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

In a proportionate current nonliquidating) distribution of his 30% interest in the MNO LLC, Neil received cash $60,000), land basis of $40,000 and value of $75,000), and unrealized receivables basis of $0 and value of $22,000). In addition, Neil is relieved of his $40,000 share of the LLC's liabilities. Neil's basis in MNO including his share of LLC liabilities) was $80,000 immediately prior to this distribution. a. How much gain or loss does Neil recognize on this distribution? b. What is Neil's basis in the receivables and land he receives in the distribution? c. What is Neil's basis in the LLC interest following the distribution?

Match the following statements with the best match from the following choices. Choice M may be used more than once. -Active member of LLC

Which of the following statements correctly reflects one of the rules regarding proportionate liquidating distributions?

Match the following statements with the best match from the following choices. Choice K may be used more than once. -Hot assets

Cynthia sells her 1/3 interest in the CAR Partnership to Brandon for $95,000 cash. On the date of sale, the partnership balance sheet and agreed-upon fair market values were as follows. Adjusted Basis FMV Cash \ 40,000 \ 40,000 Receivables -0- 60,000 Land Total \ 90,000 \ 225,000 Cynthia, capital \ 30,000 \ 75,000 Arnold, capital 30,000 75,000 Ralph, capital 30,000 75,000 Total \ 90,000 \ 225,000 If the partnership has a § 754 election in effect, the total "step up" in basis of partnership assets allocated to Brandon is:

James received a distribution of $110,000 cash in liquidation of his 25% managing general partner) interest in the JKL LLP. JKL is a service-oriented entity. Before the distribution, the LLP's assets consisted of $200,000 cash, land basis of $40,000, value of $100,000), unrealized receivables basis of $0, value of $100,000), and goodwill basis of $0, value of $40,000). James negotiated the $10,000 portion of the payment that is for goodwill; the partnership agreement does not address payments to retiring partners for goodwill. James will recognize $35,000 of ordinary income from his §736a) payment; the remaining $75,000 distribution is treated as a § 736b) property payment for his partnership interest.

Anna and Brad are equal partners in the AB LLC. If AB distributes $10,000 of cash to Anna and a capital asset valued at $10,000 to Brad, and if both Anna and Brad continue to be members of the LLC, the distribution is classified as a proportionate current distribution.

Compare the different tax results gains, losses, basis) that might arise for a partner in a proportionate current nonliquidating) distribution versus a proportionate liquidating distribution, under the general tax rules.

Orson was a 40% partner in the calendar year ORP LLC. When Orson died on June 30, the interest transferred to his estate. On October 1 of that year, Yolanda, an unrelated third party, acquired Orson's interest from his estate with the approval of the other LLC members). The LLC's operating agreement provides that a monthly allocation annual income divided by 12) will be used to prorate income when required. For the year, the LLC will issue three Schedules K-1 related to this interest: 1) 20% of the year's income to Orson, 2) 10% to Orson's Estate, and 3) 10% to Yolanda.

Jeremiah received a proportionate nonliquidating distribution of land from the JZ Partnership. The land had a fair market value of $65,000 and a basis to the partnership of $50,000. The land was held for investment purposes by the partnership. Jeremiah's basis in his partnership interest immediately before the distribution was $40,000. The partnership's only remaining assets were cash, another parcel of land, and a building on that land. If the partnership has a § 754 election in effect, it will record a $10,000 step-up; a portion of the step-up will be allocated to the building and will be depreciated; and the step-up and any related depreciation expense will be allocated among all the partners in the partnership.

Leonard and Penny, a married couple, formed the equally owned calendar year PL LLC several years ago. Capital is a material income-producing factor for the LLC. On July 1 of this year, they each transferred a 20% interest to their son, Sheldon after the transfer, 40% is owned by Sheldon; Leonard and Penny each retained 30% interests). For the current tax year, PL reported income of $300,000, which was earned evenly throughout the year. Penny provides uncompensated services to the partnership valued at $100,000; Leonard and Sheldon provide no services. How much income will be allocated to Penny, Leonard, and Sheldon for the year?

GHI Partnership is owned 60% by Greg and 20% each by Howard and Isaac. Greg wants to dispose of his partnership interest for $100,000, including $20,000 for partnership goodwill. A goodwill payment to a retiring partner is not provided for in the partnership agreement). The partnership owns no hot assets. Greg will have the same tax result if he sells his interest to Howard and Isaac for $50,000 each $100,000 total), or if GHI redeems Greg's interest by distributing $100,000 of cash to Greg.

Match the following independent distribution payments in liquidation of a partner's interest in an ongoing partnership with the statements below. -Distribution of $60,000 cash for a partner's share of unrealized receivables when the partner is a general partner and most of the partnership's income is derived from services.

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 distributee partner's basis in distributed property is increased or decreased from the inside basis the partnership held in those assets. The election is made by the partnership each year in which it is necessary to adjust a partner's share of the inside basis of partnership assets; in a year in which an unfavorable result would arise, the partnership can forgo making the election.

Janella's basis in her partnership interest was $120,000, including her $150,000 share of partnership debt. At the end of the current year, the partnership pays off its debts and liquidates. Janella receives a proportionate liquidating distribution consisting of $42,000 cash and inventory valued at $24,000 adjusted basis to the partnership = $20,000). How much gain or loss does Janella recognize, and what is her basis in the distributed property?

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

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 fair market value of $100,000, basis of $80,000), accounts receivable fair market 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. How much gain or loss does she recognize and what is its character? How much can the partnership deduct?

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 basis of partnership assets exceeds their value by more than $250,000 even if a § 754 election is not in effect.

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. Jaymo owns no other securities. If this stock is distributed to Jason in liquidation of his 30% partnership interest, a portion of the distribution is treated as a cash distribution, and, because the security is appreciated, a portion is treated as a property distribution.

In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable basis of $0, fair market value of $10,000), and land basis of $30,000, fair market value of $50,000). William's basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable and $50,000 in the land.