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

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.

Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

Which of the following statements is true regarding the sale of a partnership interest?

Martha receives a proportionate nonliquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $60,000 cash and noninventory property (adjusted basis to the partnership of $20,000; fair market value of $23,000). How much gain or loss does Martha recognize, and what is her basis in the distributed property and in her partnership interest following the distribution?

James, Justin, and Joseph are equal partners in the JJJ Partnership. The partnership balance sheet reads as follows on December 31 of the current year: Partner Joseph has an adjusted basis of $45,000 for his partnership interest. If Joseph sells his entire partnership interest to new partner Kayla for $65,000 cash, how much capital gain and ordinary income must Joseph recognize from the sale?

The December 31, 2011, balance sheet of the DBW General Partnership is as follows: The partners share equally in partnership capital, income, gain, loss, deduction, and credit and capital is not a material income-producing factor. On December 31, 2011, general partner Dana receives a distribution of $155,000 cash in liquidation of her interest under § 736. Dana's outside basis for the partnership interest immediately before the distribution is $110,000. What is Dana's gain or loss on the distribution and its character?

In a proportionate liquidating distribution in which the partnership is also liquidated, Macy received cash of $10,000 and inventory (basis of $18,000 and fair market value of $32,000). Immediately before the distribution, Macy's basis in the partnership interest was $40,000. Macy recognizes no gain or loss, and her basis in the inventory is $30,000.

Rex and Scott operate a law practice in partnership form. Because Rex and Scott are brothers, the partnership is subject to the family partnership income reallocation rules.

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.

Nicole's basis in her partnership interest was $160,000, including her $50,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Nicole receives $30,000 cash and accounts receivable with a $50,000 basis and a $52,000 fair market value to the partnership. What gain or loss does Nicole recognize, and what is her basis in the accounts receivable?

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

A partnership continues in existence unless one of the following happens: 1) all assets are distributed to the partners in liquidation of the partnership, or 2) one partner buys the interest of the second partner in a two partner partnership (resulting in a single owner of the entity).

Andrew receives a proportionate nonliquidating distribution from the AEF Partnership. The distribution consists of $50,000 cash and property (adjusted basis to the partnership of $34,000 and fair market value of $42,000). Immediately before the distribution, Andrew's adjusted basis in the partnership interest was $40,000. His basis in the noncash property received is:

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

Which of the following distributions would never result in gain recognition to the recipient partner?

In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash distributed exceeds the partner's basis in the partnership interest.

The RST Partnership makes a proportionate distribution of its assets to Ryan, in complete liquidation of his partnership interest. The distribution consists of $40,000 in cash and capital assets with a basis to the partnership of $30,000 and a fair market value of $48,000. None of the payment is for partnership goodwill. At the time of the distribution, Ryan's partnership basis is $45,000 and the partnership has no liabilities and no "hot assets." If the partnership makes an optional basis adjustment election on a timely filed return, it recognizes:

Cynthia sells her 1/3 interest in the CAR Partnership to Brandon for $80,000 cash. Brandon also assumed Cynthia's 1/3 share of partnership liabilities. On the date of sale, the partnership balance sheet and agreed-upon fair market values were as follows: If the partnership has a § 754 election in effect, the total "step-up" in basis that Brandon can take in the partnership assets is:

Your client has operated a sole proprietorship for several years, and is now interested in raising capital for expansion. He is considering forming either a C corporation or an LLC.

Cindy, a 20% general partner in the CDE Partnership, wants to retire and has approached the other partners about having the partnership buy her out. The partnership is a cash basis, service oriented partnership in which Cindy is an active partner. The partnership assets consist primarily of unrealized receivables and cash. The partnership also has substantial going concern value (goodwill) which is probably its most valuable asset. The other partners in the partnership are also active in the business and are not related to Cindy.