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Exam 21: Dispositions of Partnership Interests and Partnership Distributions

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Question 1

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Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000. Just prior to the sale, Paul's outside and inside bases in KDP are $48,000. KDP's balance sheet includes the following: $\begin{array}{l}\begin{array} { l r r } \text { Assets: } & \underline { \text { Basis } } & \underline { \text { FMV } } \\\text { Cash } & \mathbf { \$ 4 8 , 0 0 0 } & \$ \mathbf { 4 8 , 0 0 0 } \\\text { Land held for investment } & \mathbf { 9 6 , 0 0 0 } & \mathbf { 1 3 2 , 0 0 0 }\end{array}\\\\\text { Liabilities and Capital: }\\\begin{array} { r r } \text { Capital } \text { - Paul } &&&& \mathbf { 4 8 , 0 0 0 } \\\text { - Kristi } &&&& \mathbf { 4 8 , 0 0 0 } \\\text { - David } &&&& \mathbf { 4 8 , 0 0 0 }\end{array}\end{array}$ If KDP has a §754 election in place, what is Kathy's special basis adjustment?

A) $0
B) $36,000
C) $12,000
D) None of these is correct.

E) C) and D)
F) A) and C)

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Question 2

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Which of the following statements is false concerning partnership liquidating distributions?

A) A partner who receives a liquidating distribution can retain an interest in the partnership.
B) A partnership agreement may restrict the sale of a partnership making a liquidating distribution the only way a partner can close out his interest in the partnership.
C) Liquidating a single partner's interest is similar in concept to a corporate redemption of a shareholder's interest.
D) None of these statements is false.

E) A) and C)
F) A) and B)

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Question 3

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Randolph is a 30% partner in the RD Partnership. On January 1, RD distributes $15,000 cash, an investment with a fair value of $20,000 (inside basis of $10,000) , and a parcel of land with a fair value of $10,000 (inside basis of $5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in RD is $48,000. What is Randolph's basis in the distributed investment and land?

Inventory is substantially appreciated if the fair market value of all inventory items exceeds 100% of their basis to the partnership.

Riley is a 50% partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?

Lola is a 35% partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $30,000. What is the amount and character of Lola's gain or loss?

Which of the following is true concerning a partner's basis in assets (other than money) distributed in an operating distribution?

The SSC Partnership balance sheet includes the following assets on December 31 of the current year: $\begin{array} { | l | r | r | } \hline & \text { Basis } & \underline { \text { FMV } } \\\hline \text { Cash } & \$ 180,000 & \$ 180,000 \\\hline \text { Accounts receivable } & - 0 - & 60,000 \\\hline \text { Land } & 90,000 & 120,000 \\\hline \text { Total } & \underline { \$ 270,000 } & \underline { \$ 360,000 } \\\hline\end{array}$ Susan, a 1/3 partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

Jaime has a basis in her partnership interest of $50,000 when the partnership distributes (in an operating distribution) two parcels of land to Jaime, each valued at $30,000. The basis in parcel A is $40,000 and the basis in parcel B is $20,000. Jaime allocates $20,000 of basis to parcel A and $30,000 of basis to parcel B.

Unrealized receivables include accounts receivable for which of the following partnerships?

Nadine Fimple is a one-third partner in the NWL Partnership with equal inside and outside bases. On January 1, NWL distributes $100,000 to Nadine in complete liquidation of her FPL interest. NWL's balance sheet as of January 1 is as follows: $\begin{array}{l}\begin{array}{lrr}&\text { Basis}&\text { FMV: }\\\text { Cash} & {\$120,000} & \$ 120,000 \\\text { Inventory} & \mathbf{6 0 , 0 0 0} & \mathbf{180 , 0 0 0} \\\text { Total} & \$\mathbf{18 0 , 0 0 0} & \$300,000 \\\\\text { Nadine, capital} & {\$60,000} &\\\text { Wendell, capital} & \mathbf{60 , 0 0 0} &\\\text { Louis, capital} & \underline{\mathbf{6 0 , 0 0 0}}& \\\text { Total} & \$\mathbf{18 0 , 0 0 0} &\\\end{array}\end{array}$ What is the amount and character of Nadine's recognized gain or loss on the distribution?

A disproportionate distribution is a distribution in which the partner's share of the partnership's hot assets either increases or decreases as a result of the distribution.

Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a pro-rata operating distribution to Heidi of $60,000 cash. What is the amount and character of Heidi's recognized gain or loss? What is Heidi's remaining basis in HT?

The SSC Partnership balance sheet includes the following assets on December 31 of the current year: $\begin{array} { | l | r | r | } \hline & \text { Basis } & \text { FMV } \\\hline \text { Cash } & \$ 180,000 & \$ 180,000 \\\hline \text { Accounts receivable } & - 0 - & 60,000 \\\hline \text { Land } & 90,000 & 120,000 \\\hline \text { Total } & \underline { \$ 270,000 } & \$ 360,000 \\\hline\end{array}$ Susan, a 1/3 partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $100,000 cash, what is the amount and character of Susan's gain or loss from the sale?

Tyson is a 25% partner in the KT Partnership. On January 1, KT distributes $16,000 cash, inventory with a $10,000 fair value (inside basis $4,000) , land A with a fair value of $8,000 (inside basis of $12,000) and land B with a fair value of $6,000 (inside basis of $4,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in KT is $23,000. What is Tyson's basis in the distributed inventory, land A and land B?B. He first allocates his outside basis to the distributed assets in an amount equal to KT's basis ($16,000 cash, $4,000 inventory, $12,000 land A, and $4,000 land B) . This results in a required decrease of $13,000 ($36,000 - $23,000) . He reduces the basis in land A by the unrealized depreciation ($4,000) , which leaves a required decrease of $9,000 that Tyson must allocate to the 2 parcels of land based on their relative adjusted bases. This results in an additional decrease to land A of $6,000 and a decrease to land B of $3,000.

Marty is a 40% owner of MB Partnership. Marty has decided to sell his interest in the business to Emilio for $100,000 cash plus the assumption of his share of MB's liabilities. Assume Marty's inside and outside basis in MB are equal. MB shows the following balance sheet as of the sale date: $\begin{array}{l}\begin{array}{lrr}\text { Assets: }&\text { Basis}&\text { FMV: }\\\text { Cash } & \$ \underline{160,000} & \$ 160,000 \\\text { Receivables } & \mathbf{5 0 , 0 0 0} & \mathbf{5 0 , 0 0 0} \\\text { Inventory } & \mathbf{8 0 , 0 0 0} & 170,000 \\\text { Land held for investment } & \underline{\mathbf{6 0 , 0 0 0}} & \underline{\mathbf{4 0 , 0 0 0}} \\\text { Totals } & \underline{\mathbf{3 5 0 , 0 0 0}} & \underline{\mathbf{4 2 0 , 0 0 0}}\end{array}\end{array}$ $\begin{array}{l}\text { Liabilities and capital: }\\\begin{array}{lr}\text { Liabilities } & \$ 120,000 \\\text { Capital - Marty } & 92,000 \\\text { - Barry } & \underline{\mathbf{1 3 8 , 0 0 0}} \\\text { Totals } & \underline{350,000}\end{array}\end{array}$ What is the amount and character of Marty's recognized gain or loss?

In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when the partnership assets include cash and land held for 5 years as an investment.

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

Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a pro-rata operating distribution to Teresa of $40,000 cash and stock with a fair value of $20,000 (inside basis of $7,000). What is the amount and character of Teresa's recognized gain or loss? What is Teresa's remaining basis in HT?

Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside basis is $22,000). Tyson's outside basis is $90,000 including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?