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

In a proportionate liquidating distribution, Ashleigh receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $40,000, fair market value of $50,000). In addition, the partnership repays all liabilities, of which Ashleigh's share was $70,000. Ashleigh's basis in the entity immediately before the distribution was $60,000. As a result of the distribution, what is Ashleigh's basis in the accounts receivable and land, and how much gain or loss does she recognize?

Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. a. Cash basis accounts receivable, for example. b. Fair market value exceeds 120% of basis. c. Inside basis of partnership property can be adjusted to reflect the purchase price paid. d. Terminates the partner's interest in the partnership. e. Ordinary income-producing items. f. Cash, then inventory and unrealized receivables, then other assets. g. Does not eliminate the partner's interest in the partnership. h. Liquidation of the partner's interest in hot assets. i. Changes the partner's or the partnership's ordinary income potential. j. Any partnership assets other than cash, capital, or § 1231 assets. k. Sometimes treated as an unrealized receivable. l. No correct match provided. -Ordering rules

In a proportionate 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 choices below. Note: Choice L may be used more than once. a. Cash basis accounts receivable, for example. b. Fair market value exceeds 120% of basis. c. Inside basis of partnership property can be adjusted to reflect the purchase price paid. d. Terminates the partner's interest in the partnership. e. Ordinary income-producing items. f. Cash, then inventory and unrealized receivables, then other assets. g. Does not eliminate the partner's interest in the partnership. h. Liquidation of the partner's interest in hot assets. i. Changes the partner's or the partnership's ordinary income potential. j. Any partnership assets other than cash, capital, or § 1231 assets. k. Sometimes treated as an unrealized receivable. l. No correct match provided. -Unrealized receivable

Your client, Greg, transferred precontribution gain property to BIG LLC on December 31, 2014, for a 30% interest. a. Describe two types of distributions that might result in some or all of this precontribution gain being recognized by Greg. b. In general terms, what is the purpose of these rules?

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. -Section 754

Mark contributed property to the MDB Partnership in 2010. At the time of the contribution, the basis in the property was $40,000 and its value was $50,000. In 2014, MDB distributed that property to partner Dara. Because this is a distribution of precontribution gain property, MBD (the partnership) may be required to recognize a gain that is allocated to all of the partners.

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 $100,000, representing the partner's share of the value of partnership equipment which has potential depreciation recapture of $25,000.

Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. a. Cash basis accounts receivable, for example. b. Fair market value exceeds 120% of basis. c. Inside basis of partnership property can be adjusted to reflect the purchase price paid. d. Terminates the partner's interest in the partnership. e. Ordinary income-producing items. f. Cash, then inventory and unrealized receivables, then other assets. g. Does not eliminate the partner's interest in the partnership. h. Liquidation of the partner's interest in hot assets. i. Changes the partner's or the partnership's ordinary income potential. j. Any partnership assets other than cash, capital, or § 1231 assets. k. Sometimes treated as an unrealized receivable. l. No correct match provided. -Hot assets

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 $60,000 for a partner's share of unrealized receivables where the partner is a limited partner, and most of the partnership's income is derived from services.

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 liability partnership

Mark receives a proportionate nonliquidating distribution. At the beginning of the partnership year, the basis of his partnership interest is $100,000. During the year, he received a cash distribution of $40,000 and a property distribution (basis of $30,000, fair market value of $25,000). In addition, Mark's share of partnership liabilities was reduced by $10,000 during the year. How much gain or loss does Mark recognize; what is his basis in the property he received; and what is his remaining basis in the partnership interest?

Nicky's basis in her partnership interest was $150,000, including her $40,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Nicky receives $30,000 cash and accounts receivable with a $50,000 basis and a $48,000 fair market value to the partnership. What gain or loss does Nicky recognize, and what is her basis in the accounts receivable?

In a proportionate liquidating distribution of his 40% interest in the RST LLC, Stuart received cash ($100,000), land (basis of $60,000 and value of $90,000), and unrealized receivables (basis of $0 and value of $40,000). In addition, Stuart is relieved of his $80,000 share of the LLC's liabilities. Stuart's basis in RST (including his share of LLC liabilities) was $200,000 immediately prior to this distribution. a. How much gain or loss does Stuart recognize on this distribution? b. What is Stuart's basis in the receivables and land he receives in the distribution?

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.

Jeremy is an active partner who owns a 30% interest in the JS LLP (in which capital is not a material income- producing factor). Partnership assets consist of land (fair market value of $200,000, basis of $140,000), accounts receivable (fair market value of $200,000, basis of $0), and cash of $400,000. JS distributes $220,000 of the cash to Jeremy in liquidation of his interest. In addition, Jeremy is relieved of his $40,000 share of the LLP's liabilities. The total payment includes $20,000 for Jeremy's share of JS goodwill (for which the agreement does not provide). Jeremy's basis in the partnership interest (including his share of the partnership's liabilities) is $120,000 immediately before the distribution. How much gain or loss does Jeremy recognize and what is its character? How much can the partnership deduct?

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. -Sales price of partnership interest

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 $100,000 to a managing member (general partner) in a cash basis service-oriented LLC for the member's share of unrealized receivables and office equipment.

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. a. Describe the treatment of an LLC and discuss any advantages the LLC offers over the C corporation. b. Assume instead the client has previously operated as a C corporation. Describe the tax consequences of converting to an LLC.

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