). Since his basis in his partnership interest was $85,000 and he received $60,000 in distributed assets, he will have no remaining basis in his partnership interest after the liquidating distribution.

Question 7

A gain will only arise on a distribution from a partnership of cash that exceeds the partner's basis in the partnership interest. For this purpose, only cash, checks, and credit card charges are treated as cash.

Accepted Answer

In the context of partnership distributions, "cash" includes not only physical currency but also checks and credit card charges. However, the statement is false because a gain can arise from distributions of property other than cash if the distribution exceeds the partner's basis in the partnership interest.

Question 8

In a liquidating distribution that liquidates the partnership, each partner recognizes gain or loss equal to the difference between the value of assets received less the partner's basis in the partnership interest.

Accepted Answer

The answer of In a liquidating distribution that liquidates the...

Question 9

Tim and Darby are equal partners in the TD Partnership. Partnership income for the year is $60,000. Tim needs cash in order to pay tax on his share of the partnership income, but Darby wants to leave the cash in the partnership for expansion. If the partners agree, it is acceptable for TD to distribute $8,000 to Tim, and no cash or other property to Darby.

Accepted Answer

Since Tim needs cash to pay his taxes, it is acceptable for the partnership to distribute $8,000 to him, even if Darby wants to leave the cash in the partnership. As equal partners, they have the right to agree on this distribution.

Question 10

Zach's partnership interest basis is $100,000. Zach receives a proportionate, liquidating distribution from a liquidating partnership of $50,000 cash and inventory having a basis of $20,000 to the partnership and a fair market value of $30,000. Zach assigns a basis of $20,000 to the inventory and recognizes a $30,000 loss.

Accepted Answer

The answer of Zach's partnership interest basis is $100,000. Zach...

Question 11

Marcie is a 40% member of the M&A LLC. Her basis is $10,000 immediately before the LLC distributes to her $30,000 of cash and land (basis to the LLC of $20,000 and fair market value of $25,000). As a result of the proportionate, current (nonliquidating) distribution, Marcie recognizes a gain of $20,000 and her basis in the land is $0.

Accepted Answer

The calculation is correct. Marcie's total distribution is worth $30,000, but since her 40% ownership stake is only worth $12,000, she must recognize a gain of $20,000. Her new basis in the land is $0 because she recognized the full gain on the distribution.

Question 12

In a proportionate current (nonliquidating) distribution, cash is deemed to be distributed first, followed by capital and § 1231 assets, and last, unrealized receivables and inventory.

Accepted Answer

In a proportionate current (nonliquidating) distribution, the distribution is deemed to consist of a pro rata share of each asset in the partnership, not in a specific order like cash, capital, §1231 assets, unrealized receivables, and inventory.

Question 13

In a proportionate current (nonliquidating) distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Accepted Answer

In a proportionate nonliquidating distribution, a partner generally does not recognize gain unless the cash received exceeds the partner's basis in the partnership interest. The distribution of property (other than cash) does not by itself trigger gain recognition.

Question 14

In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable (basis of $0, fair market value of $10,000), and land (basis of $30,000, fair market value of $50,000). William's basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.

Accepted Answer

The answer of In a proportionate liquidating distribution, WYX Partnership...

Question 15

Generally, no gain is recognized on a proportionate liquidating or current (nonliquidating) distribution of non-cash property even if the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Accepted Answer

This statement is true according to the Internal Revenue Code Section 731(a)(1). When a partner receives a proportionate distribution of non-cash property, they generally do not recognize any gain even if the fair market value of the property exceeds their basis in the partnership interest. However, if the partnership distributes appreciated property and the partner's share of the property's built-in gain is greater than their basis in the partnership interest, then gain may be recognized.

Question 16

The ELF Partnership distributed $20,000 cash to Emma in a proportionate, current (nonliquidating) distribution.
Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain.

Accepted Answer

The distribution of $20,000 represents a return of capital to Emma, which is nontaxable to the extent of her basis. Since her basis was only $12,000, she can receive $12,000 tax-free but the remaining $8,000 would be treated as a gain and recognized for tax purposes. Therefore, her basis is reduced to $0 and she recognizes an $8,000 gain.

Question 17

Loss cannot be recognized on a current (nonliquidating) distribution from a partnership unless cash, unrealized receivables, and/or § 1231 assets are the only items distributed.

Accepted Answer

Loss can be recognized on a current (nonliquidating) distribution from a partnership even if cash, unrealized receivables, and/or § 1231 assets are the only items distributed. This is because the distribution may result in the partner receiving a proportionate share of partnership liabilities, which can reduce their outside basis and trigger a loss.

Question 18

The BAM Partnership distributed the following assets to partner Barbie in a proportionate nonliquidating distribution:
$10,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $25,000, fair market value of $30,000). Barbie's basis in her partnership interest was $40,000 immediately before the distribution. Barbie will allocate a basis of $15,000 each to the two land parcels, and her basis in her partnership interest will be reduced to $0.

Accepted Answer

In a proportionate nonliquidating distribution, Barbie's basis in her partnership interest is first reduced by the cash received, then the remaining basis is allocated to the land parcels based on their adjusted basis, not fair market value.

Question 19

Generally, a distribution of property does not result in gain to a partner on either a current or liquidating distribution. A situation where a gain may arise, however, is when a partner contributed appreciated property to the partnership and that property is distributed back to the contributing partner within seven years of the contribution.

Accepted Answer

The answer of Generally, a distribution of property does not...

Question 20

In a proportionate liquidating distribution, RST Partnership distributes to partner Riley cash of $30,000, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $65,000, fair market value of $50,000). Riley's basis was $40,000 before the distribution. On the liquidation, Riley recognizes a gain of $0, and her basis is $10,000 in the land and $0 in the accounts receivable.

Accepted Answer

Riley's basis in the accounts receivable and land will be equal to their fair market value at the time of distribution, since they received a proportionate share. The gain recognized on the distribution is $0 because the fair market value of the assets received equals or is less than their adjusted basis. Riley's new basis in the assets is their fair market value.

Quiz 21: Partnerships