Question 1

A § 754 election is made for a tax year in which the partner recognizes gain or loss on a distribution from the partnership or the basis in distributed property is increased or decreased from the inside basis the partnership held in those assets.The election is made by a partner any time it is necessary to adjust his or her share of the inside basis of partnership assets.

Accepted Answer

The partnership,not the partner,makes a basis adjustment election under § 754.Once made,the election remains in effect until it is revoked.

Question 2

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,value of $30,000),and land parcel B (basis of $5,000,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 takes a total substituted basis in the land parcels of $60,000 (basis in interest of $85,000 less $25,000 cash distribution).That basis must be allocated between the two properties.First,the properties take a carryover basis of $5,000 each.Next,the remaining basis is allocated to each property,up to its fair market value,resulting in basis allocations of $30,000 and $15,000,respectively.Last,the remaining $15,000 of basis is allocated between the properties according to their respective fair market values (bases after the second allocations): 2/3 of the $15,000 is added to the $30,000 basis of the first parcel and 1/3 is added to the $15,000 basis of the second parcel.Final basis allocations are $40,000 and $20,000,respectively.

Question 3

A payment to a retiring partner for his or her share of goodwill of a partnership in which capital is a material income-producing factor is classified as a § 736(a)income payment and results in ordinary income to the retiring partner and a current deduction to the partnership.

Accepted Answer

Goodwill is a § 736(a)income payment only if the payment is to a retiring general partner,the partnership is an entity in which capital is not a material income-producing factor,and the goodwill is not provided for in the partnership agreement.

Question 4

Matt,a partner in the MB Partnership,receives a proportionate,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 take a $10,000 basis in the property,and his basis in the partnership interest is reduced to zero.

Accepted Answer

Section 732(a)(2)limits the basis of distributed property to the basis of the partner's interest before the distribution,reduced by any cash distributed in the transaction,or $10,000.

Question 5

Jason sold his 40% interest in the HIJ Partnership to Kim for $280,000.The inside basis of all partnership assets was $600,000 at the time of the sale.If the partnership makes a § 754 election,it will record a $40,000 step-up in the basis of the partnership assets,and the step-up will be attributed solely to Kim.

Accepted Answer

The step-up related to the sale of the partnership interest is calculated as the difference between Kim's purchase price for the partnership interest ($280,000)and her 40% share of the inside basis of partnership assets.The step-up is $40,000 ($280,000 - $240,000)and is allowed solely to Kim.

Question 6

Generally,gain is recognized on a proportionate current or liquidating distribution only if the cash distributed exceeds the partner's basis in the partnership interest.For this purpose,relief of a partner's share of a liability is treated as a distribution of cash,and marketable securities distributed may be treated as cash.

Accepted Answer

Either a distribution of cash or relief of debt will trigger gain to the distributee partner if the distribution exceeds the partner's basis in interest.If other property is distributed,and the partnership's inside basis in the assets exceeds the partner's outside basis,the partner generally takes a substituted basis in the property.

Question 7

Tim and Janet are equal partners in the TJ Partnership.Partnership income for the year is $20,000.Tim needs cash in order to pay tax on his share of the partnership income,but Janet wants to leave the cash in the partnership for expansion.If the partners agree,it is acceptable to distribute $5,000 to Tim,and no cash or other property to Janet.

Accepted Answer

Disproportionate distributions are permitted.To ensure equity to all partners,though,capital accounts must be maintained in accordance with §§ 704(b)and (c).In addition,the distribution cannot be a disguised sale.

Question 8

Tim receives a proportionate nonliquidating distribution from the RST Partnership when the basis of his interest is $60,000.The distribution consists of cash of $40,000 and inventory with a partnership basis of $30,000 and fair market value of $35,000.As a result of this distribution,Tim recognizes a $10,000 gain and takes a $30,000 basis in the inventory.

Accepted Answer

Tim recognizes no gain or loss on the distribution.His basis in the inventory is limited to the $20,000 basis remaining after taking into account the $40,000 cash distribution.In a proportionate nonliquidating distribution,gain is recognized to the extent the distributed cash exceeds the partner's basis in the partnership interest.The basis in noncash property is the lesser of the partnership's inside basis in the property or the partner's outside basis before the distribution.

Question 9

Rex and Scott operate a law practice in partnership form.Since Rex and Scott are brothers,the partnership is subject to the family partnership income reallocation rules.

Accepted Answer

For purposes of § 704(e),a family does not include brothers or sisters.Furthermore,even if Rex and Scott were parent and child,the family partnership provisions still would not apply because the business consists principally of fees for personal services.§ 704(e)(3)

Question 10

The Crimson Partnership is a service provider.Its assets consist of unrealized receivables (basis $0,value $200,000),cash of $200,000,and land (basis of $280,000,value of $400,000).Assume 25% general partner Jill has a basis in her partnership interest of $130,000.If the ongoing partnership distributes the $200,000 cash to Jill in liquidation of her interest in the partnership,she will recognize ordinary income of $50,000 and a capital gain of $20,000.

Accepted Answer

Section 736 applies to this transaction.Since capital is not a material income-producing factor in the partnership and since Jill is a general partner,the cash payment for her $50,000 share of the unrealized receivables is classified as a guaranteed payment under § 736(a),and Jill will recognize $50,000 of ordinary income.The rest of the payment will be a § 736(b)payment,and Jill will recognize $20,000 ($150,000 - $130,000)of capital gain.

Question 11

A partnership has accounts receivable with a basis of $0 and a fair market value of $10,000 and depreciation recapture potential of $15,000.All other assets of the partnership are either cash,capital assets,or § 1231 assets.If a purchaser acquires a 30% interest in the partnership from another partner,the selling partner will be required to recognize ordinary income of $7,500.

Accepted Answer

The selling partner must recognize ordinary income to the extent of gain inherent in the partner's share of unrealized receivables.The seller's 30% share of receivables and recapture is $7,500 [($10,000 + $15,000)F1F1F1S1F1F1F10 30%].The partnership has no basis in these items,so ordinary income must be recognized for the entire $7,500.

Question 12

Terry received a proportionate share of partnership inventory in complete liquidation of her partnership interest.If Terry holds the distributed property as a capital asset for six years and sells it for a gain,the gain is taxed as a long-term capital gain.

Accepted Answer

Under § 735(a)(2),the sale or exchange of inventory items results in ordinary income or loss if the partner sells or exchanges such items within five years of the distribution date.After five years,the character is determined based on the partner's use of the property.

Question 13

The MBC Partnership makes a § 736(b)cash payment of $50,000 to partner Betty in liquidation of her interest in the partnership.The partnership owns no hot assets.Betty's basis in her partnership interest before the distribution was $20,000.If the partnership has a § 754 election in effect,it will record a $30,000 decrease in its inside basis in partnership assets,allocable to the remaining partners in the partnership.

Accepted Answer

A distribution in which the partner reports a gain results in a step-up in partnership asset basis under § 754.As Betty receives a distribution of $50,000 cash against a basis of $20,000,she must report a $30,000 gain.A step-up resulting from a distribution to a partner is allocated to the remaining assets in the partnership and benefits the remaining partners.

Question 14

Sarah owns a 30% interest in the capital and profits of the STP Partnership.Immediately before she receives a proportionate nonliquidating distribution from STP,the basis of her partnership interest is $25,000.The distribution consists of $20,000 in cash and land with a fair market value of $40,000.STP's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution,Sarah recognizes a gain of $35,000 and her basis in the land is $40,000.

Accepted Answer

Under § 731(a)gain is recognized by a distributee partner in a nonliquidating distribution only if the cash received (including marketable securities or liability relief treated as cash)exceeds the basis of the partner's interest.Since Sarah received cash of only $20,000,no gain results.Sarah's basis in the land is limited to $5,000,and her interest basis is reduced to zero.

Question 15

Susan is a one-fourth limited partner in the SJ Partnership in which capital is not a material income-producing factor.Partnership assets consist of land (value of $100,000,basis of $80,000),accounts receivable (value of $100,000,basis of $0)and cash of $200,000.SJ distributes $100,000 of the cash to Susan in liquidation of her interest.Susan's basis in the partnership interest was $70,000 immediately before the distribution.Susan recognizes $25,000 of ordinary income,and a $5,000 capital gain on the distribution,and the partnership cannot claim a deduction for the $25,000 Susan recognizes as ordinary income.

Accepted Answer

Because Susan is a limited partner,SJ's $25,000 payment for her share of unrealized receivables is treated as a § 736(b)payment.As such,Susan recognizes ordinary income,but the partnership cannot claim a deduction.The remaining $75,000 payment exceeds Susan's $70,000 basis in the partnership interest by $5,000; therefore,Susan recognizes a $5,000 capital gain on disposition of the interest.

Question 16

Milton contributed property to the MDB Partnership in 2006.At the time of the contribution,the basis in the property was $10,000 and its value was $15,000.In 2008,MDB distributed that property to partner Dana.Milton may be required to recognize gain on the distribution to Dana.

Accepted Answer

A distribution of precontribution gain property results in gain to the contributing partner under § 704(c)(1)(B)if it is distributed to a partner other than the contributing partner within seven years of the contribution and any precontribution gain remains to be recognized.

Question 17

Larry's partnership interest basis is $60,000.Larry receives a proportionate,liquidating distribution from a liquidating partnership of $45,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $28,000.Larry assigns a basis of $15,000 to the inventory and recognizes no gain or loss.

Accepted Answer

Larry's basis is reduced to $15,000 by the cash distribution.Since $15,000 is less than the partnership's $30,000 basis in the inventory,the inventory takes a substituted basis of $15,000,and Larry recognizes no gain or loss.

Question 18

Maggie,a partner in the Magpie partnership,received a proportionate nonliquidating distribution of $20,000 cash,unrealized receivables with a basis of $0 and a fair market value of $30,000,and land with a basis of $25,000 and a fair market value of $20,000.Her basis in the partnership interest immediately before the distributions was $30,000.She will recognize $0 gain on the distribution,and her basis in the receivables and land will be $0 and $20,000 respectively.

Accepted Answer

Maggie will take a carryover basis of $20,000 and $0,respectively,for the cash and unrealized receivables.The distribution of these assets will reduce her outside basis for her partnership interest to $10,000 ($30,000 - $10,000 - $0).She will take a $10,000 substituted basis for the land.

Question 19

Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000.His basis in his partnership interest was $15,000 immediately before the distribution.Carlos assigns a basis of $5,000 to the inventory,and recognizes a $2,000 capital loss.

Accepted Answer

The cash distribution reduces Carlos's outside basis in his partnership interest to $7,000 ($15,000 - $8,000).He will take a $5,000 substituted basis for the inventory and recognize a $2,000 capital loss.

Question 20

The LMO Partnership distributed $30,000 cash to Laura in a proportionate,nonliquidating distribution.Laura's basis in her partnership interest was $25,000 immediately before the distribution.As a result of the distribution,Laura's basis is reduced to ($5,000)(negative)and she recognizes no gain or loss.

Accepted Answer

A distribution of cash reduces the partner's basis.Gain is recognized if the distribution exceeds the partner's basis.The partner's basis cannot be negative.

Quiz 11: Partnerships: Distributions, transfer of Interests, and Terminations

A payment to a retiring partner for his or her share of goodwill of a partnership in which capital is a material income-producing factor is classified as a § 736(a)income payment and results in ordinary income to the retiring partner and a current deduction to the partnership.

Rex and Scott operate a law practice in partnership form.Since Rex and Scott are brothers,the partnership is subject to the family partnership income reallocation rules.

Terry received a proportionate share of partnership inventory in complete liquidation of her partnership interest.If Terry holds the distributed property as a capital asset for six years and sells it for a gain,the gain is taxed as a long-term capital gain.

Milton contributed property to the MDB Partnership in 2006.At the time of the contribution,the basis in the property was $10,000 and its value was $15,000.In 2008,MDB distributed that property to partner Dana.Milton may be required to recognize gain on the distribution to Dana.