Chapter 11 Tax Corp - Important 1

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Chapter 11 Tax Corp - Important 1 - Quiz

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Questions and Answers
  • 1. 

    A cash distribution from a partnership to a partner is generally taxable to the partner. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Cash distributions from a partnership to a partner are generally not taxable to the partner. Instead, the partner's share of the partnership's income is subject to taxation. The partner will only be taxed on the cash distribution if it exceeds their share of the partnership's income. Therefore, the statement "A cash distribution from a partnership to a partner is generally taxable to the partner" is false.

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  • 2. 

    For federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    A distribution from a partnership to a partner is not treated the same as a distribution from a C corporation to its shareholders for federal income tax purposes. In a partnership, the distribution is generally considered a return of the partner's capital and is not subject to tax. On the other hand, a distribution from a C corporation is typically treated as a dividend and is subject to taxation. Therefore, the statement is false.

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  • 3. 

    In a current (non-liquidating) distribution, loss is never recognized. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a current (non-liquidating) distribution, loss is never recognized. This means that when a distribution is made to shareholders, any loss incurred by the company is not recognized or recorded. This is because the distribution is considered a return of capital rather than a loss. The company is simply distributing its assets to shareholders without any implication of loss. Therefore, the statement "loss is never recognized" is true in the context of current (non-liquidating) distributions.

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  • 4. 

    Anna and Brad are equal partners in the AB LLC. If AB distributes $10,000 of cash to Anna and a capital asset valued at $10,000 to Brad, and if both Anna and Brad continue to be members of the LLC, the distribution is classified as a proportionate current distribution. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    A current distribution is one that does not liquidate the interests of the partners or members. A proportionate distribution is one that does not change the partner's interests in the hot assets of the partnership.

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  • 5. 

    In a liquidating distribution, a partnership must distribute all of its property to all of its partners. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    A liquidating distribution occurs either when the partnership liquidates and terminates the interests of all the partners or an ongoing partnership distributes property in liquidation of a single partner's interest.

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  • 6. 

    A distribution can be "proportionate" (as defined for purposes of Subchapter K) even if only one partner receives assets from the partnership. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a partnership, a distribution is considered "proportionate" when it is in accordance with the partner's share of ownership or partnership interest. This means that even if only one partner receives assets from the partnership, it can still be considered proportionate if it aligns with their ownership percentage. Therefore, the statement that a distribution can be "proportionate" even if only one partner receives assets from the partnership is true.

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  • 7. 

    Generally, a distribution of property does not result in gain to a partner on either a current or liquidating distribution. A situation where a gain may arise, however, is when a partner contributed appreciated property to the partnership and that property is distributed back to the contributing partner within seven years of the contribution. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    A distribution of precontribution gain property does not result in gain under § 737 if it is merely returned to the partner who contributed the property to the partnership.

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  • 8. 

    Loss cannot be recognized on a distribution from a partnership unless cash, unrealized receivables, and/or § 1231 assets are the only items distributed. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    A loss can only be recognized on a distribution in which cash, unrealized receivables and/or inventory are the only items distributed, and the distribution is a liquidating distribution.

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  • 9. 

    Generally, no gain is recognized on a proportionate liquidating or current (non-liquidating) distribution of non-cash property even if the FMV of property distributed exceeds the partner's basis in the partnership interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    No gain is recognized on a proportionate liquidating or current (non-liquidating) distribution of non-cash property, even if the fair market value (FMV) of the property distributed exceeds the partner's basis in the partnership interest. This means that if a partner receives non-cash property from the partnership, they will not have to recognize any gain for tax purposes, regardless of the value of the property received compared to their basis in the partnership. This rule applies to both liquidating distributions, which occur when a partnership is winding up its affairs, and current distributions, which are made during the partnership's ongoing operations.

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  • 10. 

    In a proportionate current (non-liquidating) distribution of cash and a capital asset, the partner recognized gain to the extent the amount of cash plus the FMV of property distributed exceeds the partner's basis in the partnership interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    In a proportionate distribution of cash and property, the partner does not recognize a gain or loss unless the amount of cash distributed exceeds the partner's outside basis.

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  • 11. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - in a proportionate distrbution of property, cash is distributed first, followed by unrealized receivables and inventory. All "other assets" are distrbuted last.

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  • 12. 

    A gain will only arise on a distribution from a partnership of cash that exceeds the partner's basis in the partnership interest. For this purpose, only cash, checks, and credit card charges are treated as cash. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Either a distribution of cash or relief of debt will trigger gain to the distributee partner if the distribution exceeds the partner's basis in interest.

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  • 13. 

    The ELF partnership distributed $20,000 cash to Emma in a proportaionate, current (nonliquidating) distribution. Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Emma's basis in her partnership interest was $12,000 before the distribution. As a result of the $20,000 cash distribution, her basis is reduced to $0. Since her basis is reduced to $0, and the distribution exceeded her basis, she recognizes a gain of $8,000. Therefore, the statement "Emma's basis is reduced to $0 and she recognizes an $8,000 gain" is true.

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  • 14. 

    Scott owns 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate current (nonliquidating) distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognized no gain or loss and his basis in the land is $10,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Scott's basis in the land after the distribution is determined by subtracting the cash received ($30,000) from his basis in the partnership interest ($40,000), resulting in a basis of $10,000. Since Scott recognized no gain or loss, his basis in the land remains at $10,000. Therefore, the statement is true.

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  • 15. 

    Randi owns a 40% interest in the capital and profits of the RAY Partnership. Immediately before she receives a proportionate current (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 $57,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Under § 731(a) gain is recognized by a distributee partner in a current (nonliquidating) distribution only if the cash received exceeds the basis of the partner's interest.

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  • 16. 

    Lori, a partner in the JKL partnership, received a proportionate current (nonliquidating) distribution of $10,000 cash, unrealized receivables with a basis of $0 and a fair market value of $15,000, and land with a basis of $6,000 and a fair market value of $10,000. Her basis in the partnership interest immediately before the distribution was $14,000. She will recognize $0 gain on the distribution, and her basis in the receivables and land will be $0 and $4,000 respectively. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Lori received a proportionate current distribution from the partnership, which consisted of cash, unrealized receivables, and land. The distribution does not result in any gain for Lori. Her basis in the partnership interest immediately before the distribution was $14,000, and after the distribution, her basis in the receivables becomes $0, while her basis in the land becomes $4,000. Therefore, the answer is true.

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  • 17. 

    Matt, a partner in the MB Parntership, receives a proportionate, current (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 no gain or loss. He will take a $10,000 basis in the property, and his basis in the partnership interest is reduced to zero. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Matt will recognize no gain or loss because the fair market value of the distributed property is less than his basis in the partnership interest. Therefore, he will take a $10,000 basis in the property, and his basis in the partnership interest is reduced to zero. This is why the answer is True.

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  • 18. 

    Tim and Darby are equal partners in the TD Parntership. Partnership income for the year is $60,000. Tim needs cash in order to pay tax on his share of the partnership income, but Darby wants to leave the cash in the partnership for expansion If the partners agree, it is acceptable for TD to distribute $8,00 to Tim, and no cash or other property to Darby. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Tim and Darby are equal partners in the TD Partnership, and the partnership income for the year is $60,000. Since Tim needs cash to pay taxes on his share of the partnership income, it is acceptable for TD to distribute $8,000 to Tim. This means that Tim will receive the necessary cash, while Darby's share of the partnership income will remain in the partnership for expansion. Therefore, the statement "True" is the correct answer.

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  • 19. 

    Marcie is a 40% member of the M&A LLC. Her basis is $10,000 immediately before the LLC distributes to her $30,000 of cash and land (basis to the LLC of $20,000 and fair market value of $25,000). As a result of the proportionate, current (nonliquidating) distribution, Marcie recognizes a gain of $20,000 and her basis in the land is $0. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Marcie's basis in the LLC is $10,000 and she receives a distribution of $30,000 in cash and land. The fair market value of the land is $25,000, which is greater than her basis in the LLC. This means that Marcie recognizes a gain of $20,000 ($25,000 fair market value - $5,000 basis in the LLC). Therefore, the statement "Marcie recognizes a gain of $20,000 and her basis in the land is $0" is true.

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  • 20. 

    The BAM Partnership distributed the following assets to partners Barbie in a proportionate nonliquidating distribution: $10,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $25,000, fair market value of $30,000). Barbie's basis in her partnership interest was $40,000 immediately before the distribution. Barbie will allocate a basis of $15,000 each to the two land parcels, and her basis in her partnership interest will be reduced to $0. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Barbie takes a total substituted basis in the land parcels of $30,000. That bais must be allocated between the two properties. First, the properties take a carryover basis of $5,000 for parcel A and $25,000 for parcel B, regardless of their fair market values. As there is no remaining basis to allocate, these amounts become Barbie's basis in the two properties.

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  • 21. 

    Carl's basis in his LLC interest is $10,000. In a current (nonliquidating) distribution. Carl receives land (basis = $10,000; FMV = $12,000); and invventory (basis = $6,000; FMV = $8,000). Carl takes a $10,000 basis in the land and a $0 basis in the inventory, and has a $0 basis in the LLC interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Assets are distributed in the following order: 1) cash, 2) hot assets and 3) other assets. The inventory is distributed first, takes a $6,000 carryover basis, and reduces Carl's LLC interest basis to $4,000. The land is stepped down by $6,000 and takes Carl's remaining $4,000 LLC interest basis. Result: inventory basis = $6,000; land basis = $4,000; LLC interest basis = $0.

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  • 22. 

    In a liquidating distribution that liquidates the partnership, each partner recognizes gain or loss equal to the difference between the value of assets received less the partner's basis in the partnership interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Partnership distributions are, in general, tax-deferred transations. Distributed assets take the lesser of a carryover basis (the partnership's basis in the assets) or a substituted basis (the partner's basis in the partnership interest before that asset was distributed). Gain or loss are only recognized in specific, defined situations. True/False

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  • 23. 

    In a proportionate liquidating distribution, RST Parntership distributes to partner Riley cash of $30,000, accounts receivable (basis of $0, FMV of $40,000), and land (basis of $65,000, FMV 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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a proportionate liquidating distribution, the partner receives cash, accounts receivable, and land. The partner's basis in the distributed assets is determined by the fair market value of the assets received. In this case, Riley receives cash of $30,000, accounts receivable with a fair market value of $40,000, and land with a fair market value of $50,000. Since Riley's basis before the distribution was $40,000, which is less than the total fair market value of the assets received ($30,000 + $40,000 + $50,000 = $120,000), Riley recognizes no gain on the liquidation. Therefore, the statement is true.

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  • 24. 

    In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable (basis of $0, FMV of $10,000), and land (basis of $30,000, FMV of $50,000). William's basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - William recognizes no gain or loss because distributed cash was less than his basis in his partnership interest. He takes a carryover basis of $0 in the accounts receivable. William's basis in the land is limisted to his $40,000 basis in the partnership interest after the cash and accounts receivable distributions. William's $80,000 basis is first reduced by the cash distribution to $40,000. Next, the accounts receivable take a $0 carryover basis and William's basis in the parntership interest remains at $40,000. Because this is a liquidating distribution (and because the land is a "hot asset"), the basis in the land is the greater of William's remaining $40,000 basis in his partnership interest or the parntership's $30,000 basis in the land.

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  • 25. 

    Zach's partnership interest basis is $100,000. Zacch recevies a proportionate, liquidating distribution from a liquidating partnership of $50,000 cash and inentory having a bsis of $20,000 to the partnership and a FMV of $30,000. Zach assigns a basis of $20,000 to the inventory and recignizes a $30,000 loss. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Zach's partnership interest basis is $100,000. When he receives a proportionate, liquidating distribution from a liquidating partnership of $50,000 cash and inventory with a basis of $20,000 to the partnership and a fair market value (FMV) of $30,000, he assigns a basis of $20,000 to the inventory. Since the FMV of the inventory is less than its assigned basis, Zach recognizes a loss of $30,000. Therefore, the statement "True" is correct.

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  • 26. 

    The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated; $25,000 cash, land parcel A (basis of $5,000, FMV of $30,000) and land parcel B (basis of $5,000, FMV of $15,000). James's basis in his partnership interest was $85,000 immediately before the distribution. James will alloate basis of $40,000 to parcel A and $20,000 to parcel B, and he will have no remaining basis in his partnership interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a proportionate liquidating distribution, the partnership distributes its assets to the partners in a manner that reflects their proportionate ownership interests. In this case, James is receiving $25,000 cash, which does not affect his basis. He is also receiving land parcel A with a fair market value of $30,000, which is greater than its basis of $5,000. Therefore, James will allocate a basis of $40,000 to parcel A, which is the fair market value, and he will have no remaining basis in his partnership interest. The same logic applies to land parcel B, where James will allocate a basis of $20,000, equal to its fair market value of $15,000. Hence, the statement is true.

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  • 27. 

    Carlos receives a proportionate liquidating distribution consisting of $8000 cash and inventory with a basis to the partnership of $5,000 and a FMV of $6000. His basis in his partnership interest was $15,000 immediately before the distribution. Carlos assigns a basis of $7,000 to the inventory, and recognizes no gain or loss. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The cash distribution reduces Carlo's outside basis in his partnership interest to $7,000 (15,000-8,000). He cannot step up the basis of inventory, so he will take a $5,000 substituted basis (carryover) for the inventory and recognize a $2,000 capital loss.

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  • 28. 

    In a proportionate liquidating distribution in which the partnership is also liquidated, Ralph received cash of $30,000, accounts receivable (basis of $0, FMV of $20,000), and land (basis of $1,000, FMV of $10,000). Immediately before the distribution, Ralph's basis in the partnership interest was $40,000. Ralph realizes and recognizes a loss of $9,000, and his basis is $0 in the accounts receivable and $1,000 in the land. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    A loss can only be recognizes in a liquidating distribution from a partnership if the only asset distributed are cash, unrealized receivables, and inventory. As Ralph received a parcel of land the loss is not deductible. Ralph's basis is reduced to $10,000 by the cash distribution. The A/R take a carryover basis of $0. Because this is a liquidating distribution, Ralph's remaining basis in the partnership interest of $10,000 is allocated to the land, and no loss is recognized.

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  • 29. 

    Cynthia's basis in her LLC interest was $60,000, including her $40,000 share of the LLCs debt. In a proportionate liquidating distribution in which the LLC also liquidates, Cynthia receives cash of $50,000, and inventory with a basis of $3,000 and a FMV of $5,000. Cynthia recognizes a gain of $30,000 on the distribution and take a basis of $0 in the inventory. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    Relief of debt is treated as a cash distribution. Cynthia receives $90,000 as a distribution against her $60,000 basis. The basis is reduced to $0 so she cannot assign any basis to the inventory.

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  • 30. 

    Two years ago, Marcus contributed land with a basis of $6,000 and a FMV of $20,000 in exchange for a 30% interest in the MNO LLC. This year, when the value was $25,000, that property was distributed to Jamal, whose basis in the LLC interest was $50,000 before the distribution. Marcus will recognize a gain of $14,000 and increase his basis in his LLC interest by that same amount; Jamal will take a $20,000 basis in the distributed property. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    20,000 - 6,000 = 14,000
    $14,000 built-in gain at the contribution date must be recognized by that contributing partner, Marcus. The distributee partner, Jamal, first take a basis under the normal distribution rules ($6,000) and then increases the basis in the property by the $14,000 gain recognzied by Marcus; his basis is $20,000.

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  • 31. 

    Several years ago, the Jaymo Partnership purchased $2,000 shares of ABCO stock (publicy traded) for $40,000; the stock now has a FMV of $90,000. Jaymo owns no other securities. If this stock is distributed to Jason in liquidation of his 30% partnership interest, a portion of the distribution is treated as a cash distribution, and becayse the security is appreciated, a portion is treated as a normal property distribution. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    The appreciation in the stock allocable to Jason's ownership interest is treated as a property distribution rather than a cash distribution. Although beyond the scope of the text, note that Jason's share of the appreciation in the stock before the distribution was $15,000 (30%*(90,000-40,000). Jason's deemed cash distribution is $75,000 (90,000-15,000) and his property distribution is $15,000

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  • 32. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    The FMV of a marketable security distributed to a partners is generally treated as a cash distribution. On a distribution to a partners, gain arises when cash distributions (or deemed cash distribtutions) exceed the partner's basis in the partnership interest.

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  • 33. 

    The Crimson Partnership is a service provider. Its assets consist of unrealized receivables (basis of $0, FMV of $400,000), cash of $200,000, and land (basis of $200,000, FMV of $300,000). Assume 20% general partner Jana has a basis in her partnership interest of $100,000. If the ongoing partnership distributes $200,000 cash to Jana in liquidation of her interest in the partnership, she will recognize ordinary income of $80,000 and a capital gain of $20,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    Section 736 applies. Capital is not a material income-producing factor in the partnership and because Jana is a general partners, the cash payment for her $80,000 share of the unrealized receivables is classidied as a guaranteed payment under 736 and Jana will recognize $80,000 of ordinary income. The rest of the payment will be 736(b) and Jana will recognize $20,000 (120,000-100,000)

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  • 34. 

    Mark contributed property to the MDB Partnership in year 1. At the time of the contribution, the basis in the property was $40,000 and its value was $50,000. In year 5, MDB distributed that property to partners Dara. Because this is a distribution of precontribution gain property, Dara may be recquired to recognize a gain. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    A distribution of precontribution gain property results in gain to the contributing partner (Mark) under 704(c)(1)(B) if it is distributed to a partner other than the contributing partner within seven years of the contribution and any precontribution gain remains to be recognized.

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  • 35. 

    A disproportionate 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 interst in the partnership. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    Each partner is deemed to own a share of the partnership's unrealized receivables and inventory. If a partner's share of these assets changes, the partner's ordinary income potential has shifted. Thus, a disproportionate distribution is one in which such ordinary income potential has shifted.

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  • 36. 

    In addition to its other assets, BC LLC has unrealized receivables (basis=$0, FMV=$60,000) and inventory (basis=$30,000, FMV=$40,000). If BC distributes $60,000 cash to Bart and the unrealized receivable to Charles, then Bart will recognize ordinary income of $30,000 and Charles will have a basis of $30,000 in receivables values at $60,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    The disproportionate distribution rules are designed so that the partners remain responsible for their respective shares of ordinary income. Hot assets are deemed to be distributed equally to the two LLC memvers - they both take a $0 basis in their $30,000 unrealized receivable. Then, Bary is deemed to sell his receivables to Charles, resulting in $30,000 of ordinary income. Bart recognizes $30,000 income not and charles will recognize $30,000 of income when he collects on the $60,000 receivable.

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  • 37. 

    A payment to a retiring general partner for his or her share of goodwill of a partnership in which capital is a material income-producing factor is classified as a § 736(a) income payment and results in ordinary income to the retiring partner and a current deduction to the partnership, as long as the goodwill payment is provided for in the partnership agreement. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    Goodwill is a § 736(a) payment only if the payment is to a retiring general partner, the partnership is an entity in which capital is not a material income-producing factor, and the goodwill is not provided for in the partnership agreement.

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  • 38. 

    Taylor's basis in his partnership's interest is $140,000, including his $60,000 share of partnership debt, Sandy buys Taylor's partnership interest for $100,00 cash and she assumes Taylor's $60,000 share of the partnership's debt. If the partnership ownes no hot assets, Taylor will recognize a capital loss of $40,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    False
    The partner's share of partnership debt is included in both the partner's basis in the partnership interest and in the proceeds received on the sale. Taylor's sales price for the interest is $160,000 (100,000 cash + 60,000 assumption of partnership debt). Because his basis was $140,000, he realizes a capital gain of $20,000.

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  • 39. 

    James received a distribution of $110,000 cash in liquidation of his 25% managing (general partner) interest in the JKL LLP. JKL is a service oriented entity. Before the distribution, the LLP's assets consisted of $200,000 cash, land (basis of $40,000, FMV of $100,000), unrealized receivables (basis of $0, FMV of $100,000), and goodwill (basis of $0, FMV of $40,000). James negotiated the $10,000 portion of the payment that is for goodwill; the partnership agreement does not address payments to retiring partners for goodwill. James will recognize $35,000 of ordinary income from his § 736(a) payment; the remaining $75,000 distribution is treated as a § 736(b) property payment for his paternship interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    The § 736(b) payment James receives for his share of partnership property is $75,000 or 25% of the value of the partnership's cash and land. The payment James receives as a § 736(a) payment is $35,000 or 25% of his share of the partnership's unrealizes receivables and goodwill. Goodwill payment is treated as a § 736(a) payment because James is a general partner in a partnership in which capital is not a material income-producing factor, and because the goofwill is not provided for in the partnership agreement.

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  • 40. 

    Nick sells his 25% interest in the LMNO Partnership to a new partner Katrina for $67,500. The partnership's assets consist of cash $100,000, land (basis of $90,000, FMV of $110,000) and inventory (basis of $40,000, FMV of $60,000). Nick's basis in his partnership interest was $57,000. On the sale, Nick will recognize ordinary income of $5,000 and a capital gain of $5,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    Nick receives $15,000 for his share of the partnership's inventory, in which he partnership's basis is $10,000. Therefore, Nick recognizes $5,000 of ordinary income. The remaining sales price is for Nick's interest in the partnership's land and cash. Nick receives $52,500 (67,500-15,000) for his interest in those assets which have a basis of $47,500 (25,000 cash share + $22,500 land share) so he recognizes a $5,000 capital gain on that part of the transation.

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  • 41. 

    Midway through the current tax year, Georgie sells her 40% interest in the GHI Partnership to new partner Kelly for $150,000, including Georgie's share of partnership liabilities. At the beginning of the tax year, Georgie's basisin her partnership interest was $40,000 (ecluding her share of partnership debt). The partnership reported income of $120,000 for the year, and Goergie's share of partnership debt was $50,000 at the sale date. (Assume the partnership uses a monthly proation of income). On the sale date, the partnership's assets consist of cash (195,000), land (basis of $90,000, FMV of $120,000), and unrealized receivables (basis of $0, FMV of $60,000). Georgie will recognize ordinary income of $24,000 and a capital gain of $12,000, for a total of $36,000 on the sale. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Georgie's basis in her partnership interest was $40,000 at the beginning of the tax year. She sold her 40% interest in the partnership for $150,000, which includes her share of partnership liabilities. The partnership reported income of $120,000 for the year. Georgie's share of partnership debt at the sale date was $50,000. The partnership's assets at the sale date include cash, land, and unrealized receivables. Based on these facts, Georgie will recognize ordinary income of $24,000 and a capital gain of $12,000 on the sale. Therefore, the statement that Georgie will recognize a total of $36,000 on the sale is true.

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  • 42. 

    If one partner dies in a two partnership, the estate cannot be a partner, so the partnership is terminated. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    Interest is transferred to the successor in interest, who becomes a partner.

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  • 43. 

    A partnership has accounts receivable with a basis of $0 and a FMV of $30,000 and a 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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    The selling partner must recognize ordinary income to the extent of the gain inherent in the partner's share of unrealized receivables. 30,000 unrealized receivables + 20,000 depreciation recapture = 50,000 * .4 = 20,000 ordinary income

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  • 44. 

    A § 754 election is made for a tax year in which the partner recognizes gain or loss on a distribution from the partnership or the distributee partner's basis in distributed property is increased or decreased from the inside basis the partnership held in those assets. The election is made by the partnership each year in which it is necessary to adjust a partner's share of the inside basis of partnership assets; in a year in which any favorable result would arise, the partnership can forego making the election. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False
    The partnership, not the partner, makes a basis adjustment election under § 754. Once made, the election remains in effect until it is revoked.

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  • 45. 

    Orson was a 40% partner in the calendar year ORP, LLC. When Orson died on June 30, the interest transferred to his estate. On October 1 of that year, Yolanda, an unrelated third party, acquired Orson's interest from his estate (with the approval of the other LLC members). The LLC's operating agreement provides that a monthly allocation (annual income divided by 12) will be used to prorate income when required. For the year, the LLC will issue three Schedules K-1 related to this interest: (1) 20% of the year's income to Orson, (2) 10% to the Estate of Orson, and (3) 10% to Yolanda. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    When a partner dies, the partnership tax year closes with respect to that partner, and the income is allocated between the decedent and the successor in interest.

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  • 46. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    If the basis of partnership assets exceeds their value by more than $250,000 and if there is a sale of a partnership interest, the partnership has a substantial built-in loss. The partnership is not required to make a § 754 election, but the basis of the partnership assets must be reduced to correct the basis differential.

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  • 47. 

    Beth sold her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year. Katie also assumed Beth's share of the partnership's liabilities. Beth's basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities. The partnership's income for the entire year was $100,000, and Beth's share of partnership debt was $10,000 as of the date she sold the partnership interest. Assume the calendar-year partnership has no hot assets, all of its income is earned evenly throughout the year, and the partnership uses the monthly proration method to allocate its income among the partners. Beth recognizes a gain of $12,500 on the sale. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    40,000 basis + (5,000 share of debt) = 35,000
    35,000 + (100,000 income 8 .25 * 1/2 year) 12,500 = 47,500
    50,000 sale + 10,000 assumption of liabilities = 60,000 - 47,500 (Beth's basis) = 12,500 gain

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  • 48. 

    The MBA Partnership makes a § 736(b) cash payment of $20,000 to partner Amanda in liquidation of her interest in the partnership. The partnership owns no hot assets. Amanda's basis in her partnership interest before the distribution was $50,000. If the partnership has a § 754 election in effect, it will record a $30,000 decrease in its inside basis in partnership assets, affecting all the remaining partners in the partnership. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    A distribution where the partner reports a loss results in a step-down in partnership assets basis under § 754. 20,000 cash - 50,000 basis = (30,000) loss. A step-down is allocated to the remaining assets in the partnership and affects the remaining partners.

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  • 49. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    400,000 sale of partnership - 240,000 (600,000 inside basis * 40%) = 160,000 step-up allowed solely to Ashley.

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  • 50. 

    In the year a donor gives a partnership interest to a donee, their share of the partnership's income is prorated between the donor and donee. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True
    Partnership income is prorated between the donor and the donee for the year of the gift. If the partnership's tax year does not close on the date of the gift, the partnership is not required to issue a Schedule K-1 to the donor until its normal due date.

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