Deck 21: Dispositions of Partnership Interests and Partnership Distributions

Question 1

Under what circumstances will a partner recognize a loss from an operating distribution?

Answer 1

A partner can record the loss resulting from an operating distribution if the amount collected is not sufficient to cover the outside basis.This reduction can be taken to mean a reduction in the share of debt as a distribution of money.If an increase is done from the partner's side then this is considered as cash contributed by the partner.
This is also considered to mean the outside basis for the individual partner after the distribution.On the other hand if the partner cannot reduce his outside basis to zero then the partner can record loss.

Question 2

Joy is a 30% partner in the JOM Partnership when she sells her entire interest to Hope for $72,000 cash.At the time of the sale, Joy's basis in JOM is $44,000 (which includes her $6,000 share of JOM liabilities).JOM does not have any hot assets.What is Joy's gain or loss on the sale of her interest?

Answer 2

In the current scenario of JOM Partnership, below are the computation of gain earned by joy;
Joy's Gain Joy accomplished a gain of in the sale of interest in JOM Partnership.

Question 3

Melissa, Nicole, and Ben are equal partners in the Opto partnership (calendar year-end).Melissa decides she wants to exit the partnership and receives a proportionate distribution to liquidate her partnership interest on January 1.The partnership has no liabilities and holds the following assets as of January 1 Melissa receives one-third of each of the partnership assets.She has a basis in her partnership interest of $25,000.?a.What is the amount and character of any recognized gain or loss to Melissa?
?b.What is Melissa's basis in the distributed assets?
?c.What are the tax implications (amount and character of gain or loss and basis of assets) to Melissa if her outside basis is $11,000 rather than $25,000?
d.What is the amount and character of any recognized gain or loss from thedistribution to Opto?

Answer 3

In the current scenario of O Partnership, below are the computation of Gain or Loss;
a)Mellisa's Gain or Loss
The calculation for gain or loss is as follows:- Therefore there is a gain of b)Mellisa's Basis
The basis of Melisa in the assets which are distributed is $25,000.)Mellisa's Gain or Loss
The calculation is as follows:- Therefore there is a loss of d)O Partnership Gain or Loss
The calculation is as under:-

Question 4

In general, what effect does an operating distribution have on the partnership?

Question 5

Allison, Keesha, and Steven each own equal interests in KAS partnership, a calendar year-end, cash-method entity.On January 1 of the current year, Steven's basis in his partnership interest is $27,000.During January and February, the partnership generates $30,000 of ordinary income and $4,500 of tax exempt income.On March 1, Steven sells his partnership interest to Juan for a cash payment of $45,000.The partnership has the following assets and no liabilities at the sale date: a.Assuming KAS's operating agreement provides for an interim closing of the books when partners' interests change during the year, what is Steven's basis in his partnership interest on March 1 just prior to the sale?
b.What is the amount and character of Steven's recognized gain or loss on the sale?
c.What is Juan's basis in the partnership interest?
d.What is the partnership's basis in the assets following the sale?

Question 6

AJ is a 30% partner in the Trane partnership, a calendar year end entity.On January 1, AJ has an outside basis in his interest in Trane of $73,000, which includes his share of the $50,000 of partnership liabilities.Trane generates $42,000 of income during the year and does not make any changes to its liabilities.On December 31, Trane makes a proportionate distribution of the following assets to AJ to terminate his partnership interest:
?? Basis ? FMV
?Inventory?$ 55,000?$ 65,000
?Land? 30,000 ? 25,000
? Totals? $ 85,000 ? $90,000
?
a.What are the tax consequences (gain or loss, basis adjustments) of the distribution to Trane?
b.What is the amount and character of any recognized gain or loss to AJ?
?c.What is AJ's basis in the distributed assets?
d.If AJ sells the inventory four years after the distribution for $70,000, what is the amount and character of his recognized gain or loss?

Question 7

Joey is a 25% owner of Loopy LLC.He no longer wants to be involved in the business.What options does Joey have to exit the business?

Question 8

If a partner's outside basis is less than the partnership's inside basis in distributed assets, how does the partner determine his basis of the distributed assets in an operating distribution?

Question 9

Grace, James, Helen, and Charles each own equal interests in GJHC partnership, a calendar year-end, cash-method entity.On January 1 of the current year, James' basis in his partnership interest is $62,000.For the taxable year, the partnership generates $80,000 of ordinary income and $30,000 of dividend income.For the first 5 months of the year, GJHC generates $25,000 of ordinary income and no dividend income.On June 1, James sells his partnership interest to Robert for a cash payment of $70,000.The partnership has the following assets and no liabilities at the sale date: a.Assuming GJHC's operating agreement provides that the proration method will be used to allocate income or loss when partners' interests change during the year, what is James' basis in his partnership interest on March 1 just prior to the sale?
b.What is the amount and character of James' recognized gain or loss on the sale?
c.If GJHC uses an interim closing of the books, what is the amount and character of James' recognized gain or loss on the sale?

Question 10

David's basis in the Jimsoo Partnership is $53,000.In a proportionate liquidating distribution, David receives cash of $7,000 and two capital assets: land one with a fair market value of $20,000 and a basis to Jimsoo of $16,000 and land two with a fair market value of $10,000 and a basis to Jimsoo of $16,000.Jimsoo has no liabilities.?a.How much gain or loss will David recognize on the distribution? What is the character of any recognized gain or loss?
?b.What is David's basis in the distributed assets?
?c.If the two parcels of land had been inventory to Jimsoo, what are the tax consequences to David (amount and character of gain or loss and basis in distributed assets)?

Question 11

Compare and contrast the aggregate and entity approaches for a sale of a partnership interest.

Question 12

Under what conditions will a partner recognize gain in a liquidating distribution?

Question 13

At the end of last year, Lisa, a 35% partner in the five-person LAMEC partnership, has an outside basis of $60,000 including her $30,000 share of LAMEC debt.On January 1 of the current year, Lisa sells her partnership interest to MaryLynn for a cash payment of $45,000 and the assumption of her share of LAMEC's debt.a.What is the amount and character of Lisa's recognized gain or loss on the sale?
b.If LAMEC has $100,000 of unrealized receivables as of the sale date, what is the amount and character of Lisa's recognized gain or loss?
c.What is MaryLynn's basis in the partnership interest?

Question 14

Megan and Matthew are equal partners in the J J partnership (calendar-year-end entity).On January 1 of the current year, they decide to liquidate the partnership.Megan's basis in her partnership interest is $100,000 and Matthew's is $35,000.The two partners receive identical distributions with each receiving the following assets: ?a.What is the amount and character of Megan's recognized gain or loss?
?b.What is Megan's basis in the distributed assets?
?c.What is the amount and character of Matthew's recognized gain or loss?
?d.What is Matthew's basis in the distributed assets?

Question 15

What restrictions might prevent a partner from selling his partnership interest to a third party?

Question 16

Under what conditions will a partner recognize loss in a liquidating distribution?

Question 17

Marco, Jaclyn, and Carrie formed Daxing partnership (a calendar year-end entity) by contributing cash 10 years ago.Each partner owns an equal interest in the partnership.Marco, Jaclyn, and Carrie each have an outside basis in his/her partnership interest of $104,000.On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000.The partnership has the following assets and no liabilities as of the sale date: The equipment was purchased for $240,000 and the partnership has taken $60,000 of depreciation.The stock was purchased 7 years ago.a.What are the "hot assets" (§751(a)) for this sale?
b.What is Marco's gain or loss on the sale of his partnership interest?
c.What is the character of Marco's gain or loss?
d.What is Ryan's inside and outside bases in the partnership on the date of the sale?

Question 18

Bryce's basis in the Markit Partnership is $58,000.In a proportionate liquidating distribution, Bryce receives the following assets:
?a.How much gain or loss will Bryce recognize on the distribution? What is the character of any recognized gain or loss?
?b.What is Bryce's basis in the distributed assets?

Question 19

Explain how a partner's debt relief affects his amount realized in a sale of partnership interest.

Question 20

Describe how a partner determines his basis in distributed assets in cases in which a partnership distributes only money, inventory, and/or unrealized receivables in a liquidating distribution.

Question 21

Franklin, Jefferson, and Washington formed the Independence Partnership (a calendar-year-end) by contributing cash 10 years ago.Each partner owns an equal interest in the partnership.Franklin, Jefferson, and Washington each have an outside basis in his partnership interest of $104,000.On January 1 of the current year, Franklin sells his partnership interest to Adams for a cash payment of $122,000.The partnership has the following assets and no liabilities as of the sale date: The equipment was purchased for $240,000 and the partnership has taken $60,000 of depreciation.The stock was purchased 7 years ago.a.What is Franklin's overall gain or loss on the sale of his partnership interest?
b.What is the character of Franklin's gain or loss?

Question 22

{Planning} Bella Partnership is an equal partnership in which each of the partners has a basis in his partnership interest of $10,000.Bella reports the following balance sheet: ??Liabilities and capital: ?a.Identify the "hot assets" if Toby decides to sell his partnership interest.Are these assets "hot" for purposes of distributions?
?b.If Bella distributes the land to Toby in complete liquidation of his partnership interest, what tax issues should be considered?

Question 23

Under what circumstances will the gain or loss on the sale of a partnership interest be characterized as ordinary rather than capital?

Question 24

How does a partner determine his basis in distributed assets when the partnership distributes other property in addition to money and hot assets?

Question 25

Travis and Alix Weber are equal partners in the Tralix partnership, which does not have a §754 election in place.Alix sells one-half of her interest (25%) to Michael Tomei for $30,000 cash.Just before the sale, Alix's basis in her entire partnership interest is $75,000 including her $30,000 share of the partnership liabilities.Tralix's assets on the sale date are as follows a.What is the amount and character of Alix's recognized gain or loss on the sale?
b.What is Alix's basis in her remaining partnership interest?
c.What is Michael's basis in his partnership interest?
d.What is the effect of the sale on the partnership's basis in the assets?

Question 26

Michelle pays $120,000 cash for Brittany's one-third interest in the Westlake Partnership.Just prior to the sale, Brittany's interest in Westlake is $96,000.Westlake reports the following balance sheet:
?a.What is the amount and character of Brittany's recognized gain or loss on the sale?
?b.What is Michelle's basis in her partnership interest? What is Michelle's inside basis?
?c.If Westlake were to sell the land for $264,000 shortly after the sale of Brittany's partnership interest, how much gain or loss would the partnership recognize?
?d.How much gain or loss would Michelle recognize?
?e.Suppose Westlake has a §754 election in place.What is Michelle's special basis adjustment? How much gain or loss would Michelle recognize on a subsequent sale of the land in this situation?

Question 27

What are "hot assets" and why are they important in the sale of a partnership interest?

Question 28

{Planning} SBT partnership distributes $5,000 cash and a parcel of land with a fair market value of $40,000 and a $25,000 basis to the partnership to Sam (30% partner).What factors must Sam and SBT consider in determining the tax treatment of this distribution?

Question 29

Newton is a one-third owner of ProRite Partnership.Newton has decided to sell his interest in the business to Betty for $50,000 cash plus the assumption of his share of ProRite's liabilities.Assume Newton's inside and outside basis in ProRite are equal.ProRite shows the following balance sheet as of the sale date What is the amount and character of Newton's recognized gain or loss?

Question 30

Cliff's basis in his Aero partnership interest is $11,000.Cliff receives a distribution of $22,000 cash from Aero in complete liquidation of his interest.Aero is an equal partnership with the following balance sheet: ?Liabilities and capital: ?a.What is the amount and character of Cliff's recognized gain or loss? What is the effect on the partnership assets?
?b.If Aero has a §754 election in place, what is the amount of the special basis adjustment?

Question 31

For an accrual-method partnership, are accounts receivable considered unrealized receivables? Explain.

Question 32

Discuss the underlying concern to tax policy makers in distributions in which a partner receives more or less than his share of the partnership hot assets.

Question 33

Coy and Matt are equal partners in the Matcoy Partnership.Each partner has a basis in his partnership interest of $28,000 at the end of the current year, prior to any distribution.On December 31, they each receive an operating distribution.Coy receives $10,000 cash.Matt receives $3,000 cash and a parcel of land with a $7,000 fair market value and a $4,000 basis to the partnership.Matcoy has no debt or hot assets.a.What is Coy's recognized gain or loss? What is the character of any gain or loss?
b.What is Coy's ending basis in his partnership interest?
?c.What is Matt's recognized gain or loss? What is the character of any gain or loss?
d.What is Matt's basis in the distributed property?
e.What is Matt's ending basis in his partnership interest?

Question 34

Erin's basis in her Kiybron partnership interest is $3,300.Erin receives a distribution of $2,200 cash from Kiybron in complete liquidation of her interest.Kiybron is an equal partnership with the following balance sheet: ?Liabilities and capital: ?a.What is the amount and character of Erin's recognized gain or loss? What is the effect on the partnership assets?
?b.If Kiybron has a §754 election in place, what is the amount of the special basis adjustment?

Question 35

Can a partnership have unrealized receivables if it has no accounts receivable?

Question 36

In general, how do the disproportionate distribution rules ensure that partners recognize their share of partnership ordinary income?

Question 37

Justin and Lauren are equal partners in the PJenn Partnership.The partners formed the partnership seven years ago by contributing cash.Prior to any distributions, the partners have the following bases in their partnership interests On December 31 of the current year, the partnership makes a pro-rata operating distribution of: ?? Property 7,000 ?(FMV) ($2,000 basis to partnership)a.What is the amount and character of Justin's recognized gain or loss?
b.What is Justin's remaining basis in his partnership interest?
c.What is the amount and character of Lauren's recognized gain or loss?
d.What is Lauren's basis in the distributed assets?
e.What is Lauren's remaining basis in her partnership interest?

Question 38

Helen's basis in Haywood partnership is $270,000.Haywood distributes all the land to Helen in complete liquidation of her partnership interest.The partnership reports the following balance sheet just before the distribution: ?Liabilities and capital: ?a.What is the amount and character of Helen's recognized gain or loss? What is the effect on the partnership assets?
?b.If Haywood has a §754 election in place, what is the amount of the special basis adjustment?

Question 39

How do hot assets affect the character of gain or loss on the sale of a partnership interest?

Question 40

{Planning} Why would a new partner who pays more for a partnership interest than the selling partner's outside basis want the partnership to elect a special basis adjustment?

Question 41

Adam and Alyssa are equal partners in the PartiPilo Partnership.The partners formed the partnership three years ago by contributing cash.Prior to any distributions, the partners have the following bases in their partnership interests On December 31 of the current year, the partnership makes a pro-rata operating distribution of: ??Property 8,000 ?(FMV) ($6,000 basis to partnership)a.What is the amount and character of Adam's recognized gain or loss?
b.What is Adam's remaining basis in his partnership interest?
c.What is the amount and character of Alyssa's recognized gain or loss?
d.What is Alyssa's basis in the distributed assets?
e.What is Alyssa's remaining basis in her partnership interest?

Question 42

Simon is a 30% partner in the SBD partnership, a calendar-year-end entity.As of the end of this year, Simon has an outside basis in his interest in SBD of $188,000, which includes his share of the $60,000 of partnership liabilities.On December 31, SBD makes a proportionate distribution of the following assets to Simon: a.What are the tax consequences (amount and character of recognized gain or loss, basis in distributed assets) of the distribution to Simon if the distribution is an operating distribution?
b.What are the tax consequences (amount and character of recognized gain or loss, basis in distributed assets) of the distribution to Simon if the distribution is a liquidating distribution?
c.Compare and contrast the results from parts a.and b.

Question 43

Under what circumstances can a partner recognize both gain and loss on the sale of a partnership interest?

Question 44

List two common situations that will cause a partner's inside and outside basis to differ.

Question 45

Karen has a $68,000 basis in her 50% partnership interest in the KD Partnership before receiving a current distribution of $6,000 cash and land with a fair market value of $35,000 and a basis to the partnership of $18,000.a.What is the amount and character of Karen's recognized gain or loss?
b.What is Karen's basis in the land?
c.What is Karen's remaining basis in her partnership interest?

Question 46

{Planning} Paolo is a 50% partner in the Capri partnership and has decided to terminate his partnership interest.Paolo is considering two options as potential exit strategies.The first is to sell his partnership interest to the two remaining 25% partners, Giuseppe and Isabella, for $105,000 cash and the assumption of Paolo's share of Capri's liabilities.Under this option, Giuseppe and Isabella would each pay $52,500 for half of Paolo's interest.The second option is to have Capri liquidate his partnership interest with a proportionate distribution of the partnership assets.Paolo's basis in his partnership interest is $110,000, including Paolo's share of Capri's liabilities.Capri reports the following balance sheet as of the termination date: Liabilities and capital: a.If Paolo sells his partnership interest to Giuseppe and Isabella for $105,000, what is the amount and character of Paolo's recognized gain or loss?
b.Giuseppe and Isabella each have a basis in Capri of $55,000 before any purchase of Paolo's interest.What are Giuseppe and Isabella's basis in their partnership interests following the purchase of Paolo's interest?
c.If Capri liquidates Paolo's partnership interest with a proportionate distribution of the partnership assets, what is the amount and character of Paolo's recognized gain or loss?
d.If Capri liquidates Paolo's interest, what is Paolo's basis in the distributed assets?
e.Compare and contrast Paolo's options for terminating his partnership interest.

Question 47

Absent any special elections, what effect does a sale of partnership interest have on the partnership?

Question 48

Explain why a partnership might not want to make a §754 election to allow special basis adjustments.

Question 49

Pam has a $27,000 basis (including her share of debt) in her 50% partnership interest in the Meddoc partnership before receiving any distributions.This year Meddoc makes a current distribution to Pam of a parcel of land with a $40,000 fair market value and a $32,000 basis to the partnership.The land is encumbered with a $15,000 mortgage (the partnership's only liability).a.What is the amount and character of Pam's recognized gain or loss?
b.What is Pam's basis in the land?
c.What is Pam's remaining basis in her partnership interest?

Question 50

Carrie D'Lake, Reed A.Green, and Doug A.Divot share a passion for golf and decide to go into the golf club manufacturing business together.On January 2, 2011, D'Lake, Green, and Divot form the Slicenhook Partnership, a general partnership.Slicenhook's main product will be a perimeter-weighted titanium driver with a patented graphite shaft.All three partners plan to actively participate in the business.The partners contribute the following property to form Slicenhook: Carrie had recently acquired the land with the idea that she would contribute it to the newly formed partnership.The partners agree to share in profits and losses equally.Slicenhook elects a calendar year end and the accrual method of accounting.In addition, Slicenhook borrows $1,500,000 from BigBank at the time the contributions were made.Slicenhook uses the proceeds from the loan and the cash contributions to build a state-of-the-art manufacturing facility ($1,200,000), purchase equipment ($600,000), and produce inventory ($400,000).With the remaining cash, Slicenhook invests $45,000 in the stock of a privately owned graphite research company and retains $55,000 as working cash.Slicenhook operates on a just-in-time inventory system so it sells all inventory and collects all sales immediately.That means that at the end of the year, Slicenhook does not carry any inventory or accounts receivable balances.During 2011, Slicenhook has the following operating results: The partnership is very successful in its first year.The success allows Slicenhook to use excess cash from operations to purchase $15,000 of tax-exempt bonds (you can see the interest income already reflected in the operating results).The partnership also makes a principal payment on its loan in the amount of $300,000 and a distribution of $100,000 to each of the partners on December 31, 2011.
The partnership continues its success in 2012 with the following operating results: The operating expenses include a $1,800 trucking fine that one of their drivers incurred for reckless driving and speeding and meals and entertainment expense of $6,000.By the end of 2012, Reed has had a falling out with Carrie and Doug and has decided to leave the partnership.He has located a potential buyer for his partnership interest, Indie Ruff.Indie has agreed to purchase Reed's interest in Slicenhook for $730,000 in cash and the assumption of Reed's share of Slicenhook's debt.Carrie and Doug, however, are not certain that admitting Indie to the partnership is such a good idea.They want at least to consider having Slicenhook liquidate Reed's interest on January 1, 2013.As of January 1, 2013, Slicenhook has the following assets: Carrie and Doug propose that Slicenhook distribute the following to Reed in complete liquidation of his partnership interest: Slicenhook has not purchased or sold any equipment since its original purchase just after formation.a.Determine each partner's recognized gain or loss upon formation of Slicenhook.b.What is each partner's initial tax basis in Slicenhook on January 2, 2011?
c.Prepare Slicenhook's opening tax basis balance sheet as of January 2, 2011.d.Using the operating results, what are Slicenhook's ordinary income and separately stated items for 2011 and 2012? What amount of Slicenhook's income for each period would each of the partner's receive?
e.What are Carrie's, Reed's, and Doug's bases in their partnership interest at the end of 2011 and 2012?
f.If Reed sells his interest in Slicenhook to Indie Ruff, what is the amount and character of his recognized gain or loss? What is Indie's basis in the partnership interest?
g.What is Indie's inside basis in Slicenhook? What effect would a §754 election have on Indie's inside basis?
h.If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed's partnership interest, what is the amount and character of Reed's recognized gain or loss? What is Reed's basis in the distributed assets?
i.Compare and contrast Reed's options for terminating his partnership interest.

Question 51

{Research} Generally, a selling partner's capital account carries over to the purchaser of the partnership interest.Under what circumstances will this not be the case?

Question 52

When might a new partner have an upward basis adjustment following the acquisition of a partnership interest?

Question 53

{Research} Two years ago, Kimberly became a 30% partner in the KST Partnership with a contribution of investment land with a $10,000 basis and $16,000 fair market value.On January 2 of this year, Kimberly has a $15,000 basis in her partnership interest and none of her pre-contribution gain has been recognized.On January 2, Kimberly receives an operating distribution of a tract of land (not the contributed land) with a $12,000 basis and an $18,000 fair market value.a.What is the amount and character of Kimberly's recognized gain or loss on the distribution?
b.What is Kimberly's remaining basis in KST after the distribution?
c.What is KST's basis in the land Kimberly contributed after Kimberly receives this distribution?

Question 54

What distinguishes operating from liquidating distributions?

Question 55

Are special basis adjustments mandatory? If so, when?

Question 56

Rufus is a one-quarter partner in the Adventure partnership.On January 1 of the current year, Adventure distributes $13,000 cash to Rufus in complete liquidation of his interest.Adventure has only capital assets and no liabilities at the date of the distribution.Rufus' basis in his partnership interest is $18,500.a.What is the amount and character of Rufus' recognized gain or loss?
b.What is the amount and character of Adventure's recognized gain or loss?
c.If Rufus' basis is $10,000 at the distribution date rather than $18,500, what is the amount and character of Rufus' recognized gain or loss?

Question 57

Under what circumstances will a partner recognize a gain from an operating distribution?

Question 58

Jerry is a 30% partner in the JJM Partnership when he sells his entire interest to Lucia for $56,000 cash.At the time of the sale, Jerry's basis in JJM is $32,000.JJM does not have any debt or hot assets.What is Jerry's gain or loss on the sale of his interest?

Question 59

The Taurin Partnership (calendar-year-end) has the following assets as of December 31 of the current year:
On December 31, Taurin distributes $15,000 of cash, $10,000 (FMV) of accounts receivable, and $40,000 (FMV) of inventory to Emma (a 1/3 partner) in termination of her partnership interest.Emma's basis in her partnership interest immediately prior to the distribution is $40,000.?a.What is the amount and character of Emma's recognized gain or loss on the distribution?
?b.What is Emma's basis in the distributed assets?
?c.If Emma's basis before the distribution was $55,000 rather than $40,000, what is Emma's recognized gain or loss and what is her basis in the distributed assets?