Question 1

Patrick purchases a one-third interest in the PPP partnership for $600,000.The partnership has assets with a value of $1,500,000.PPP has a 754 election in effect.What is the amount of the basis adjustment?

Accepted Answer

When a partner purchases an interest in a partnership, the basis of the partner's share of the partnership's assets is adjusted based on the purchase price. Since Patrick purchases a one-third interest in the partnership for $600,000, his share of the partnership assets is $1,800,000 ($600,000 / 0.33). However, the partnership's assets are only valued at $1,500,000, so there is a $300,000 built-in gain. Because the partnership has a 754 election in effect, Patrick's basis in his share of the partnership assets is increased by his share of the built-in gain, which is $100,000 (one-third of $300,000). Therefore, the correct answer is choice D - a $100,000 increase in Patrick's share of the basis in the partnership assets.

Question 2

The STU Partnership,an electing Large Partnership,has no passive activities and reports the following transactions for the year: net long-term capital losses $50,000,Sec.1231 gain $60,000,ordinary income $20,000,charitable contributions $15,000,and tax-exempt income $2,000.How much will be reported as ordinary income to its partners?

Accepted Answer

The answer of The STU Partnership,an electing Large Partnership,has no...

Question 3

Identify which of the following statements is true.

Accepted Answer

A limited liability company (LLC) is a hybrid business entity that combines the legal protection of a corporation with the tax benefits of a partnership. Option A is false because dividing a partnership into new partnerships results in the creation of multiple new partnerships, not necessarily all new. Option B is false because a partnership can be publicly traded by registering with the Securities and Exchange Commission (SEC) and following certain rules, even if its interests are not traded on an established exchange.

Question 4

When must a partnership make mandatory basis adjustments?

Accepted Answer

Mandatory basis adjustments are required when there is a substantial built-in loss in the partnership assets. This occurs when the partnership's adjusted basis in its assets exceeds their fair market value by $250,000 or more. Therefore, choice D is the correct answer.

Question 5

The Tandy Partnership owns the following assets on December 31:
  Is the partnership's inventory considered to be substantially appreciated for purposes of Sec.751? Show your work.

Accepted Answer

The answer of The Tandy Partnership owns the following assets...

Question 6

Han purchases a 25% interest in the CHOP Partnership from Huang for $600,000.The partnership has assets with a basis of $1,600,000.What is the amount of the basis adjustment,if the partnership has a 754 election in place?

Accepted Answer

With a 754 election in place, the basis of partnership assets is adjusted to reflect the purchase price of an interest in the partnership. Han's purchase of a 25% interest for $600,000 represents a contribution of additional capital to the partnership. Therefore, Han's share of the basis in partnership assets would increase by $200,000 (25% of the $800,000 difference between the purchase price and the existing basis of $1,600,000).

Question 7

Two years ago,Tom contributed investment land with a basis of $50,000 and FMV of $62,000 to the RST Partnership.This year,Tom has a basis in his partnership interest of $53,000 when he receives a current distribution of $14,000 cash and inventory with a basis of $35,000 and FMV of $52,000.(There is no Sec.751 exchange in connection with the inventory distribution.)The partnership continues to hold the land Tom contributed.How much gain (if any)must Tom recognize as a result of this distribution?

Accepted Answer

The answer of Two years ago,Tom contributed investment land with...

Question 8

The TK Partnership has two assets: $20,000 cash and a machine having a $28,000 basis and a $40,000 FMV.The partnership has claimed $16,000 in depreciation on the machine since its purchase.If the machine is sold for its FMV,would TK Partnership have an unrealized receivable item?

Accepted Answer

The answer of The TK Partnership has two assets: $20,000...

Question 9

Patrick purchased a one-third interest in the PPP partnership for $600,000.At the time of the purchase,the partnership had a 754 election in effect and its only asset was land with a basis of $1,500,000.This year,PPP sells the land for $1,800,000.What is Patrick's recognized share of the gain on the sale of the land?

Accepted Answer

The answer of Patrick purchased a one-third interest in the...

Question 10

Jerry has a $50,000 basis for his interest in JJ Partnership before receiving a current distribution consisting of $8,000 in money,accounts receivable having a zero basis to the partnership,and land having a $28,000 basis to the partnership.What is Jerry's basis in his partnership interest after the distribution?

Accepted Answer

The answer of Jerry has a $50,000 basis for his...

Question 11

On November 30,Teri received a current distribution of cash of $4,000,marketable securities with a basis of $24,000 and an FMV of $30,000,and inventory with a basis of $2,000 and an FMV of $6,000.Prior to the distribution,Teri's basis in her interest in the partnership was $30,000.(There is no Sec.751 exchange as a result of the distribution.)How much gain (if any)must Teri recognize as a result of the distribution?

Accepted Answer

The answer of On November 30,Teri received a current distribution...

Question 12

The CHS Partnership's balance sheet presented below is prepared on a cash basis at September 30 of the current year.
   Cindy withdraws from the partnership under an agreement whereby she takes one-third of each of the three assets and assumes $10,000 of the notes payable.Her basis for the partnership interest before any distribution is $25,000.What gain/loss should she report for tax purposes?

Accepted Answer

The answer of The CHS Partnership's balance sheet presented below...

Question 13

Last year,Cara contributed investment land with an FMV of $24,000 and basis of $18,000 to the CDE Partnership.CDE made no distributions during last year,and Cara's basis in her partnership interest on December 31 of last year was $28,000.On January 1 of this year,the partnership distributed cash of $30,000 to Cara and distributed the land contributed by Cara to another partner,David.On the distribution date,the land had a $27,000 FMV.Assume the CDE Partnership reported no profit or loss this year.How much gain (if any)must Cara recognize as a result of the distributions? What is her basis in the partnership after the distributions?

Accepted Answer

The answer of Last year,Cara contributed investment land with an...

Question 14

The AB,BC,and CD Partnerships merge into the ABCD Partnership.AB (owned by Austin and Ben)contributes assets worth $100,000.BC (owned by Ben and Charlie)contributes assets worth $200,000.CD (owned by Charlie and Dennis)contributes assets worth $300,000.The capital and profits interest in ABCD is owned by: Austin,10%; Ben,30%; Charlie,25%; and Dennis,35%.ABCD Partnership is a continuation of

Accepted Answer

The ABCD Partnership is a continuation of the CD partnership, which contributed the largest amount of assets. Therefore, D is the best choice. AB and BC partnerships are not the correct choices because they did not contribute the majority of assets and would not have the controlling interest in the new partnership. Option A is not correct because one of the partnerships did continue into the new partnership.

Question 15

Adnan had an adjusted basis of $11,000 for his interest in the Adnan and Donnell Partnership on December 31.On this date,Adnan received from the partnership,in complete liquidation of his interest,$10,000 cash and land with a $2,000 basis to the partnership and a $3,000 FMV.What is Adnan's basis for the land distributed to him?

Accepted Answer

The answer of Adnan had an adjusted basis of $11,000...

Question 16

The STU Partnership,an electing Large Partnership,has no passive activities and reports the following transactions for the year: net long-term capital losses $50,000,Sec.1231 gain $60,000,ordinary income $20,000,charitable contributions $15,000,and tax-exempt income $2,000.How much will be reported as long-term capital gains to its partners?

Accepted Answer

Since the STU Partnership has no passive activities, the net long-term capital losses of $50,000 will be deducted from the Sec. 1231 gain of $60,000 to arrive at a net long-term capital gain of $10,000. The partnership will report this $10,000 as long-term capital gains to its partners.

Question 17

The LM Partnership terminates for tax purposes on July 15 when Latasha sells her 60% capital and profits interest to Zoe for $100,000.The partnership has no liabilities,and its assets at the time of termination are as follows:  Marika,a 40% partner in the LM Partnership,has a $64,800 basis in her partnership interest (outside basis)at the time of the termination.She has held her LM Partnership interest for three years at the time of the termination.The bases of Marika and Zoe in the new LM Partnership is:

Accepted Answer

To determine the new bases of Marika and Zoe in the new partnership, we need to allocate the assets to the partners based on their profit and loss sharing ratios. 
Before the sale, Latasha had a 60% interest and Marika had a 40% interest. So the allocation of the assets would be as follows:

Cash: $20,000 x 60% = $12,000 to Latasha and $20,000 x 40% = $8,000 to Marika 
Accounts Receivable: $40,000 x 60% = $24,000 to Latasha and $40,000 x 40% = $16,000 to Marika 
Inventory: $80,000 x 60% = $48,000 to Latasha and $80,000 x 40% = $32,000 to Marika 
Land: $200,000 x 60% = $120,000 to Latasha and $200,000 x 40% = $80,000 to Marika

Total allocation: Latasha - $200,000; Marika - $136,000

Since Latasha sells her interest to Zoe, Zoe would take over Latasha's allocation of the assets. So Zoe's total allocation would be $200,000 + $100,000 (the amount she paid for Latasha's interest in the partnership) = $300,000.

Therefore, the new bases for Marika and Zoe would be:

Marika: $64,800 (original outside basis) - $136,000 (her allocation of the partnership assets) = -$71,200 (negative basis)
Zoe: $100,000 (cash paid for Latasha's interest) + $300,000 (her allocation of the partnership assets) = $400,000

Option C is the correct answer.

Question 18

Which of the following is valid reason for making a 754 election?

Accepted Answer

The answer of Which of the following is valid reason...

Question 19

Jerry has a $50,000 basis for his interest in JJ Partnership before receiving a current distribution consisting of $8,000 in money,accounts receivable having a zero basis to the partnership,and land having a $28,000 basis to the partnership.What will Jerry's basis be in these assets?

Accepted Answer

The answer of Jerry has a $50,000 basis for his...

Question 20

Which of the following statements is correct?

Accepted Answer

The Sec.754 election applies to both sales and distributions. This election allows a partnership to adjust the basis of its assets when there is a transfer of a partnership interest. This adjustment can help prevent inequities between partners who have different basis in the partnership assets. It applies to both sales and distributions, and cannot be revoked once made.

Quiz 19: Special Partnership Issues