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

Megan's basis was $120,000 in the MYP Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $100,000, fair market value of $130,000) and inventory (basis of $80,000, fair market value of $70,000). After the distribution, Megan's bases in the land and inventory are, respectively:

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.

Beth has an outside basis of $100,000 in the BTDE Partnership as of December 31 of the current year. On that date the partnership liquidates and distributes to Beth a proportionate distribution of $50,000 cash and inventory with an inside basis to the partnership of $10,000 and a fair market value of $16,000. In addition, Beth receives an antique desk (not inventory) which has an inside basis and fair market value of $0 and $5,000, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Beth recognize on the distribution, and what basis will she take in the desk?

Compare the different tax results (gains, losses, basis) that might arise for a partner in a proportionate nonliquidating distribution vs. a proportionate liquidating distribution. Consider the general rules only.

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

Randi owns a 40% interest in the capital and profits of the RAY Partnership. Immediately before she receives a proportionate nonliquidating distribution from RAY, the basis for her partnership interest is $60,000. The distribution consists of $45,000 in cash and land with a fair market value of $72,000. RAY's adjusted basis in the land immediately before the distribution is $36,000. As a result of the distribution, Randi recognizes a gain of $21,000.

Normally a distribution of property from a partnership does not result in gain recognition. However, a distribution of marketable securities may be treated, in part, as a distribution of cash that could result in gain recognition.

A partnership has accounts receivable with a basis of $0 and a fair market value of $30,000 and depreciation recapture potential of $20,000. All other assets of the partnership are either cash, capital assets, or § 1231 assets. If a purchaser acquires a 40% interest in the partnership from another partner, the selling partner will be required to recognize ordinary income of $12,000.

The BLM LLC's balance sheet on August 31 of the current year is as follows. The nonrecourse debt is shared equally among the LLC members. On that date, Lillie sells her one-third interest to Robyn for $170,000, including cash and relief of Lillie's share of the nonrecourse debt. Lillie's outside basis for her interest in the LLC is $50,000, including her share of the LLC's debt. How much capital gain and/or ordinary income will Lillie recognize on the sale?

The December 31, 2014, balance sheet of the calendar-year JKL Partnership reads as follows. Each partner shares in 1/3 of the partnership capital, income, gain, loss, deduction and credit. On December 31, 2014, Jan sells her 1/3 partnership interest to Jennifer for $43,000 cash. Assume the partnership makes a § 754 election for 2014. a. What is the amount of Jennifer's "step­up" adjustment under § 743(b)? b. If the nondepreciable capital asset is sold the next year for $120,000, determine the amount of gain that Jennifer will recognize on her tax return because of the sale.

Karli owns a 25% capital and profits interest in the calendar-year KJDV Partnership. Her adjusted basis for her partnership interest on July 1 of the current year is $200,000. On that date, she receives a proportionate nonliquidating distribution of the following assets: a. Calculate Karli's recognized gain or loss on the distribution, if any. b. Calculate Karli's basis in the inventory received. c. Calculate Karli's basis in land received. The land is a capital asset. d. Calculate Karli's basis for her partnership interest after the distribution.

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. Determine the amount and character of any gain that Hannah recognizes on the sale.

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. -Liquidating distribution

Frank receives a proportionate nonliquidating distribution from the AEF Partnership. The distribution consists of $10,000 cash and property (adjusted basis to the partnership of $54,000 and fair market value of $60,000). Immediately before the distribution, Frank's adjusted basis in the partnership interest was $50,000. His basis in the noncash property received is:

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 general partner, and most of the partnership's income is derived from services.

At the beginning of the year, Elsie's basis in the E&G Partnership interest is $90,000. She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0, fair market value $40,000), and land (basis of $30,000, fair market value of $50,000). After the distribution, Elsie's bases in the accounts receivable, land, and partnership interest are:

Serena owns a 40% interest in the RST LLP. Partnership assets consist of land (fair market value of $100,000, basis of $80,000), accounts receivable (fair market value of $120,000, basis of $0), and cash of $180,000. Serena sells her interest in RST to Jaclyn for cash of $140,000. In addition, Jaclyn assumes Serena's $40,000 share of the LLP's liabilities. Serena's basis in the partnership interest (including her share of the partnership's liabilities) is $120,000 immediately before the sale. a. How much gain or loss does Serena recognize and what is its character? b. What is Jaclyn's basis in the partnership interest? c. If the LLP has a § 754 election in effect, how much is the adjustment and to which partner(s) is it allocated?

The December 31, 2014, balance sheet of GST Services, LLP reads as follows: The partners share equally in partnership capital, income, gain, loss, deduction, and credit. Capital is not a material income-producing factor to the partnership, and all partners are active in the business. On December 31, 2014, general partner Sue receives a distribution of $200,000 cash in liquidation of her partnership interest under § 736. Sue's outside basis for the partnership interest immediately before the distribution is $150,000. (Her basis does not correspond to her capital account because she purchased the interest a few years ago at a $10,000 premium.) How much is Sue's gain or loss on the distribution and what is its character?

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. -Technical termination

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 $15,000.