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

In a proportionate liquidating distribution in which the partnership is liquidated, Marcus received cash of $60,000, inventory (basis of $10,000, fair market value of $12,000), and a capital asset (basis and fair market value of $22,000). Immediately before the distribution, Marcus's basis in the partnership interest was $100,000. a. How much gain or loss will Marcus recognize on the distribution? b. What is Marcus's basis in the inventory and the capital asset?

In a proportionate nonliquidating distribution, cash is deemed to be distributed first, followed by capital and § 1231 assets, and last, unrealized receivables and inventory.

Match the following independent descriptions as "hot" (i.e., ordinary income) or nonhot assets with the statements below. a. Hot assets for purposes of distributions, liquidation of a partnership interest under § 736, and sale of a partnership interest. b. May be a hot asset for some but not all the purposes stated in (a). c. Not a hot asset. -Inventory with a basis of $10,000 and a fair market value of $10,500.

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.

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.

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.

A partnership may make an optional election to adjust the basis of its property on a distribution to a partner which liquidates the partner's entire interest in the partnership. If such an election is in effect, the partnership:

Misha receives a proportionate nonliquidating distribution when the basis of her partnership interest is $60,000. The distribution consists of $80,000 cash and inventory (adjusted basis to the partnership of $10,000, fair market value of $20,000). How much gain or loss does Misha recognize, and what is her basis in the distributed inventory and in her partnership interest following the distribution?

Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. a. Includes the partner's share of partnership liabilities. b. Could result from sale of a partnership interest for more than the partner's share of the inside basis of assets. c. Liquidation payments from this type of partnership are always § 736(b) payments. d. Could arise if a distribution results in loss to the distributee partner. e. May be a § 736(a) payment. f. May receive § 736(a) payments. g. Probably treated as a general partner for § 736 purposes h. Sale of more than 50% in less than 12 months. i. Liquidation payments from this type of partnership may include § 736(a) payments. j. A § 736(b) payment. k. Adjustment designed to bring inside and outside bases into balance. l. Partnership asset basis is at least $250,000 > FMV. m. Would result if the partner contributes appreciated property to the partnership. n. No correct match is provided. -Limited partner

Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. a. Includes the partner's share of partnership liabilities. b. Could result from sale of a partnership interest for more than the partner's share of the inside basis of assets. c. Liquidation payments from this type of partnership are always § 736(b) payments. d. Could arise if a distribution results in loss to the distributee partner. e. May be a § 736(a) payment. f. May receive § 736(a) payments. g. Probably treated as a general partner for § 736 purposes h. Sale of more than 50% in less than 12 months. i. Liquidation payments from this type of partnership may include § 736(a) payments. j. A § 736(b) payment. k. Adjustment designed to bring inside and outside bases into balance. l. Partnership asset basis is at least $250,000 > FMV. m. Would result if the partner contributes appreciated property to the partnership. n. No correct match is provided. -Step up

George (a calendar year taxpayer) owns a 40% interest in the cash-basis GLO LLP. GLO has a natural business year ending March 31. George has found another opportunity and would like to sell his interest on July 1 of the current tax year to new partner Monica. What are some of the issues that should be considered by George, Monica, and GLO?

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.

Zach's partnership interest basis is $100,000. Zach receives a proportionate, liquidating distribution from a liquidating partnership of $50,000 cash and inventory having a basis of $20,000 to the partnership and a fair market value of $30,000. Zach assigns a basis of $20,000 to the inventory and recognizes a $30,000 loss.

Match the following independent distribution payments in liquidation of a partner's interest in an ongoing partnership with the statements below. a. A payment for the partner's share of partnership income under § 736(a). b. A payment for the partner's share of partnership property under § 736(b). c. The payment includes both a § 736(a) and a § 736(b) element. -Distribution of cash of $10,000 to a general partner for goodwill, where goodwill is provided for in the partnership agreement, and the partnership derives most of its income from services.

Bob received a proportionate 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 step­down in the basis of remaining assets, and the step­down will be attributed to all partners in the partnership.

Match the following independent distribution payments in liquidation of a partner's interest in an ongoing partnership with the statements below. a. A payment for the partner's share of partnership income under § 736(a). b. A payment for the partner's share of partnership property under § 736(b). c. The payment includes both a § 736(a) and a § 736(b) element. -Distribution of cash of $10,000 to a limited partner for goodwill, where goodwill is not provided for in the partnership agreement.

Connie owns a one-third capital and profits interest in the calendar-year CDB Partnership. Her adjusted basis for her partnership interest was $120,000 when she received a proportionate nonliquidating distribution of the following assets: Partnership's Basis in Asset Asset's Fair Market Value Cash $140,000 $140,000 Land held for investment 30,000 60,000 a. Calculate Connie's recognized gain or loss on the distribution, if any. b. Calculate Connie's basis in the land received. c. Calculate Connie's basis for her partnership interest after the distribution.

Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. a. Includes the partner's share of partnership liabilities. b. Could result from sale of a partnership interest for more than the partner's share of the inside basis of assets. c. Liquidation payments from this type of partnership are always § 736(b) payments. d. Could arise if a distribution results in loss to the distributee partner. e. May be a § 736(a) payment. f. May receive § 736(a) payments. g. Probably treated as a general partner for § 736 purposes h. Sale of more than 50% in less than 12 months. i. Liquidation payments from this type of partnership may include § 736(a) payments. j. A § 736(b) payment. k. Adjustment designed to bring inside and outside bases into balance. l. Partnership asset basis is at least $250,000 > FMV. m. Would result if the partner contributes appreciated property to the partnership. n. No correct match is provided. -Active member of LLC

Match the following independent descriptions as "hot" (i.e., ordinary income) or nonhot assets with the statements below. a. Hot assets for purposes of distributions, liquidation of a partnership interest under § 736, and sale of a partnership interest. b. May be a hot asset for some but not all the purposes stated in (a). c. Not a hot asset. -Marketable securities (not held as inventory).

The December 31, 2014, balance sheet of the BCD LLP reads as follows. Each partner shares in 1/3 of the partnership capital, income, gain, loss, deduction, and credit. Capital is not a material income-producing factor to the partnership. On December 31, 2014, general partner Christina receives a distribution of $140,000 cash in liquidation of her partnership interest under § 736. Nothing is stated in the partnership agreement about goodwill. Christina's outside basis for the partnership interest immediately before the distribution is $84,000. How much is Christina's recognized gain from the distribution and what is the character of the gain?