Chapter 11 Tax Corp - Important 1

  • IRS Regulations
  • Subchapter K
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1. 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

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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Chapter 11 Tax Corp - Important 1 - Quiz

Explore key concepts of partnership distributions in tax law through 'Chapter 11 Tax Corp - important 1'. This quiz assesses understanding of tax implications in cash and asset distributions among partners, differentiating partnership and corporate distribution treatments.

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2. 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

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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3. 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 p 754 election is not in effect. True/False

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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4. 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 p 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

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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5. Fred and Wilma formed the equally-owned FW partnership several years ago. On the last day of the prior tax year, they each transferred a 20% interest in the FW partnership (a capital-intensive business) to their son, Rocky (40% total to Rocky; Fred and Wilma each retained 30% interests). For the current tax year, FW reported income of $200,000. Fred provides services to the partnership valued at $60,000; Wilma and Rocky provide no services. The $200,000 of income will be allocated $102,000 to Fred, $56,000 to Rocky, and $42,000 to Wilma. True/False

Explanation

True
200,000 - 60,000 = 140,000
Rocky = 140,000 * .4 = 56,000
Wilma = 140,000 * .3=42,000
Fred=140,000 * .3 = 42,000 + 60,000 = 102,000

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6. 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

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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7. 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

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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8. 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

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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9. 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

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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10. 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

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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11. 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

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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12. 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

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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13. 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

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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14. 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 p 736(a) payment; the remaining $75,000 distribution is treated as a p 736(b) property payment for his paternship interest. True/False

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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15. The calendar year STUVY Partnership was equally owned by five partners. On May 1 of the current tax year, Stevie sells his 20% interest to new partner Sarah. On June 1, Thomas sells his 20% interest to new partner Tabitha. On October 1 of the current year, Sarah resells her 20% interest to new partner Samantha. On December 31, STUVY redeems the 20% interests of Vincent and Yousif. At that time, the remaining three partners (Samantha, Tabitha, and Uriel) each own one-third interests. On March 1 of the following year, Uriel sells his one-third interest to new partner Uber. At which one of the following dates does a technical termination of the partnership occur?

Explanation

March 1 of the following year.
A technical termination of a partnership arises if 50% or more of the capital and profits interests are sold within a 12-month period.

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16. Roman was a 40% partner in the calendar year POR LLC. When Roman died on April 30, the interest transferred to his estate. On November 1 of that year, Tiwanda, an unrelated third party, negotiated a buy-out and acquired Roman's interest (with the approval of the other LLC members). The LLC's operating agreement provides that a monthly allocation will be used to prorate income when required. If the LLC's income for the year was $300,000, how will it be allocated?

Explanation

300,000 .4 4/12 = 40,000 to Roman
300,000 .4 1/2 = 60,000 to his estate
300,000 .4 2/12 = 20,000 to Tiwanda

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17. Leonard and Penny, a married couple, formed the equally-owned calendar year PL LLC several years ago. Capital is a material income-producing factor for the LLC. On July 1 of this year, they each transferred a 20% interest to their son, Sheldon (after the transfer, 40% is owned by Sheldon; Leonard and Penny each retained 30% interests). For the current tax year, PL reported income of $300,000, which was earned evenly throughout the year. Penny provides uncompensated services to the partnership valued at $100,000; Leonard and Sheldon provide no services. How much income will be allocated to Penny, Leonard, and Sheldon for the year?

Explanation

300,000 - 100,000 = 200,000
200,000 / 2 = 100,000/2 = 50,000
100,000 * .4 = 40,000 to Sheldon
100,000 * .3 = 30,000 + 50,000 = 80,000 to Leonard
100,000 * .3 = 30,000 + 100,000 + 50,000 = 180,000 to Penny

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18. 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

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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19. 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

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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20. A general partnership can convert to either limited liability partnership or limited liability company status with no federal income tax liability; conversion of a C corporation, however, would result in tax on any built-in gains. True/False

Explanation

True
Conversion of general partnership to either an LLC or LLP is not reated as a termination of the existing entity, so there is no liquidation of the entity with the potential for changes in asset basis or gain recognition if the cash deemed cash distributions exceeded the partner's basis in their general partnership interests.

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21. Jeremiah received a proportionate non-liquidating distribution of land from the JZ Partnership. The land had a fair market value of $60,000 and a basis to the partnership of $50,000. The land was held for investment purposes by the partnership. Jeremiah's basis in his partnership interest immediately before the distribution was $40,000. The partnership's only remaining assets were cash, another parcel of land, and a building on that land. If the partnership has a p 754 election in effect, it will record a $10,000 step-up; a portion of the step-up will be allocated to the building and will be depreciated; and the step-up and any related depreciation expense will be allocated among all the partners in the partnership. True/False

Explanation

True
A decrease in the basis of a distributed asset can be compensated for by an increase in the basis of remaining partnership assets. That basis is allocated among the remaining partnership assets, and the step-up attributable to any depreciable asset will be depreciated.

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

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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23. 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

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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24. 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

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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25. 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

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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26. 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

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

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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28. 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

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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29. 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

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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30. Mack has a basis in a partnership interest of $200,000, including his share of partnership debt. At the end of the current year, the partnership distributed to Mack, in a proportionate current (nonliquidating) distribution, cash of $20,000, inventory (basis to the partnership of $30,000 and fair market value of $40,000), and land (basis to the partnership of $40,000 and fair market value of $42,000). In addition, Mack's share of partnership debt decreased by $12,000 during the year. What basis does Mack take in the inventory and land and in the partnership interest (including debt share) following the distribution?

Explanation

30,000 inventory, 40,000 land, 98,000 partnership interest
188,000 - 20,000 = 168,000
168,000 - 30,000 = 138,000
138,000 - 40,000 = 98,000

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31. On December 31 of last year, Maria gave her daughter, Chelsea, a gift of a 25% interest in a partnership in which capital is a material income-producing factor. For the current calendar year, the partnership's ordinary income was $100,000. Maria and Chelsea were the only partners, and there were no guaranteed payments. Maria's services performed for the partnership were worth $60,000, and Chelsea has never performed any services. What is Maria's distributive share of partnership income for the current year?

Explanation

100,000 - 60,000 = 40,000
40,000 * .75 = 30,000
30,000 + 60,000 = 90,000

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32. 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 inventory with a $50,000 basis and a $58,000 fair market value to the partnership. What gain or loss does Nicky recognize, and what is her basis in the inventory?

Explanation

$30,000 loss, $50,000 basis in inventory
150,000 - 40,000 (repayment of liabilities = 110,000
110,000 - 30,000 (cash) = 80,000
80,000 - 50,000 (inventory) = 30,000

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33. The MBA Partnership makes a p 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 p 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

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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34. Suzy owns a 30% interest in the JSD LLC. In liquidation of the entity, Suzy receives a proportionate distribution of $30,000 cash, inventory (basis of $16,000, fair market value of $18,000), and land (basis of $25,000, fair market value of $30,000). Suzy's basis in the entity immediately before the distribution was $80,000. As a result of the distribution, what is Suzy's basis in the inventory and land, and how much gain or loss does she recognize?

Explanation

$16,000 inventory, $34,000 land, $0 gain/loss
80,000 - 30,000 = 50,000
50,000 - 16,000 = 34,000
34,000 - 34,000 = 0

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35. Janella's basis in her partnership interest was $120,000, including her $150,000 share of partnership debt. At the end of the current year, the partnership pays off its debts and liquidates. Janella receives a proportionate liquidating distribution consisting of $42,000 cash and inventory valued at $24,000 (adjusted basis to the partnership = $20,000). How much gain or loss does Janella recognize, and what is her basis in the distributed property?

Explanation

$72,000 capital gain, $0 basis in property
120,000 - 150,000 (payment of liabilities) = (30,000)
(30,000) - 42,000 (cash) = (72,000) - 72,000 = $0

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36. In a proportionate liquidating distribution, Sam receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $50,000), and land (basis of $20,000, fair market value of $50,000). In addition, the partnership repays all liabilities, of which Sam's share was $40,000. Sam's basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sam's basis in the accounts receivable and land, and how much gain or loss does he recognize?

Explanation

$0 basis in a/r, $50,000 basis in land, $0 gain/loss
120,000 - 40,000 = 80,000
80,000 - 30,000 = 50,000
50,000 - 50,000 (remaining basis to land) = $0

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37. Last year, Darby contributed land (basis of $60,000, fair market value of $80,000) to the Seagull LLC in exchange for a 25% interest in the LLC. In the current year, the LLC distributes the land (now worth $82,000) to Shelby, who is also a 25% owner. Immediately prior to the distribution, Darby's basis in the LLC was $70,000, while Shelby's basis in the LLC was $110,000. How much gain or loss must be recognized and by whom? What is Shelby's basis in the property she receives and Darby's basis in her partnership interest following the distribution?

Explanation

20,000 gain by Darby, $80,000 property basis by Shelby, $90,000 Darby's interest in partnership
80,000 - 60,000 = 20,000 Darby's precontribution gain.
Darby's basis = 70,000 + 20,000 gain = $90,000
Shelby's basis in 60,000 + 20,000 (darby's gain) = 80,000

Submit
38. The December 31, 2017 balance sheet of RST General Partnership reads as follows: Total ADJ Basis: 120,000 Total FMV: 172,500 The partners share equally in partnership capital, income, gain, loss, deduction and credit. Ted's adjusted basis for his partnership interest is $40,000. On December 31, 2017, he retires from the partnership, receiving a $60,000 cash payment in liquidation of his interest. The partnership agreement states that $2,500 of the payment is for goodwill. Which of the following statements about this distribution is false?

Explanation

The payment for Ted's share of goowill will create $2,500 of ordinary income to him.

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39. Miguel contributed substantially appreciated property to the MR Partnership in year 1. In year 4, other property was distributed to Miguel. Which one of the following statements is TRUE regarding the contribution and/or distribution?

Explanation

Miguel recognizes some or all of the precontribution gain in year 4 when the second property is distributed to him.

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40. At the beginning of the year, Elsie's basis in the E&G Partnership interest is $90,000. She receives a proportionate current (non-liquidating) distribution from the partnership consisting of $10,000 cash, unrealized a/r (basis $0, FMV $40,000), and land (basis $30,000, FMV $50,000). After the distribution, Elsie's basis in the A/R, land, and partnership interest are:

Explanation

$0, $30,000, and $50,000
90,000 basis - 10,000 cash distribution = $80,000
80,000 - $0 (a/r) = 80,000
80,000 - $30,000 (land) = $50,000

Submit
41. 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

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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42. 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

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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43. 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

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.

Submit
44. Rex and Scott operate a law practice in partnership form. Because Rex and Scott are brothers, the partnership is subject to the family partnership income reallocation rules. True/False

Explanation

False
For purposes of § 704(e), a family does not income brothers or sisters

Submit
45. GHI Partnership is owned 50% by Greg and 20% each by Howard and Isaac. Greg will have the same tax result if he sells his interest to Howard and Isaac for $50,000 each, or if GHI redeems his interest by distributing $100,000 of cash to Greg. True/False

Explanation

False
Sale of a partnership and liquidation of a partnership interest can have the same economic result but different tax consequences. Differences could arise based on the treatment of good will, or if the payments are made over time.

Submit
46. 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

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.

Submit
47. 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

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.

Submit
48. 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

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.

Submit
49. 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

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.

Submit
50. Alyce owns a 30% interest in a continuing partnership. The partnership distributes a $35,000 year-end cash payment to Alyce. In a proportionate current (nonliquidating)distribution, the partnership also distributed property (basis of $20,000, fair market value of $30,000) to Alyce. Immediately before the distributions of cash and property, Alyce's basis in the partnership interest was $60,000. As a result of the distribution, Alyce recognizes:

Explanation

No gain or loss
60,000 - 35,000 = 25,000
25,000 - 20,000 = 5,000

Submit
51. In a proportionate liquidating distribution, Sara receives a distribution of $40,000 cash, accounts receivable (basis of $0, fair market value of $30,000), and inventory (basis of $50,000, fair market value of $60,000). Sara's basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sara's basis in the accounts receivable and inventory, and how much gain or loss does she recognize?

Explanation

$0 basis in a/r, $50,000 basis in inventory, $30,000 loss
120,000 - 40,000 = 80,000
80,000 - 50,000 = 30,000

Submit
52. 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

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.

Submit
53. Which of the following distributions would never result in gain recognition to the recipient partner.

Explanation

A proportionate distribution of inventory property.
This choice would not result in a gain because the inventory takes the lesser of the partnership's basis or the partner's remaining basis before the inventory distribution.

Submit
54. Which of the following is not typically a "hot asset"?

Explanation

Inventory with a basis of $16,000 and a FMV of $15,000

Submit
55. Tom, Tina, Tatum, and Terry are equal owners in the 4-Ts LLC, a cash basis service entity. 4-Ts has unrealized receivables of $400,000 (basis of $0), and no other hot assets. A goodwill payment of $50,000 per partner is provided for in the LLC's operating agreement. If 4-Ts distributes cash of $300,000 to Tom in liquidation of his LLC interest, which of the following statements is correct?

Explanation

The $50,000 payment that releases to LL goodwill cannot be deducted by the LLC.

Submit
56. Which of the following would be classified as disproportionate distributions? Assume that A and B each own 50% interests in the AB partnership, the partnership owns hot assets, and the partners remain partners in AB after the distribution.

Explanation

Partner A receives $6,000 cash and Partner B receives inventory items valued at $6,000 (basis $3,500).
A disproportionate distribution arises when the partner's share changes in the ordinary income in partnership assets. Happens when one partner receives hot assets and the other does not.

Submit
57. The BLM LLC's balance sheet on August 31 of the current year is as follows. Total ADJ Basis: 150,000 Total FMV: 510,000 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?

Explanation

$70,000 capital gain, $50,000 ordinary income
150,000 * 1/3 = 50,000
140,000 cash + 30,000 debt relief - 50,000 unrealized receivables = 120,000
120,000 - 50,000 = 70,000 capital gain

Submit
58. Marcella is a 40% non-managing member (treated as a limited partner) in the MNO LLC, in which capital is a material income-producing factor. MNO has inventory with a basis of $200,000 and a value of $250,000, but no other hot assets. Marcella's basis in the LLC interest is $80,000. If she receives a distribution of $180,000 cash in liquidation of her interest in the LLC, which one of the following statements is NOT TRUE?

Explanation

MNO can deduct the $20,000 paid for Marcella's share of ordinary income related to the inventory.

Submit
59. Cynthia sells her 1/3 interest in the CAR Partnership to Brandon for $95,000 cash. On the date of sale, the partnership balance sheet and agreed-upon fair market values were as follows: Total ADJ Basis: 90,000 Total FMV: 225,000 If the partnership has a p 754 election in effect, the total "step-up" in basis of partnership assets that will be allocated to Brandon is:

Explanation

65,000
30,000 - 95,000 = 65,000

Submit
60. 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

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.

Submit
61. A partnership may make an optional election to adjust the basis of its property under p 754. If such an election is in effect, the partnership:

Explanation

Generally applies the election to transfers that take place at any later day, unless the election is revoked.

Submit
62. Mark receives a proportionate current (non-liquidating) 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, FMV 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?

Explanation

$0 loss/gain, $30,000 basis in property, $20,000 remaining basis
100,000 - 40,000 (cash) = 60,000
60,000 - 10,000 (decrease in liabilities) = 50,000
50,000 - 30,000 (property basis lessor of carryover or remaining basis in partnership) = 20,000 partnership interest

Submit
63. Which one of the following statements is false regarding the tax treatment of various partnership situations?

Explanation

If a C corporation converts to a limited liability company there is no federal income tax liability.

Submit
64. Landis received $90,000 cash and a capital asset (basis of $50,000, fair market value of $60,000) in a proportionate liquidating distribution. His basis in his partnership interest was $120,000 prior to the distribution. How much gain or loss does Landis recognize and what is his basis in the asset received?

Explanation

$0 gain/loss, $30,000 basis in asset
120,000 - 90,000 = 30,000
30,000 - 30,000 = $0

Submit
65. The calendar year ABCD partnership was equally owned by Arnie, Barney, Charlie, and Dale. One May 1 of the current tax year, Arnie sells his 25% interest to a new partner Sadie. On June 1, Barney sells his 25% interest to a new partner, Zoey. On March 31 of the following year, Charlie sells his 25% interest to new partner Chloe. The partnership does not terminate, because a technical termination only occurs if more than 50%R of the partnership's capital and profits interests are sold during the same taxable year. True/False

Explanation

False
There is a technical termination of a partnership if 50% of more of the capital and profits interests are sold within a 12-month period. That period does not have to be within the same taxable year.

Submit
66. A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts. True/False

Explanation

False
A properly established limited liability company provides limited liability for all of its members, regardless of whether they are active in the management of the LLC.

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

Submit
68. Catherine's basis was $50,000 in the CAR Partnership just before she received a proportionate current (nonliquidating) distribution consisting of land held for investment with a basis to CAR of $40,000 (value of $60,000), and inventory with a basis of $40,000 (value of $40,000). After the distribution, Catherine's bases in the land and inventory are:

Explanation

10,000 (land), $40,000 (inventory)
50,000 - 40,000 = 10,000
10,000 - 10,000 = $0

Submit
69. 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

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.

Submit
70. Frank receives a proportionate current (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:

Explanation

$40,000
50,000 - 10,000 = 40,000
40,000 - 40,000 (basis up to basis remaining for property) = 0

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

Explanation

$20,000 capital gain, $0 basis in inventory, $0 basis in partnership
60,000 - 80,000 = (20,000) capital gain
(20,000) - $0 (limited to amount of the basis in partnership interest) = (20,000)

Submit
72. Anthony's basis in the WAM Partnership interest was $200,000 just before he received a proportionate liquidating distribution consisting of investment land (basis of $90,000, fair market value of $100,000), and inventory (basis of $30,000, fair market value of $70,000). After the distribution, Anthony's recognized gain or loss and his basis in the land and inventory are:

Explanation

$0 gain/loss, $170,000 land, $30,000 inventory
200,000 - 30,000 (inventory) = 170,000
170,000 - 170,000 (land absorbs remaining basis because this is a liquidating distribution) = $0

Submit
73. Beth has an outside basis of $100,000 in the BJDE 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 $5,000. 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?

Explanation

$0 gain/loss, $40,000 basis in desk
100,000 - 50,000 = 50,000
50,000 - 10,000 = 40,000
40,000 - 40,000 (desk must take the remaining outside basis) = $0

Submit
74. Jonathon owns a one-third interest in a liquidating partnership. Immediately before the liquidation, Jonathon's basis in the partnership interest is $60,000. The partnership distributes cash of $32,000 and two parcels of land (each with a fair market value of $10,000). Parcel A has a basis of $2,000 to the partnership and Parcel B has a basis of $6,000. Jonathon's basis in the two parcels of land is:

Explanation

Parcel A-$14,000 Parcel B-$14,000
60,000 - 32,000 = 28,000
28,000 - 28,000 = $0
28,000 / 2 = $14,000

Submit
75. Michelle receives a propo(rtionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

Explanation

$8,000 capital gain, $0 basis in property
50,000 - 58,000 - (8,000)

Submit
76. 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?

Explanation

$0 basis in a/r, $0 basis in land, $40,000 gain
60,000 - 70,000 - (10,000)
10,000 + 30,000 = 40,000 capital gain
basis in land is $0

Submit
77. Which of the following statements correctly reflects one of the rules regarding proportionate liquidating distributions.

Explanation

Assets are deemed distributed in the following order: cash, unrealized receivables, and inventory, and finally capital assets.

Submit
78. Dan receives a proportionate current non-liquidating distribution when the basis of his partnership interest is $30,000. The distribution consists of $10,000 in cash and property with an adjusted basis to the partnership of $24,000 and a FMV of $26,500. Dan's basis in the noncash property is:

Explanation

$20,000
Reduce partnership interest by cash ($10,000), his partnership interest basis is $20,000 before considering the property received. The property takes the lessor of a substituted or carryover basis, or $20,000

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

Explanation

The selling partner could be required to report both ordinary income and a capital gain or loss on sale of the partnership interest

Submit
80. The BR LLC owns an unrealized receivable with a basis of $0 and fair market value of $200,000, plus cash of $200,000. If BREE distributes $20,000 of the receivable to 50% member Brenda and $20,000 of cash to 50% member Renee, which one of the following statements is TRUE?

Explanation

Brenda recognizes $10,000 of ordinary income.

Submit
81. Nicholas is a 25% owner in the DDBN LLC (a calendar year entity). At the end of the last tax year, Nicholas's basis in his interest was $50,000, including his $20,000 share of LLC liabilities. On July 1 of the current tax year, Nicholas sells his LLC interest to Anna for $80,000 cash. In addition, Anna assumes Nicholas's share of LLC liabilities, which, at that date, was $15,000. During the current tax year, DDBN's taxable income is $120,000 (earned evenly during the year and allocated using the monthly proration method). Nicholas's share of the LLC's unrealized receivables is valued at $6,000 ($0 basis). At the sale date, what is Nicholas's basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss?

Explanation

6,000 ordinary income, $29,000 capital gain
50,000 - 5,000 decrease in liabilities = 45,000
45,000 + 15,000 share of income (120,000 x .25 x 1/2 year) = 60,000
95,000 sale (80,000 cash + 15,000 assumption of liabilities) - 60,000 = 35,000 gain
$6,000 share of hot asset
29,000 capital gain and $6,000 ordinary income

Submit
82. Brittany, Jennifer, and Daniel are equal partners in the BJD Partnership. The partnership balance sheet reads as follows on December 31 of the current year. Total ADJ Basis: 120,000 Total FMV: 189,000 Partner Daniel has an adjusted basis of $40,000 for his partnership interest. If Daniel sells his entire partnership interest to new partner Amber for $73,000 cash, how much can the partnership step-up the basis of Amber's share of partnership assets under pp 754 and 743(b)?

Explanation

73,000 sale - 40,000 Daniel's basis = 33,000

Submit
83. Partner Jordan received a distribution of $90,000 cash from the JKL Partnership in complete liquidation of his partnership interest. If Jordan's outside basis immediately before the distribution was $80,000, and if the partnership has made (and not revoked) a p 754 election in a prior year, which of the following statements is true? (Assume the partnership owns no "hot assets.")

Explanation

Both b. and c. are true
80,000 - 90,000 = (10,000) capital gain
Partnership will step-up the basis of partnership assets by the amount of gain recognized

Submit
84. Megan's basis was $120,000 in the MYP Partnership interest just before she received a proportionate current (non-liquidating) distribution consisting of land held for investment (basis of $100,000, FMV $130,000) and inventory (basis $80,000, FMV $70,000). After the distribution, Megan's basis in the land and inventory are:

Explanation

$40,000 and $80,000
120,000 basis - 80,000 (inventory) = 40,000
40,000 - 40,000 (land up to basis) = $0

Submit
85. 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

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.

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

Explanation

False
Interest is transferred to the successor in interest, who becomes a partner.

Submit
87. 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 p 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

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

Submit
88. Bob received a proportionate current (non-liquidating) distribution of land from BZ Partnership. The land had a FMV of $15,000 and a basis to the partnership of $10,000. The land was held for investment purposes by the partnership. Bob's basis in his partnership interest immediately before the distribution was $6,000. If the partnership has a p 754 election in effect, it will record a $4,000 step-down in the basis of remaining assets, and the step-down will be attributed to all partners in the partnership. True/False

Explanation

False
a decrease in the basis of the distributed asset can be compensated for by an increase in the basis of remaining partnership assets.

Submit
89. A partnership continues in existence unless one of the following happens: (1) all assets are distributed to the partners in liquidation of the partnership, or (2) a majority of the partners vote to adopt a plan of liquidation of the partnership. True/False

Explanation

False
The partnership can terminate if the partnership redeems the interest of all partners, of if there is a "technical termination" of the partnership.

Submit
90. Rajesh contributed appreciated property to the RS Partnership in year 1. In year 4, that property was distributed to Simon. Which one of the following statements best captures the tax consequences of the distribution?

Explanation

Rajesh recognizes the precontribution gain and increases his basis in the partnership interest; Simon's basis in the distributed property is increased by the amount of recognized gain.

Submit
91. Which of the following transactions will not result in termination of a partnership for Federal tax purposes?

Explanation

Cash is distributed in liquidation of a 60% partner's interest in a five-partner partnership.
A distribution is not considered a sale or exchange for termination purposes. Therefore, it does not result in technical termination of the partnership continues in business after the distribution.

Submit
92. 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

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.

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

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

Submit
95. 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

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.

Submit
96. 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

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.

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

Submit
98. Jack has a basis in a partnership interest of $300,000, including his $80,000 share of partnership debt. At the end of the current year, the partnership pays off its liabilities and makes a proportionate current (nonliquidating) distribution to its partners. Jack receives a parcel of land (partnership basis = $120,000, value = $135,000) and inventory (partnership basis = $160,000, value = $180,000). Following the distribution, what is Jack's basis in the land, inventory, and the partnership interest?

Explanation

$60,000, $160,000, $0
300,000 - 80,000 (liability pay off) = 220,000
220,000 - 160,000 (inventory) = 60,000
60,000 - 60,000 (basis up to basis remaining for land) = $0

Submit
99. 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

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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100. 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

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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101. 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 p 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

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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102. 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

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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103. A p 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

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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104. 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

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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105. Which one do you like?

Explanation

80,000 + (240,000 .4 1/2) = 128,000
128,000 + 100,000 (share of liabilities) = 228,000
300,000 - 228,000 = 72,000
$150,000 * .4 = 60,000
$60,000 ordinary income and $12,000 capital gain

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A payment to a retiring general partner for his or her share of...
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Which one do you like?
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