Question 1

Lori, a partner in the JKL partnership, received a proportionate 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 immediately before the distributions was $14,000. The total fair market value of the assets she received is $25,000 ($10,000 cash + $15,000 receivables + $10,000 land). Since the fair market value of the assets she received is greater than her basis in the partnership interest, she will recognize a gain on the distribution.

Question 2

A gain will only arise on a distribution 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

For tax purposes, cash includes not only physical currency but also checks and credit card charges. However, the statement is incorrect because a gain can arise from other distributions, not just cash, that exceed the partner's basis.

Question 3

For Federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

Accepted Answer

For Federal income tax purposes, a distribution from a partnership to a partner is generally not treated the same as a distribution from a C corporation to its shareholders. Partnerships are pass-through entities, meaning the income, deductions, gains, losses, and credits flow through to the partners and are taxed at their individual rates, whereas C corporations are taxed at the corporate level and distributions (dividends) to shareholders are taxed again at the individual level.

Question 4

A distribution cannot be "proportionate" if only one partner receives assets from the partnership.

Accepted Answer

A distribution can still be proportionate if only one partner receives assets, as long as the distribution is based on their percentage ownership in the partnership. Proportionality refers to the fairness of the distribution based on the partners' ownership percentages, not the number of partners receiving assets.

Question 5

Zach's partnership interest basis is $80,000.Zach receives a proportionate, liquidating distribution from a liquidating partnership of $60,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $26,000.Zach assigns a basis of $20,000 to the inventory and recognizes no gain or loss.

Accepted Answer

Zach's basis in the inventory is $20,000, which is less than the partnership's basis of $30,000. Therefore, Zach recognizes a loss of $10,000 on the distribution of the inventory.

Question 6

Loss will be recognized on any distribution from a partnership in which cash, unrealized receivables and/or appreciated inventory are the only items distributed.

Accepted Answer

Loss is not recognized on a distribution from a partnership unless the distribution is in liquidation of a partner's entire interest and consists solely of cash, unrealized receivables, or inventory.

Question 7

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, nonliquidating distribution, Marcie recognizes a gain of $20,000 and her basis in the land is $0.

Accepted Answer

The distribution is proportionate, so Marcie's share of the land is $25,000 x 40% = $10,000. Her basis in the land is $0 because her basis in the LLC is reduced by the amount of cash and the fair market value of the land distributed to her.

Question 8

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not distributed.

Accepted Answer

This statement is true, as the partnership itself is not taxed as a separate entity like a corporation. Instead, profits and losses are allocated to each partner according to their ownership percentage, and are reported on their individual tax returns, regardless of whether or not the profits were actually distributed to them.

Question 9

A property distribution from a partnership to a partner is generally taxable to the partner.

Accepted Answer

In general, property distributions from a partnership to a partner are not taxable events. Instead, the partner's basis in the partnership interest is adjusted by the distribution. However, there are exceptions, such as when the distribution exceeds the partner's basis in the partnership.

Question 10

The LMO Partnership distributed $30,000 cash to Emma in a proportionate, nonliquidating distribution.Emma's basis in her partnership interest was $25,000 immediately before the distribution.As a result of the distribution, Emma's basis is reduced to $0 and she recognizes a $5,000 gain.

Accepted Answer

A proportionate, nonliquidating distribution reduces the basis of the partner's interest by the amount received. Therefore, Emma's basis would be reduced to $0 after receiving the $30,000 distribution. Since her basis is lower than the amount received, she would recognize a gain of $5,000.

Question 11

Jared owns a 40% interest in the capital and profits of the JAJ Partnership.Immediately before he receives a proportionate nonliquidating distribution from JAJ, the basis of his partnership interest is $60,000.The distribution consists of $40,000 in cash and land with a fair market value of $25,000.JAJ's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution, Jared recognizes no gain or loss and his basis in the land is $20,000.

Accepted Answer

Since the distribution is proportionate, Jared's basis in the partnership does not change. The total value of the distribution is $65,000 ($40,000 + $25,000), which is less than his basis in the partnership interest ($60,000). Therefore, he recognizes no gain or loss. His basis in the land is $20,000, which is the fair market value of the land minus JAJ's adjusted basis in the land ($25,000 - $30,000 = -$5,000, but his basis cannot be negative, so it is $20,000).

Question 12

Randi owns a 40% interest in the capital and profits of the RAY Partnership.Immediately before she receives a proportionate 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 $21,000.

Accepted Answer

We can use the following formula to calculate the gain or loss recognized on a proportionate nonliquidating distribution:

Gain or Loss = FMV of Property Received - Basis of Partnership Interest

For Randi, the cash portion of the distribution does not affect her basis. Therefore, her gain or loss only depends on the land portion of the distribution:

Gain or Loss = $72,000 - $60,000 = $12,000

This means that Randi recognizes a gain of $12,000, not $21,000. Therefore, the correct answer is B, false.

Question 13

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 recognize a $6,000 gain, take a $16,000 basis in the property, and his basis in the partnership interest is reduced to zero.

Accepted Answer

When a partner receives a proportionate, nonliquidating distribution of property, the partner's basis in the property is equal to the property's basis to the partnership immediately before the distribution. Therefore, Matt's basis in the property would be $23,000, not $16,000. As a result, Matt would have no gain or loss recognized and his basis in the property would be $23,000. His basis in the partnership interest would also be reduced to $0, but this is not affected by the distribution of property.

Question 14

The BAM Partnership distributed the following assets to partner Barbie in a proportionate non-liquidating 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 $20,000).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

Barbie cannot allocate a total of $30,000 ($15,000 each) to two properties with a total fair market value of $50,000 ($30,000 + $20,000). She must allocate the total fair market value of the properties, which is $50,000, among them in proportion to their respective fair market values. The allocation would be $36,000 to land parcel A (30,000/50,000 x $60,000) and $14,000 to land parcel B (20,000/50,000 x $60,000). This would result in a total basis allocation of $41,000, which is greater than Barbie's $40,000 basis in her partnership interest before the distribution. Therefore, her basis in her partnership interest would not be reduced to $0.

Question 15

Generally, gain is recognized on a proportionate current or liquidating distribution if the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Accepted Answer

The answer of Generally, gain is recognized on a proportionate...

Question 16

In a proportionate nonliquidating distribution, cash is deemed to be distributed first, followed by unrealized receivables and inventory and, last, capital and other assets.

Accepted Answer

In a proportionate nonliquidating distribution, cash is generally distributed first, followed by unrealized receivables and inventory, and then by capital and other assets. This is because cash is the most liquid asset that can be easily distributed among the partners. Unrealized receivables and inventory are also relatively liquid, as they can be converted into cash quickly. Capital and other assets, such as equipment or real estate, are typically the least liquid and may take more time to distribute or sell.

Question 17

In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000, fair market value of $8,000), and land (basis of $50,000, fair market value of $60,000).William's basis was $75,000 before the distribution.On the liquidation, William recognizes no gain or loss, 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, UVW Partnership...

Question 18

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

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

Question 19

In a proportionate 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 recognizes gain only if the cash distributed exceeds the partner's basis in the partnership interest. The fair market value of the property does not trigger gain recognition.

Question 20

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.

Quiz 21: Partnerships