Chapter 11 Tax Corp - Important 1

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  • 1/105 Questions

    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

    • True
    • False
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About This 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.

Chapter 11 Tax Corp - Important 1 - Quiz

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  • 2. 

    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

    • True

    • 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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  • 3. 

    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

    • True

    • 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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  • 4. 

    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

    • True

    • 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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  • 5. 

    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

    • True

    • 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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  • 6. 

    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

    • True

    • 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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  • 7. 

    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

    • True

    • 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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  • 8. 

    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

    • True

    • 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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  • 9. 

    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

    • True

    • 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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  • 10. 

    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

    • True

    • False

    Correct Answer
    A. True
    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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • 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

    • True

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

    • True

    • 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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  • 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?

    • 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.

    • Option 2

    • Option 3

    • Option 4

    Correct Answer
    A. 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.
    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?

    • 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

    • Option 2

    • Option 3

    • Option 4

    Correct Answer
    A. 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
    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?

    • 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

    • Option 2

    • Option 3

    • Option 4

    Correct Answer
    A. 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
    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. 

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

    • True

    • 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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  • 19. 

    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

    • True

    • 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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  • 20. 

    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

    • True

    • 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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  • 21. 

    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

    • True

    • 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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  • 22. 

    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

    • True

    • False

    Correct Answer
    A. True
    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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  • 23. 

    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 § 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

    • True

    • False

    Correct Answer
    A. True
    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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • 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?

    •  a. $30,000 basis in inventory; $40,000 basis in land, $98,000 basis in partnership.

    •  b. $30,000 basis in inventory; $42,000 basis in land, $110,000 basis in partnership.

    • C. $40,000 basis in inventory; $40,000 basis in land, $86,000 basis in partnership.

    • D. $40,000 basis in inventory; $42,000 basis in land, $98,000 basis in partnership.

    •  e. $30,000 basis in inventory; $42,000 basis in land, $110,000 basis in partnership.

    Correct Answer
    A.  a. $30,000 basis in inventory; $40,000 basis in land, $98,000 basis in partnership.
    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?

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

    • Option 2

    • Option 3

    • Option 4

    Correct Answer
    A. 100,000 - 60,000 = 40,000 40,000 * .75 = 30,000 30,000 + 60,000 = 90,000
    Explanation
    100,000 - 60,000 = 40,000
    40,000 * .75 = 30,000
    30,000 + 60,000 = 90,000

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  • 32. 

    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

    • True

    • 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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  • 33. 

    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:

    • $0; $30,000; and $50,000.

    • $0; $50,000; and $30,000.

    • $40,000; $30,000; and $10,000.

    • $40,000; $40,000; and $0.  

    Correct Answer
    A. $0; $30,000; and $50,000.
    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

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  • 34. 

    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?

    • A. $70,000 loss; $50,000 basis.

    • B. $30,000 loss; $50,000 basis.

    • C. $32,000 loss; $48,000 basis.

    • D. $72,000 loss; $48,000 basis.

    • e. $0 loss; $80,000 basis.

    Correct Answer
    A. B. $30,000 loss; $50,000 basis.
    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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  • 35. 

    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?

    • A. $0 basis in inventory; $25,000 basis in land; $0 gain or loss.

    • B. $16,000 basis in inventory; $34,000 basis in land; $0 gain or loss.

    • C. $16,000 basis in inventory; $25,000 basis in land; $9,000 loss.

    • D. $18,000 basis in inventory; $32,000 basis in land; $0 gain.

    • e. $25,000 basis in inventory; $25,000 basis in land; $0 gain or loss.

    Correct Answer
    A. B. $16,000 basis in inventory; $34,000 basis in land; $0 gain or loss.
    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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  • 36. 

    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?

    • 0 gain or loss, 0 basis in property

    • 58,000 capital loss, 20,000 basis in property

    • 30,000 capital gains, 24,000 basis in property

    • 72,000 capital gain, 0 basis in property

    Correct Answer
    A. 0 gain or loss, 0 basis in 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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  • 37. 

    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?

    • A. $0 basis in accounts receivable; $50,000 basis in land; $0 gain or loss.

    • B. $0 basis in accounts receivable; $90,000 basis in land; $0 gain or loss.

    • C. $50,000 basis in accounts receivable; $40,000 basis in land; $0 gain or loss.

    • D. $50,000 basis in accounts receivable; $50,000 basis in land; $50,000 gain.

    • e. $0 basis in accounts receivable; $70,000 basis in land; $30,000 loss.

    Correct Answer
    A. A. $0 basis in accounts receivable; $50,000 basis in land; $0 gain or loss.
    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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  • 38. 

    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?

    • No gain or loss; Shelby’s basis in the property is $80,000; Darby’s basis in interest is $70,000.

    • $20,000 gain recognized by Darby; Shelby’s basis in the property is $80,000; Darby’s basis in interest is $90,000.

    • $22,000 gain recognized by Darby; Shelby’s basis in the property is $82,000; Darby’s basis in interest is $92,000.

    • $20,000 gain recognized by Shelby; Shelby’s basis in the property is $80,000; Darby’s basis in interest is $90,000.  

    Correct Answer
    A. $20,000 gain recognized by Darby; Shelby’s basis in the property is $80,000; Darby’s basis in interest is $90,000.
    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

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  • 39. 

    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?

    • Option 1

    • Option 2

    • Option 3

    • Option 4

    Correct Answer
    A. Option 1
    Explanation
    The payment for Ted's share of goowill will create $2,500 of ordinary income to him.

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  • 40. 

    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?

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

    • B. Miguel recognizes the precontribution gain on an amended tax return for year 1 when the second property is distributed to him.

    • C. The partnership recognizes the precontribution gain in year 4 and allocates that gain to all the partners.

    • D. The partnership recognizes the precontribution gain in year 1 and allocates that gain to Miguel.

    • e. Partnership contributions and distributions are tax-deferred transactions; when no cash is involved, no gain or loss is recognized.

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

    • True

    • False

    Correct Answer
    A. 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

    • True

    • 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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  • 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

    • True

    • False

    Correct Answer
    A. 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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  • 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

    • True

    • False

    Correct Answer
    A. True
    Explanation
    False
    For purposes of § 704(e), a family does not income brothers or sisters

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  • 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

    • True

    • False

    Correct Answer
    A. 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.

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  • 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

    • True

    • 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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  • 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

    • True

    • False

    Correct Answer
    A. 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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  • 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

    • True

    • 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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  • 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

    • True

    • 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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  • Mar 22, 2023
    Quiz Edited by
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  • Nov 20, 2019
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