Question 1

The Crimson Partnership is a service provider.Its assets consist of unrealized receivables (basis of $0,fair market value of $400,000),cash of $300,000,and land (basis of $200,000,fair market value of $300,000).Assume 20% general partner Jana has a basis in her partnership interest of $100,000.If the ongoing partnership distributes $200,000 of cash to Jana in liquidation of her interest in the partnership,she will recognize ordinary income of $80,000 and a capital gain of $20,000.

Accepted Answer

Jana's capital gain will be the excess of the cash distribution ($200,000) over her basis in the partnership interest ($100,000), which is $100,000. Her capital gain would be $20,000 (20% x $100,000). The remaining $80,000 would be treated as ordinary income, which is the amount of the unrealized receivables that are deemed to be "cashed out" in the liquidation.

Question 2

Generally,a distribution of property does not result in gain to a partner on either a current or liquidating distribution.A situation where a gain may arise,however,is when a partner contributed appreciated property to the partnership and that property is distributed back to the contributing partner within seven years of the contribution.

Accepted Answer

The answer of Generally,a distribution of property does not result...

Question 3

Normally a distribution of property from a partnership does not result in gain recognition.However,a distribution of marketable securities may be treated,in part,as a distribution of cash that could result in gain recognition.

Accepted Answer

According to the IRS, if a partnership distributes marketable securities, it is treated as if the securities were sold for cash at their fair market value. This may result in gain recognition for the partners.

Question 4

Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year.Katie also assumed Beth's share of the partnership's liabilities.Beth's basis in her partnership interest at the beginning of the year was $40,000,including a $15,000 share of partnership liabilities.The partnership's income for the entire year was $100,000,and Beth's share of partnership debt was $10,000 as of the date she sold the partnership interest.Assume the partnership has no hot assets and that its income is earned evenly throughout the year.Beth recognizes a gain of $12,500 on the sale.

Accepted Answer

Beth's basis in her partnership interest at the time of sale is calculated as follows: 
Beginning basis = $40,000 
Share of partnership income = $100,000 x 25% = $25,000 
Share of partnership liabilities = $10,000 
Ending basis = $40,000 + $25,000 + $10,000 = $75,000 
Therefore, the gain on the sale is $50,000 (sale price) - $75,000 (basis) = -$25,000. Since the gain is negative, Beth recognizes a loss instead of a gain. However, the loss is limited to the lesser of the realized gain ($12,500) or the actual loss ($25,000), so Beth recognizes a loss of $12,500.

Question 5

A partnership is required to make a downward adjustment to the basis of its assets if a partnership interest is sold and if the total decline in value of partnership assets is more than $250,000.

Accepted Answer

According to the Internal Revenue Code, a partnership must make a downward adjustment to the basis of its assets if the total decline in value is more than $250,000 when a partnership interest is sold or exchanged. This is required under section 743(b) of the code. Therefore, the statement is true.

Question 6

In the year a donor gives a partnership interest to a donee,their share of the partnership's income is prorated between the donor and donee.

Accepted Answer

When a donor gives a partnership interest to a donee, the donor loses their share of income and the donee receives a prorated share of income. Therefore, the income is split between the donor and the donee.

Question 7

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,fair market value of $30,000)and land parcel B (basis of $5,000,fair market 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 received a total distribution of $70,000 ($25,000 cash + $30,000 FMV of parcel A + $15,000 FMV of parcel B). His proportionate share in the partnership was 85/100, which is 17/20. Thus, his allocated basis in parcel A is (17/20) x $5,000 + $40,000 = $43,250, and his allocated basis in parcel B is (17/20) x $5,000 + $20,000 = $23,250. The sum of his allocated bases in both parcels equals his pre-distribution basis in the partnership interest ($85,000), which means he has no remaining basis in his partnership interest after the distribution.

Question 8

Several years ago,the Jaymo Partnership purchased 2,000 shares of ABCO stock (publicly traded)for $40,000;the stock now has a fair market value of $90,000.If this stock is distributed to Jason in liquidation of his 30% partnership interest,it is treated as a cash distribution of $75,000 and a property distribution of $15,000.Assume Jaymo owns no other securities.

Accepted Answer

The fair market value of the ABCO stock is $90,000 and Jason's 30% share in the partnership is worth $75,000, which is treated as a cash distribution. The remaining $15,000 is treated as a property distribution, which is the value of the ABCO stock that is being distributed to Jason.

Question 9

If a partnership incorporates,it is always deemed to first distribute all of its assets and liabilities to the partners in complete liquidation.Then the partners are deemed to contribute those assets to the new corporation (with the corporation assuming the related liabilities)in a transaction that qualifies under § 351.

Accepted Answer

While a partnership can incorporate, the statement is not completely accurate. It is not always required for the partnership to distribute all its assets and liabilities to the partners before incorporating. The partnership can also transfer the assets and liabilities directly to the corporation in exchange for stock without any prior distribution. Additionally, not all incorporations by a partnership qualify under § 351.

Question 10

Jeremy sold his 40% interest in the HIJ Partnership to Ashley for $400,000.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 $160,000 step-up in the basis of the partnership assets,and the step-up will be attributed solely to Ashley.

Accepted Answer

Since Jeremy sold his 40% interest in the partnership, Ashley will receive a step-up in the inside basis of the partnership assets based on the amount she paid for Jeremy's interest. The step-up will only be attributed to Ashley because she was the buyer. Therefore, the statement is true.

Question 11

Tyler's basis in his partnership interest is $110,000,including his share of partnership debt.Sarah buys Tyler's partnership interest for $60,000 cash and she assumes Tyler's $90,000 share of the partnership's debt.If the partnership owns no hot assets,Tyler will recognize a capital loss of $50,000.

Accepted Answer

The answer of Tyler's basis in his partnership interest is...

Question 12

A partnership has accounts receivable with a basis of $0 and a fair market value of $20,000 and depreciation recapture potential of $30,000.All other assets of the partnership are either cash,capital assets,or § 1231 assets.If a purchaser acquires a 40% interest in the partnership from another partner,the selling partner will be required to recognize ordinary income of $20,000.

Accepted Answer

The accounts receivable have a fair market value of $20,000, and the selling partner is only transferring a 40% interest, which means they would recognize $8,000 of the fair market value as ordinary income. However, since the partnership has no basis in the accounts receivable, the entire $20,000 fair market value would be subject to depreciation recapture. Therefore, the total amount of ordinary income recognized by the selling partner would be $20,000 ($8,000 + $12,000).

Question 13

Mike contributed property to the MDB Partnership in 2009.At the time of the contribution,the basis in the property was $30,000 and its value was $55,000.In 2012,MDB distributed that property to partner Dana.Because distributions from a partnership to a partner are generally nontaxable,neither Mike nor Dana should recognize any gain on the distribution.

Accepted Answer

Although distributions from a partnership to a partner are generally nontaxable, the basis of the distributed property to the partner is equal to the partnership's basis in the property immediately before the distribution. In this case, since Mike's basis in the property contributed was $30,000 and the value of the property was $55,000, the partnership's basis in the property would also be $30,000. When the property is distributed to Dana, her basis in the property would also be $30,000. If she later sells the property for more than $30,000, she would recognize a gain on the sale.

Question 14

A disproportionate distribution arises when the partnership distributes a share of partnership hot assets to one or more partners that is not the same as the partner's ownership interest in the partnership.

Accepted Answer

A disproportionate distribution occurs when a partner receives a larger or smaller share of partnership hot assets than their ownership interest in the partnership.

Question 15

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

Accepted Answer

When a partner receives a cash distribution in liquidation of their interest in a partnership, it generally results in a decrease in the partnership's inside basis in its assets. If the partnership has a § 754 election in effect, this decrease in basis is allocated among the remaining partners based on their partnership interests. In this case, since the payment to Amanda is less than her basis in the partnership, it will result in a decrease in the inside basis of partnership assets, and this decrease will be allocated to the remaining partners.

Question 16

A payment to a retiring general partner for his or her share of goodwill of a partnership in which capital is not 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,as long as the goodwill payment is provided for in the partnership agreement.

Accepted Answer

The answer of A payment to a retiring general partner...

Question 17

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500.The partnership's assets consist of cash ($100,000),land (basis of $90,000,fair market value of $70,000),and inventory (basis of $40,000,fair market value of $60,000).Nick's basis in his partnership interest was $57,500.On the sale,Nick will recognize ordinary income of $5,000 and a capital loss of $5,000.

Accepted Answer

Nick's basis in the partnership interest is equal to the amount he received for selling it, so no capital gain or loss is recognized. However, he will recognize ordinary income equal to his share of the inventory's unrealized receivable (25% of $20,000 = $5,000) and a capital loss equal to the difference between his basis in the partnership interest and the cash he received for it ($57,500 - $57,500 = $0).

Question 18

In a proportionate liquidating distribution in which the partnership is also liquidated,Ralph received cash of $30,000,accounts receivable (basis of $0,fair market value of $20,000),and equipment (basis of $0,fair market value of $10,000).Immediately before the distribution,Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000,and his basis is $0 in both the accounts receivable and the equipment.

Accepted Answer

The answer of In a proportionate liquidating distribution in which...

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

Carlos assigns a basis of $5,000 to the inventory, which means that his remaining basis in his partnership interest immediately after the distribution is $10,000 ($15,000 - $5,000). The fair market value of the inventory ($6,000) is less than his remaining basis ($10,000) so no gain or loss is recognized on that portion of the distribution. The $8,000 cash distribution reduces his remaining basis to $2,000 ($10,000 - $8,000), resulting in a capital loss of $2,000 ($2,000 - $0).

Question 20

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

A § 754 election is made by the partnership, not an individual partner, to adjust the basis of partnership property upon certain distributions or transfers of partnership interests.

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

Normally a distribution of property from a partnership does not result in gain recognition.However,a distribution of marketable securities may be treated,in part,as a distribution of cash that could result in gain recognition.

A partnership is required to make a downward adjustment to the basis of its assets if a partnership interest is sold and if the total decline in value of partnership assets is more than $250,000.

In the year a donor gives a partnership interest to a donee,their share of the partnership's income is prorated between the donor and donee.

A disproportionate distribution arises when the partnership distributes a share of partnership hot assets to one or more partners that is not the same as the partner's ownership interest in the partnership.