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Exam 10: Dispositions of Partnership Interests and Partnership Distributions

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Question 21

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

A) $0
B) $4,000 capital gain
C) $12,000 ordinary income
D) $12,000 capital gain

E) A) and D)
F) A) and B)

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Question 22

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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 the amount and character of Riley's recognized gain or loss and what is his basis in his partnership interest?

A) $0 gain, $36,000 basis
B) $0 gain, $42,000 basis
C) $0 gain, $50,000 basis
D) $0 gain, $56,000 basis

E) None of the above
F) B) and C)

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Question 23

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Which of the following statements regarding liquidating distributions is true?

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: $\begin{array} { | l | r | r | } \hline & \text { Basis } & \text { FMV } \\\hline \text { Inventory } & \$ 40,000 & \$ 60,000 \\\hline \text { Land } & \underline { 20,000 } & \underline { 30,000 } \\\hline \text { Total } & \$ 60,000 & \$ 90,000 \\\hline\end{array}$ a. Identify the hot assets if Brooke decides to sell her interest in BPA. b. Are these assets "hot" for purposes of distributions? c. If BPA distributes the land to Brooke in complete liquidation of her partnership interest, what tax issues should be considered? $\begin{array} { | l | r | } \hline \text { Brooke, capital } & \$ 20,000 \\\hline \text { Penelope, capital } & 20,000 \\\hline \text { Amanda, capital } & \underline { 20,000 } \\\hline \text { Total } & \$ 60,000 \\\hline\end{array}$

Daniela is a 25% partner in the JRD Partnership. On January 1, JRD makes a liquidating distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in JRD is $21,000. What is the amount and character of Daniela's gain or loss from the distribution?

Under what conditions will a partner recognize a gain in a liquidating distribution?

Which of the following is false concerning special basis adjustments?

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

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 $105,000 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?

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?

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. Ordinary income will be realized on gain attributable to unrealized receivables or inventory items (hot assets).

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: 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? $\begin{array} { | l | r | r | } \hline & \text { Basis } & \text { FMV } \\\hline \text { Cash } & \$ 180,000 & \$ 180,000 \\\hline \text { Accounts receivable } & - 0 - & 240,000 \\\hline \text { Stock investment } & 75,000 & 120,000 \\\hline \text { Land } & \underline { 300,000 } & \underline { 360,000 } \\\hline \text { Total } & \$ 555,000 & \$ 900,000 \\\hline\end{array}$

Randolph is a 30% partner in the RD Partnership. On January 1, RD distributes $15,000 cash, inventory 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 $37,000. What is Randolph's basis in the distributed inventory and land?

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: $\begin{array} { | l | r | r | } \hline & \text { Basis } & \text { FMV } \\\hline \text { Cash } & \$ 120,000 & \$ 120,000 \\\hline \text { Inventory } & 60,000 & 180,000 \\\hline \text { Total } & \$ 180,000 & \$ 300,000 \\\hline\end{array}$ What is the amount and character of Nadine's recognized gain or loss on the distribution? $\begin{array} { | l | r | } \hline \text { Nadine, capital } & \$ 60,000 \\\hline \text { Wendell, capital } & 60,000 \\\hline \text { Louis, capital } & 60,000 \\\hline \text { Total } & \$ 180,000 \\\hline\end{array}$

Locke is a 50% partner in the LS Partnership. Locke has a basis in his partnership interest of $84,000 at the end of the current year, prior to any distribution. On December 31, Locke receives an operating distribution of $30,000 cash. LS has no debt or hot assets. What is the amount and character of Locke's recognized gain or loss? What is Locke's ending basis in 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.

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.

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: $\begin{array} { | l | r | r | } \hline \text { Assets: } & \text { Basis } & \text { FMV } \\\hline \text { Cash } & \$ 22,000 & \$ 22,000 \\\hline \text { Stock (imvestment) } & 11,000 & 22,000 \\\hline \text { Land } & \underline { 66,000 } & \underline { 22,000 } \\\hline \text { Total } & \$ 99,000 & \$ 66,000 \\\hline\end{array}$ 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?

Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership 5 years ago by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $44,000. On December 31, KH makes a proportionate operating distribution of $50,000 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH?

A partner that receives cash in an operating distribution recognizes gain if the cash distributed exceeds the partner's outside basis in the partnership immediately before the distribution.