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Exam 11: Partnerships: Distributions, Transfer of Interests, and Terminations

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Question 41

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The December 31 balance sheet of DBW, LLP, a service-providing partnership, reads as follows. $\begin{array} { l r r } & \text { Adjusted } \\& \text { Basis } & \text { FMV } \\\text { Cash } & \$ 180,000 & \$ 180,000 \\\text { Receivables } & -0- & 60,000 \\\text { Capital assets } & 90,000 & 120,000 \\\text { Total } & \$ 270,000 & \$ 360,000\\\\\text { Dana, capital } & \$ 90,000 & \$ 120,000 \\\text { Brooke, capital } & 90,000 & 120,000 \\\text { Whitney, capital } & 90,000 & \underline{120,000} \\\text { Total } & \$ 270,000 & \$ 360,000\\\hline\end{array}$ The partners share equally in partnership capital, income, gain, loss, deduction, and credit. Capital is not a material income-producing factor to the partnership. On December 31, partner Dana who is an active managing partner in the partnership) receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736. Dana's outside basis for the partnership interest immediately before the distribution is $90,000. How much is her gain or loss on the distribution and what is its character?

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$20,000 ordinary income and $10,000 capi...

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Question 42

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Mark contributed property to the MDB Partnership in year 1. At the time of the contribution, the basis in the property was $40,000 and its value was $50,000. In year 5, MDB distributed that property to partner Dara. Because this is a distribution of precontribution gain property, Dara may be required to recognize a gain.

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B) False

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Question 43

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Bob received a proportionate current nonliquidating) distribution of land from the BZ Partnership. The land had a fair market value of $15,000 and a basis to the partnership of $10,000. The land was held for investment purposes by the partnership. Bob's basis in his partnership interest immediately before the distribution was $6,000. If the partnership has a § 754 election in effect, it will record a $4,000 step-down in the basis of remaining assets, and the step-down will be attributed to all partners in the partnership.

Dan receives a proportionate current nonliquidating) distribution when the basis of his partnership interest is $30,000. The distribution consists of $10,000 in cash and property with an adjusted basis to the partnership of $24,000 and a fair market value of $26,500. Dan's basis in the noncash property is:

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 $7,000 to the inventory and recognizes no gain or loss.

The ELF Partnership distributed $20,000 cash to Emma in a proportionate, current nonliquidating) distribution. Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain.

Match the following independent distribution payments in liquidation of a partner's interest in an ongoing partnership with the statements below. -Distribution of $10,000 cash to a limited partner for goodwill when goodwill is not provided for in the partnership agreement.

If one partner in a two-partner partnership dies, the estate cannot be a partner, so the partnership is terminated.

Tom, Tina, Tatum, and Terry are equal owners treated as general partners) in the 4-Ts LLC, a cash basis service entity. 4-Ts has unrealized receivables of $400,000 basis of $0) and no other hot assets. A goodwill payment of $50,000 per partner is provided for in the LLC's operating agreement. If 4-Ts distributes cash of $300,000 to Tom in liquidation of his LLC interest, which of the following statements is correct?

Match the following independent descriptions as hot i.e., ordinary income-producing) or nonhot assets with the following statements. -Installment receivables for sale of a capital asset.

Jonathon owns a one-third interest in a liquidating partnership. Immediately before the liquidation, his basis in the partnership interest is $60,000. The partnership distributes cash of $32,000 and two parcels of land each with a fair market value of $10,000) . Parcel A has a basis of $2,000 to the partnership and Parcel B has a basis of $6,000. Jonathon's basis in the two parcels of land is:

In a proportionate current 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.

Hannah sells her 25% interest in the HIJK Partnership to Alyssa for $120,000 cash. At the end of the year prior to the sale, Hannah's basis in HIJK was $70,000. The partnership allocates $15,000 of income to Hannah for the portion of the year she was a partner. On the date of the sale, the partnership assets and the agreed fair market values were as follows. $\begin{array} { l r r } & \text { Adjusted } \\& \text { Basis } & \text { FMV } \\\text { Cash } & \$ 100,000 & \$ 100,000 \\\text { Accounts Receivable } & - 0 - & 80,000 \\\text { Land } & \underline { 240,000 } & \underline { 220,000 } \\\text { Total } & \$ 340,000 & \$ 400,000 \\\hline\end{array}$ Determine the amount and character of any gain that Hannah recognizes on the sale.

Which of the following transactions will not result in the termination of a partnership for Federal tax purposes?

In a proportionate liquidating distribution in which the partnership is liquidated, Bill received cash of $120,000, inventory basis of $6,000, fair market value of $8,000), and a capital asset basis and fair market value of $16,000). Immediately before the distribution, Bill's basis in the partnership interest was $90,000. a. How much gain or loss will Bill recognize on the distribution? b. What is Bill's basis in the inventory and the capital asset?

Scott owns a 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate current nonliquidating) distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognizes no gain or loss and his basis in the land is $10,000.

Fred and Wilma formed the equally owned FW partnership several years ago. On the last day of the prior tax year, they each transferred a 20% interest in the FW partnership a capital-intensive business) to their son, Rocky 40% total to Rocky; Fred and Wilma each retained 30% interests). For the current tax year, FW reported income of $200,000. Fred provides services to the partnership valued at $60,000; Wilma and Rocky provide no services. The $200,000 of income will be allocated $102,000 to Fred, $56,000 to Rocky, and $42,000 to Wilma.

On June 30 of the current tax year, Sal sells her 40% interest in the STU Partnership to new partner James for $300,000, including Sal's share of partnership liabilities. At the beginning of the tax year, Sal's basis in her partnership interest was $80,000 excluding her share of partnership debt) . The partnership reported income of $240,000 for the year, and Sal's share of partnership debt was $100,000 at the sale date. Assume the partnership uses a monthly proration of income.) At the sale date, the partnership's assets consist of cash $390,000) , land basis of $180,000, Fair market value of $210,000) , and unrealized receivables basis of $0, fair market value of $150,000) . What is Sal's basis at the sale date, and how much gain must Sal recognize?

A partnership may make an optional election to adjust the basis of its property under § 754. If such an election is in effect, the partnership:

A two-person partnership terminates when one partner sells his, her, or its partnership interest to the other partner. This termination triggers a deemed liquidating distribution to the partners, and a tax on the realized gain fair market value less partnership basis) in the partnership's assets.