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.

Accepted Answer

False

Question 2

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

Accepted Answer

When a partner passes away, it results in the closure of the partnership taxable year for that partner. This is because the partner's share of the profits or losses will need to be calculated up until the date of their death, and their estate will be responsible for any tax liabilities.

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.

Accepted Answer

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.

Accepted Answer

The partner does not recognize gain on the receipt of property as a guaranteed payment for services or for the use of capital. The gain or loss recognition rules apply when the partner subsequently disposes of the property.

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.

Accepted Answer

In a liquidating distribution, it is the recipient partner who must adjust their basis in the partnership interest for any gain or loss recognized as a result of the distribution, not the partnership adjusting its assets' basis.

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.

Accepted Answer

The gain will generally be treated as capital gain, unless the property distributed was inventory in the hands of the partnership, in which case it may be treated as ordinary income.

Question 7

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

Accepted Answer

This statement is true. The distribution does not result in a recognized loss for the partner receiving it.

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.

Accepted Answer

This is in accordance with the rules of Section 751 of the Internal Revenue Code.

Question 9

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

Accepted Answer

A partnership generally does not recognize gain or loss on the distribution of property to a partner, even if the fair market value (FMV) of the asset exceeds its inside basis.

Question 10

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

Accepted Answer

According to IRS rules, when a partner receives a proportionate liquidating distribution of noncash partnership assets, there cannot be any recognized gain. However, the partner may recognize a loss if the fair market value of the assets received is less than their adjusted basis in the partnership interest.

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.

Accepted Answer

The purchaser of a partnership interest takes an outside basis in the interest equal to the amount paid for the interest, including any of the purchaser's share of partnership liabilities assumed. The inside basis of the partnership assets and the apportionment of partnership debt affect the partnership's and other partners' basis calculations, but the purchaser's initial outside basis is determined by the purchase price.

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.

Accepted Answer

When there is no § 754 election made, the basis of the partnership assets is adjusted to fair market value, which increases the new partner's outside basis. However, the inside basis remains the same for the existing partners. This leads to a disparity between the inside and outside basis for the new partner, resulting in the entity concept applying and the outside basis exceeding the inside basis.

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.

Accepted Answer

The tax effects can differ based on whether a partner sells their interest to another partner, the partnership itself, or an outside party. The nature of the sale can affect the character of the gain or loss recognized (capital vs. ordinary), how payments are taxed, and the treatment of the partner's share of partnership liabilities.

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:

Accepted Answer

In this scenario, Partner Z must recognize no gain or loss and reduce their outside basis to $200. This is because the distribution is a non-liquidating distribution, and the partner's basis in the partnership interest must be decreased by the money received ($3,000) and the partnership's basis in the distributed inventory ($7,800), totaling a reduction of $10,800. Starting with an outside basis of $11,000, after reducing it by $10,800, the new outside basis is $200.

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.

Accepted Answer

The exchange of partnership interests does not qualify for like-kind exchange treatment under Section 1031 of the Internal Revenue Code. Like-kind exchanges generally apply to real property and not to partnership interests.

Question 16

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

Accepted Answer

Current cash distributions from partnerships are generally nontaxable unless they exceed the partner's basis in the partnership. If distributions exceed the partner's basis, the excess is treated as a capital gain, which is taxable.

Question 17

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

Accepted Answer

When a partnership interest is sold, the seller may recognize ordinary gain, which is taxed at the individual's ordinary income tax rate. However, if the sale results in a loss, the seller's loss is treated as a capital loss, not an ordinary loss.

Question 18

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

Accepted Answer

A partnership's dissolution under state law does not necessarily mean it is terminated for federal tax purposes. For federal tax purposes, a partnership is considered terminated when all its operations are wound up and its affairs are fully concluded, or if there is a sale or exchange of 50% or more of the total interest in partnership capital and profits within a 12-month period.

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.

Accepted Answer

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 the distributed asset is first reduced to zero, and any remaining basis in the partnership interest is allocated among the other distributed assets, but not based on their relative fair market values. Instead, the allocation is based on the partnership's basis in those assets.

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.

Accepted Answer

Section 751 assets do include amounts due from the performance of services that have not previously been reported as income and recapture of depreciation, among other things.

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