Question 1

Operating distributions completely terminate a partner's interest in the partnership.

Accepted Answer

Operating distributions are typically regular distributions of profit and do not necessarily terminate a partner's interest in the partnership; they are meant to provide partners with their share of the earnings.

Question 2

In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain)when the partnership assets include cash and land held for five years as an investment.

Accepted Answer

In the sale of a partnership interest, the selling partner generally recognizes capital gain or loss, not ordinary income, for the portion of the sale related to the partnership's capital assets (like land held for investment). Ordinary income might be recognized if there are "hot assets" involved, such as inventory or receivables, but cash and land held for investment would typically lead to capital gain or loss.

Question 3

A partner that receives cash in an operating distribution recognizes loss if the cash distributed is less than the partner's outside basis in the partnership immediately before the distribution.

Accepted Answer

The partner would recognize gain if the cash distributed is greater than their outside basis and no loss if the cash distributed is equal to their outside basis.

Question 4

The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their partnership interests as capital.

Accepted Answer

The purpose of hot asset rules is to ensure that certain types of assets (such as inventory and unrealized receivables) are treated as ordinary income, rather than capital gains, when a partnership interest is sold, to prevent the conversion of ordinary income into capital gains.

Question 5

Barry has a basis in his partnership interest of $50,000 when the partnership distributes $60,000 in cash to Barry. As a result of the distribution, Barry reduces his basis in the partnership interest to $0, has a $60,000 basis in the cash received, and recognizes a gain of $10,000 on the distribution.

Accepted Answer

This is true according to the rules for partnership distributions and basis adjustments. Barry's basis in his partnership interest is reduced by the amount of the distribution, so it goes from $50,000 to $0. He then has a basis in the cash received (which is not part of the partnership interest) of $60,000. In order to calculate gain, we compare the amount of the distribution ($60,000) to Barry's remaining basis ($0), resulting in $60,000 of taxable gain.

Question 6

Under the entity concept, a partnership interest is an intangible asset similar to an ownership interest in a corporation. As such, a partnership interest is generally treated as a capital asset, the disposal of which results in capital gain or loss.

Accepted Answer

Partnership interest is generally treated as a capital asset, resulting in capital gain or loss upon disposal. This is in accordance with the entity concept which treats a partnership as a separate entity from its partners.

Question 7

A partner recognizes gain when she receives cash in excess of her outside basis in a liquidating distribution.

Accepted Answer

When a partner receives cash in excess of her outside basis in a liquidating distribution, she has recognized gain. This is because the cash received is greater than the partner's adjusted basis in the partnership interest being liquidated. The partner must recognize gain to the extent of the excess cash received.

Question 8

Catherine is a 30percent partner in the ACW Partnership, with an outside basis of $20,000. ACW distributes land with a basis of $12,000 and fair value of $18,000 to Catherine in complete liquidation of her interest. Catherine recognizes a capital loss of $2,000 on the distribution.

Accepted Answer

Catherine's outside basis of $20,000 exceeds her share of ACW's basis in the land of $12,000, so she would not recognize a capital loss on the distribution. Her basis in the land would be $12,000, equal to ACW's basis in the property.

Question 9

Cash distributions include decreases in a partner's share of partnership liabilities.

Accepted Answer

When a partner receives a cash distribution, their share of partnership liabilities may decrease as well, as the distribution is likely to be sourced from the partnership's assets, which may offset some of its liabilities.

Question 10

A partner's debt relief from the sale of a partnership interest will decrease his outside basis.

Accepted Answer

A partner's debt relief from the sale of a partnership interest is treated as money received in the sale, which can increase the amount realized on the sale but does not directly decrease the partner's outside basis. The outside basis is adjusted for the partner's share of partnership liabilities, but the relief of debt itself is part of the calculation of gain or loss on the sale, not a direct reduction of outside basis.

Question 11

A partner that receives cash in an operating distribution recognizes gain if the cash distributed exceeds the partner's outside basis in the partnership immediately before the distribution.

Accepted Answer

This is known as the "gain recognition" rule and is outlined in IRS tax code section 731. If a partner receives cash in excess of their outside basis, they recognize gain as if they sold a portion of their partnership interest.

Question 12

If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income (loss).

Accepted Answer

This is correct. When a partnership interest is sold, any gain or loss on the sale is allocated amongst the partner's capital account and any hot assets. Hot assets refer to Section 751 property, which includes ordinary income property such as inventory or accounts receivable. The selling partner must allocate a portion of the sale proceeds to these hot assets and recognize ordinary income (loss) accordingly.

Question 13

In an operating distribution, when a partnership distributes property other than money with a basis that exceeds the partner's outside basis, the partner assigns a carryover basis to the distributed asset and recognizes a gain.

Accepted Answer

In an operating distribution, when a partnership distributes property other than money and the property's basis exceeds the partner's outside basis, the partner does not recognize a gain at the time of distribution. Instead, the partner takes a basis in the distributed property equal to their outside basis in the partnership before the distribution, which may require a reduction in the basis of the distributed property, not a carryover basis that exceeds the partner's outside basis.

Question 14

A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets.

Accepted Answer

In a liquidating distribution, a partner will recognize a loss only if the entire distribution consists of cash, unrealized receivables, or inventory, and the partner's outside basis is greater than the cash and the fair market value of the property received. If the outside basis is less than the sum of the bases of the distributed assets, it does not automatically result in a recognized loss.

Question 15

Federico is a 30percent partner in the FRM Partnership when he sells his entire interest to Maria for $98,000. At the time of the sale, Federico's basis in FRM is $74,000. FRM does not have any debt. In addition, FRM's assets include accounts receivable with zero tax basis and $21,000 fair market value at the date of the sale. The remaining assets of the partnership are capital and §1231 assets. Federico will recognize ordinary income of $24,000 on the sale of his partnership interest.

Accepted Answer

Federico will recognize a gain of $24,000 ($98,000 sale price - $74,000 basis), but this gain is generally considered capital gain, not ordinary income. The presence of accounts receivable with zero tax basis and $21,000 fair market value does not change the character of the gain on the sale of his partnership interest because these receivables would be considered hot assets only if Federico were selling his interest in an inventory-heavy business, such as a retail or manufacturing partnership, and even then, only the portion of the gain attributable to the receivables would be treated as ordinary income. Since the question does not specify that the partnership's primary business involves such inventory or that the gain is specifically attributable to the receivables, the default assumption is that the gain is capital in nature.

Question 16

Jaime has a basis in her partnership interest of $50,000 when the partnership distributes (in an operating distribution)two parcels of land to Jaime, each valued at $30,000. Prior to the distribution, the partnership's basis in parcel A is $40,000 and the basis in parcel B is $20,000. Jaime allocates $20,000 of basis to parcel A and $30,000 of basis to parcel B.

Accepted Answer

In a non-liquidating distribution of property by a partnership, the partner's basis in the distributed property is the same as the partnership's basis in the property immediately before the distribution, but not exceeding the partner's outside basis in the partnership interest. Therefore, Jaime should allocate $40,000 of basis to parcel A (the partnership's basis) and $10,000 to parcel B (to not exceed her outside basis of $50,000 in the partnership).

Question 17

A partnership making an operating distribution will recognize gain or loss only when the partner that receives the distribution recognizes gain or loss.

Accepted Answer

A partnership itself does not recognize gain or loss on the distribution of property to a partner. Gain or loss is recognized by the partner receiving the distribution, depending on the circumstances of the distribution and the basis of the property received compared to the partner's basis in the partnership.

Question 18

Ted is a 30percent partner in the TDW Partnership, with an outside basis of $20,000. TDW distributes $15,000 of cash in complete liquidation of Ted's interest. Ted recognizes a capital loss of $5,000 on the distribution.

Accepted Answer

Ted's capital loss is calculated by subtracting the cash distribution ($15,000) from his outside basis in the partnership ($20,000), resulting in a $5,000 capital loss.

Question 19

When determining a partner's gain onthe sale of partnership interest, the selling partner must include her share of partnership debtrelief in the amount realized.

Accepted Answer

According to the IRS, the selling partner must include their share of partnership debt relief in the amount realized for determining their gain on the sale of partnership interest. This is because the relief of partnership debt reduces the selling partner's basis in the partnership, which affects the amount of gain realized on the sale.

Question 20

Hot assets include assets other than cash, capital assets, and §1231 assets.

Accepted Answer

Hot assets can include inventory, accounts receivable, and other assets that generate ordinary income or short-term gains when sold or exchanged.

Quiz 21: Dispositions of Partnership Interests and Partnership Distributions