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Exam 21: Dispositions of Partnership Interests and Partnership Distributions

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Question 51

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Esther and Elizabeth are equal partners in the EE Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $40,000 basis in their partnership interests including their share of partnership liabilities. On December 31, EE partnership repays $50,000 of debt. What is the amount and character of Esther's recognized gain or loss? What is Esther's remaining basis in EE?

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Esther does not recognize any ...

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Question 52

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Which of the following statements regarding disproportionate distributions is false?

A) A disproportionate distribution occurs when a partner receives more than his proportionate share of the partnership's hot assets.
B) A disproportionate distribution occurs when a partner receives less than his proportionate share of the partnership's hot assets.
C) The tax provisions related to disproportionate distributions attempt to preserve the partners' share of ordinary income potential.
D) Disproportionate distributions will only occur in liquidating distributions.

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

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Question 53

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Brian is a 25% partner in the BC Partnership. On January 1, BC distributes $20,000 cash and land with a $16,000 fair value (inside basis $8,000) to Brian. BC has no liabilities at the date of the distribution. Brian's basis in BC is $16,000. What is the amount and character of Brian's gain or loss on the distribution?

The PW partnership's balance sheet includes the following assets immediately before it liquidates: $\begin{array}{c}\begin{array}{lll}\\Cash\\\text{Unrealized receivables}\\Totals\\\end{array}\begin{array}{lll}\underline{\text { Basis }} \\\mathbf{1 0 , 0 0 0} \\\underline{\mathbf{-0-}} \\\$ \mathbf{10 , 0 0 0}\\\end{array}\begin{array}{lll}\underline{FMV}\\\mathbf{\$ 1 0 , 0 0 0} \\\underline{\mathbf{1 0 , 0 0 0}} \\\mathbf{\$ 2 0 , 0 0 0}\\\end{array}\end{array}$ In complete liquidation PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners) . Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Wade's recognized gain or loss?

Joan is a 1/3 partner in the PDJ Partnership. On May 1, Joan sells her interest to Freddie for a cash payment of $75,000. On January 1, Joan's basis in PDJ is $57,000. PDJ generates $60,000 of ordinary income and $9,000 of tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale date: $\begin{array}{c}\begin{array}{lll}\\Cash\\\text{Land held for investment}\\\end{array}\begin{array}{lll}\underline{\text { Basis }} \\\mathbf{\$45 , 0 0 0} \\{\mathbf{\$45 , 0 0 0}} \\\end{array}\begin{array}{r}\underline{Fair Market Value}\\\mathbf{\$45,000} \\{\mathbf{\$90 , 0 0 0}} \\\end{array}\end{array}$ What is the amount and character of Joan's gain or loss on the sale?

Jason is a 25% partner in the JJM Partnership when he sells his entire interest to Lavelle for $76,000. At the time of the sale, Jason's basis in JJM is $87,000. JJM does not have any debt or hot assets. Jason's will recognize a gain of $11,000 on the sale of his partnership interest.

A disproportionate distribution of hot assets is treated as though the partnership distributes a proportionate share of hot assets to the partner and then the partner sells those hot assets back to the partnership at fair market value in exchange for a portion of the assets actually received in the distribution.

BPA Partnership is an equal partnership in which each of the partners has a basis in her partnership interest of $20,000. BPA reports the following balance sheet: $\begin{array}{l}\begin{array}{lrr}&\text { Basis}&\text { FMV: }\\\text { Inventory } & {\$40,000} & \$ 60,000 \\\text { Land} & \mathbf{5 0 , 0 0 0} & \mathbf{30 , 0 0 0} \\\text { Total} & \$\mathbf{6 0 , 0 0 0} & \$90,000 \\\\\text { Brooke, capital} & {\$20,000} &\\\text { Penelope, capital} & \mathbf{20 , 0 0 0} &\\\text { Amanda, capital} & \underline{\mathbf{2 0 , 0 0 0}}& \\\text { Total} & \$\mathbf{6 0 , 0 0 0} &\\\end{array}\end{array}$ a. Identify the hot assets if Brooke decides to sell her interest in BPA. b. Are these assets "hot" for purposes of distributions?

In which type of distribution may a partner recognize a loss on the distribution?

A partner's debt relief from the sale of a partnership interest will decrease his outside basis.

Katrina is a one-third partner in the KYR partnership (calendar year-end). Katrina decides she wants to exit the partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The partnership has no liabilities and holds the following assets as of January 1: $\begin{array}{lrr} & \underline{\text { Basis }} & \underline{\text { FMV }} \\\text { Cash } & \mathbf{\$ 1 8 0 , 0 0 0} & \mathbf{\$ 1 8 0 , 0 0 0} \\\text { Accounts receivable } & -0- & \mathbf{2 4 0 , 0 0 0} \\\text { Stock investment } & \mathbf{7 5 , 0 0 0} & \mathbf{1 2 0 , 0 0 0} \\\text { Land } & \underline{\mathbf{3 0 0 , 0 0 0}} & \underline{\mathbf{3 6 0 , 0 0 0}} \\\text { Totals } & \underline{\mathbf{\$ 5 5 , 0 0 0}} & \underline{\underline{\mathbf{9 0 0 , 0 0 0}}}\end{array}$ Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $250,000. What is the amount and character of any recognized gain or loss to Katrina? What is Katrina's basis in the distributed assets?

If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income (loss).

Ted is a 30% partner in the TDW Partnership with an outside basis of $20,000. TDW distributes $15,000 of cash in complete liquidation of Ted's interest. Ted recognizes a capital loss of $5,000 on the distribution.

Victor is a 1/3 partner in the VRX partnership with an outside basis of $156,000 on January 1. Victor sells his partnership interest to Raj on January 1st for $200,000 cash. The VRX Partnership has the following assets and no liabilities as of January 1: $\begin{array} { l r r } & \underline { \text { Basis } } & \underline { \text { FMV } } \\\text { Cash } & \$ 27,000 & \$ 27,000 \\\text { Accounts receivable } & - \mathbf { 0 }- & \mathbf { 1 8 , 0 0 0 } \\\text { Inventory } & \mathbf { 1 0 3 , 5 0 0 } & \mathbf { 1 2 1 , 5 0 0 } \\\text { Equipment } & \mathbf { 2 7 0 , 0 0 0 } & \mathbf { 3 3 7 , 5 0 0 } \\\text { Stock investment } & \underline { \mathbf { 6 7 , 5 0 0 } } & \underline { \mathbf { 9 6 , 0 0 0 } } \\\text { Totals } & \underline { \mathbf { \$ 4 68 , 0 0 0 } } & \underline { \$ 600,000 }\end{array}$ The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock was purchased 7 years ago. What is the amount and character of Victor's gain or loss on the sale of his partnership interest?

Under which of the following circumstances will a partner recognize a gain from an operating distribution?

Tatia's basis in her TRQ partnership interest is $33,000. Tatia receives a distribution of $22,000 cash from TRQ in complete liquidation of her interest. The three partners in TRQ share profits, losses, and capital equally. TRQ has the following balance sheet: \begin{array}{c}\begin{array}{lll}\text{Assets:}\\\text{Cash}\\\text{Stock (investment)}\\\text{Land}\\\text{Totals}\\\\\text{Liabilities and capital:}\\\text{Capital - Tatia}\\\quad\text{- Rihanna}\\\quad\text{- Quinn}\\\text{Totals}\\\end{array}\begin{array}{lll}\underline{\text { Basis }} \\\mathbf{\$ 2 2 , 0 0 0} \\\mathbf{1 1 , 0 0 0} \\\underline{\mathbf{6 6 , 0 0 0}} \\\underline{\mathbf{\$9 9 , 0 0 0}} \\\\\\\mathbf{3 3 , 0 0 0} \\\mathbf{3 3 , 0 0 0} \\\underline{33,000} \\\mathbf{\$ 9 9 , 0 0 0}\\\end{array}\begin{array}{lll}\underline{\text { FMV }} \\\$ 22,000 \\\underline{22,000} \\\underline{22,000} \\\underline{\$ 66,000}\\\\\\\\\\\\\\end{array}\end{array} a. What is the amount and character of Tatia's recognized gain or loss? What is the effect on the partnership assets? b. If TRQ has a §754 election in place, what is the amount of the special basis adjustment?

Daniela is a 25% partner in the JRD Partnership. On January 1, JRD distributes $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000) , and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in JRD is $20,000. What is Daniela's basis in the distributed inventory and accounts receivable?

A partner recognizes a loss when he receives cash and other property with inside bases greater than his outside basis in a liquidating distribution.

When determining a partner's gain on sale of his partnership interest, the selling partner must include her share of partnership debt in the amount realized.

The VRX Partnership (a calendar year-end entity) has the following assets and no liabilities: $\begin{array}{l}\begin{array}{lrrr}&\underline{Basis}&\underline{FMV}\\\text { Cash }&\$27,000&\$27,000\\\text { Accounts receivable } & -0- & 18,000 \\\text { Inventory } & 103,500 & 121,500 \\\text { Equipment } & \mathbf{2 7 0 , 0 0 0} & \mathbf{3 3 7 , 5 0 0} \\\text { Stock investment } & \underline{67,500} & \underline{62,500} \\\text { Totals } & \underline{\mathbf{\$ 4 6 8 , 0 0 0}} & \underline{\mathbf{\$ 5 6 6 , 5 0 0}}\end{array}\end{array}$ The equipment was purchased for $360,000 and VRX has taken $90,000 of depreciation. The stock was purchased 7 years ago. What are VRX's hot assets for purposes of a sale of partnership interest?