R4-2 Flashcards
Thompson’s basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership’s business. Thompson received $20,000 in cash distributions during the year. Thompson’s share of Starlight’s current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson’s deductible loss for the period?
a.
$55,000
b.
$15,000
c.
$40,000
d.
$65,000
Choice “a” is correct. A partner’s deductible loss is limited to his basis plus any amounts that he is personally liable for (“at risk” provision).
Thompson’s basis would be calculated as follows:
Beginning basis $ 60,000
Plus: Net LT capital gain 15,000
Less: Cash distribution (20,000)
Basis for determining allowable loss deduction $ 55,000
Thompson would be allowed to take a loss deduction for $55,000 of the $65,000 ordinary loss passed through to him from the partnership. The remaining $10,000 would be carried forward until additional basis became available.
Choice “b” is incorrect. This choice assumes a partner can take a loss to the extent of capital gain income.
Choice “c” is incorrect. This choice does not take into account the additional basis Thompson receives for the pass through income (net long-term capital gain).
Choice “d” is incorrect. Thompson’s loss is limited to his basis plus any liabilities that he is personally liable for. His basis is calculated as above for this determination and the question does not indicate he should receive any additional basis for any liabilities.
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest’s balance sheet was as follows:
Cash $ 2,000
Equipment (adjusted basis) 2,000
Capital - Stone 3,000
Capital - Frazier 1,000
The fair market value of the equipment was $3,000. Frazier’s outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize?
a.
$0
b.
$300
c.
$500
d.
$250
Choice “b” is correct. In a complete liquidation of a partnership, the partner’s basis in property received is the same as the adjusted basis of his partnership interest reduced for any monies actually received and is generally a nontaxable event. However, if a partner receives only money that exceeds his basis in the partnership, gain or loss is recognized. In this instance, Frazier’s basis in his partnership interest was $1,200. He received $1,500 in cash in the liquidation. Frazier’s gain is calculated as follows:
Amount realized $ 1,500
Basis in partnership interest (1,200)
Gain recognized $ 300
Note: Don’t be confused by the term “outside basis.” The term outside basis merely refers to the differences that may exist between the partner’s share of the basis of the assets in the hands of the partnership (inside basis) and his basis in his partnership interest.
Choice “a” is incorrect. If Frazier had received property other than cash, gain would not have been recognized.
Choice “d” is incorrect. This choice appears to utilize Frazier’s book capital of $1,000 (which is wrong) and 50% of the fair market value of the equipment to calculate gain of $500. However, use of that capital balance as his basis and the fact that the question does not indicate that Frazier received anything other than the cash as a distribution make this choice incorrect.
Choice “c” is incorrect. This choice erroneously uses Frazier’s capital on the partnership’s balance sheet as his basis in his partnership.
Barker acquired a 50% interest in Kode Partnership by contributing $20,000 cash and a building with an adjusted basis of $26,000 and a fair market value of $42,000. The building was subject to a $10,000 mortgage, which was assumed by Kode. The other partners contributed cash only. The basis of Barker’s interest in Kode is:
a.
$52,000
b.
$62,000
c.
$41,000
d.
$36,000
Choice “c” is correct. A partner’s basis in a newly formed partnership is determined as follows:
Cash contribution $ 20,000
Adjusted basis of non-cash property 26,000
Share of partnership liabilities assumed by other partners $10,000 × 50% (5,000)
Net total $ 41,000
Choice “d” is incorrect. You must subtract the share of the partnership liabilities assumed by the other partners.
Choice “a” is incorrect. For the contributed property, the fair market value is ignored. The partnership assumes the partner’s adjusted basis. In addition, the share of the partnership liabilities assumed by the other partners is subtracted.
Choice “b” is incorrect. For the contributed property, the fair market value is ignored. The partnership assumes the partner’s adjusted basis.
At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if:
I.
The fair market value of the contributed property exceeds its adjusted basis.
II.
The property is encumbered by a mortgage with a balance of $100,000.
a.
Neither I nor II.
b.
II only.
c.
Both I and II.
d.
I only.
Choice “a” is correct. The fair market value of property (high or low) is irrelevant in determining Black’s basis in Decorators. The partner’s adjusted basis is used.
Since the mortgage does not exceed Black’s basis, he will not recognize a gain on the contribution of the encumbered property to Decorators.
On January 4, Year 1, Smith and White contributed $4,000 and $6,000 in cash, respectively, and formed the Macro General Partnership. The partnership agreement allocated profits and losses 40% to Smith and 60% to White. In Year 1, Macro purchased property from an unrelated seller for $10,000 cash and a $40,000 mortgage note that was the general liability of the partnership. Macro’s liability:
a.
Increases Smith’s partnership basis by $16,000.
b.
Has no effect on Smith’s partnership basis.
c.
Increases Smith’s partnership basis by $24,000.
d.
Increases Smith’s partnership basis by $20,000.
Choice “a” is correct. A partner’s basis in the partnership is increased by the partner’s share of partnership liabilities (Smith is a 40% partner). Macro is obligated on the $40,000 mortgage; 40% x $40,000 = $16,000. Even though the partnership is obligated to repay the mortgage, as a partner Smith is jointly and severally liable on the debt.
Choices “d”, “c”, and “b” are incorrect. A partner’s basis in the partnership is increased by the partner’s share of partnership liabilities.
Hart’s adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property:
Cash $5,000
Land
Adjusted basis 7,000
Fair market value 10,000
What was the amount of Hart’s basis in the land?
a.
$4,000
b.
$7,000
c.
$0
d.
$10,000
Choice “a” is correct. Hart must reduce his $9,000 original basis by the $5,000 cash distribution to a basis of $4,000. Smith’s basis in the land is the lesser of the land’s basis in the partnership’s hands ($7,000) or Hart’s remaining basis in his partnership interest in Best ($4,000 after the cash distribution).
Choice “c” is incorrect. Hart’s basis in the land is greater than zero. Hart’s basis must first be reduced by the cash received.
Choice “b” is incorrect. Hart’s basis in the land can not be greater than his remaining basis in his partnership interest after deducting the cash received.
Choice “d” is incorrect. The fair market value of the land is not considered in determining Hart’s basis in the land.
Stone’s basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was Stone’s recognized gain or loss on the distribution?
a.
$5,000 capital loss.
b.
$18,000 ordinary income.
c.
$13,000 capital gain.
d.
$0.
Choice “d” is correct. A partner does not ordinarily recognize income on a nonliquidating partnership distribution of property other than money. The distribution of property with an adjusted basis of $65,000 to Stone from Ace will reduce Stone’s basis in Ace partnership to $5,000 ($70,000 - $65,000). The fair market value of the property (high or low) is not relevant.
Choice “b” is incorrect. The fair market value of the property is not relevant.
Choice “c” is incorrect. A partner does not ordinarily recognize income on a nonliquidating partnership distribution of property other than money. In addition, the fair market value of the property is not relevant.
Choice “a” is incorrect. A partner does not ordinarily recognize income on a nonliquidating partnership distribution of property other than money.
On January 3, Year 1, the partners’ interests in the capital, profits, and losses of Able Partnership were:
% of capital,
profits, and losses
Dean 25%
Poe 30%
Ritt 45%
On February 4, Year 1, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, Year 1. No other transactions took place in Year 1. For tax purposes, which of the following statements is correct with respect to Able?
a.
Able did not terminate.
b.
Able terminated as of December 31, Year 1.
c.
Able terminated as of December 20, Year 1.
d.
Able terminated as of February 4, Year 1.
Choice “c” is correct. Among other events, a partnership terminates for income tax purposes when 50% or more of its interests change hands within 12 months. That threshold was reached for Able on December 20, at which time the partnership terminated for income tax purposes.
Choice “d” is incorrect. On February 4th, only 30% of the interests in the partnership changed hands.
Choice “b” is incorrect. The end of the taxable year is not the termination date, rather it is the date on which the actual sale or other terminating event occurs.
Choice “a” is incorrect. The partnership does terminate when 50% or more of its interests change hands within 12 months.
Curry’s sale of her partnership interest causes a partnership termination. The partnership’s business and financial operations are continued by the other members. What is (are) the effect(s) of the termination?
I.
There is a deemed distribution of assets to the remaining partners and the purchaser.
II.
There is a hypothetical recontribution of assets to a new partnership.
a.
I only.
b.
Neither I nor II.
c.
Both I and II.
d.
II only.
Choice “c” is correct.
Rule: When a partnership is terminated for tax purposes and its remaining partners decide to carry on the partnership business in a (deemed) new partnership, tax law treats this as a distribution of the prior partnership’s assets followed by a recontribution of the (deemed) distributed assets to the new partnership.
Choices “a”, “d”, and “b” are incorrect, per the above rule.
Alt Partnership, a cash basis calendar year entity, began business on October 1, Year 1. Alt incurred and paid the following in Year 1:
Legal fees to prepare the partnership agreement $ 23,000
Accounting fees to prepare the representations in offering materials 15,000
Alt elected to amortize costs. What was the maximum amount that Alt could deduct on the Year 1 partnership return?
a.
$5,300
b.
$4,600
c.
$0
d.
$300
Choice “a” is correct. Eligible expenditures up to $5,000 can be deducted in the first year (with overall limitations). Additional expenditures are amortized over 180 months beginning with the date they begin business. Legal fees to prepare the partnership agreement ($23,000) are eligible for this treatment, but sales and promotional expenses ($15,000) are not deductible or amortizable.
The first year deduction is calculated as follows:
23,000
(5,000) immediate deduction
18,000 / 180 months = $100 per month x 3 = 300 + 5,000 = $5,300
A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay:
I.
A salary of $5,000 monthly without regard to partnership income.
II.
A 25 percent interest in partnership profits.
a.
I only.
b.
Neither I nor II.
c.
II only.
d.
Both I and II.
Choice “a” is correct.
I.
A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income.
II.
Since the 25% interest is calculated with respect to partnership profits, it is not a guaranteed payment.
Choices “c”, “d”, and “b” are incorrect, per the above explanation.
Curry’s adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What was the amount of Curry’s basis in the land?
a.
$6,000
b.
$5,000
c.
$9,000
d.
$1,000
Choice “b” is correct. A partner who receives a distribution of non-cash property from a partnership takes the partnership’s basis as his basis, but in no case an amount greater than his basis in his partnership interest. In this case Curry would ordinarily take a $6,000 basis in the land, but since his basis in the partnership interest is only $5,000, that is the basis of the land in his hands. Curry’s partnership interest now has a basis of zero.
Choices “c”, “a”, and “d” are incorrect. Each of these uses the wrong basis (the basis a partner takes in a nonliquidating distribution).
White has a one-third interest in the profits and losses of Rapid Partnership. Rapid’s ordinary income for the current taxable year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his current year tax return?
a.
$11,000
b.
$3,000
c.
$10,000
d.
$13,000
Choice “d” is correct.
Rule: Partnership income is taxable to a partner whether or not it is distributed. White’s share of Rapid’s income is the sum of the $3,000 guaranteed payment and one-third of the partnership’s net income of $30,000 ($10,000), for a total of $13,000.
Choices “b”, “c”, and “a” are incorrect, per the above rule.
On January 2, Year 1, Black acquired a 50% interest in New Partnership by contributing property with an adjusted basis of $7,000 and a fair market value of $9,000, subject to a mortgage of $3,000. What was Black’s basis in New at January 2, Year 1?
a.
$7,500
b.
$5,500
c.
$4,000
d.
$3,500
Choice “b” is correct. A contributing partner’s basis is the adjusted basis of assets contributed, plus any gain recognized on the contribution, less debt relief.
Basis $ 7,000
Debt relief ($3,000 x 50%) (1,500)
Basis $ 5,500
Choices “d”, “c”, and “a” are incorrect. A contributing partner’s basis is the adjusted basis of assets contributed, plus any gain recognized on the contribution, less debt relief.
Gray is a 50% partner in Fabco Partnership. Gray’s tax basis in Fabco at the beginning of the year was $5,000. Fabco made no distributions to the partners during the year and recorded the following:
Ordinary income $ 20,000
Tax exempt income 8,000
Portfolio income 4,000
What is Gray’s tax basis in Fabco at the end of the year?
a.
$10,000
b.
$21,000
c.
$16,000
d.
$12,000
Choice “b” is correct. A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% x ($20,000 + $8,000 + $4,000) = $21,000.
Choice “c” is incorrect. Gray’s basis is increased by $16,000, but the question asks what his total basis is at the end of the year.
Choice “d” is incorrect. Gray’s basis is increased by 50% of $20,000 + $4,000, or $12,000, but it is also increased by 50% of tax exempt income. This increase is added to the beginning tax basis.
Choice “a” is incorrect. Gray’s basis is increased by 50% of ordinary income or $10,000, but it is also increased by tax exempt and portfolio income. This increase is added to the beginning tax basis.
On January 2, Year 1, Arch and Bean contribute cash equally to form the JK Partnership. Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively. For Year 1, the partnership’s ordinary income was $40,000. A distribution of $5,000 was made to Arch during Year 1. What is Arch’s share of taxable income for Year 1?
a.
$5,000
b.
$10,000
c.
$20,000
d.
$30,000
Choice “d” is correct. Partners are taxed on their share of partnership income whether distributed or not. Arch must report 75% x $40,000, or $30,000.
Choice “a” is incorrect. Partners are taxed on their share of partnership income, not distributions.
Choice “b” is incorrect. Arch has a 75% ownership interest.
Choice “c” is incorrect. Arch and Bean have a 75-25 profit (loss) ratio, not 50-50.
Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are:
I.
Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss).
II.
Included on schedules K-1 to be taxed as ordinary income to the partners.
a.
Neither I nor II.
b.
Both I and II.
c.
I only.
d.
II only.
Choice “b” is correct. Guaranteed payments to partners are deductible on Form 1065, Line 10, to arrive at partnership ordinary income. On Schedule K-1, guaranteed payments are shown as income on Line 5 and flow through as ordinary income.
Choices “c”, “d”, and “a” are incorrect. Each of these does not address both rules correctly.
At the beginning of the taxable year, Paul owned a 25% interest in Associates partnership. During the year, a new partner was admitted and Paul’s interest was reduced to 20%. The partnership liabilities at January 1 were $150,000 but decreased to $100,000 at December 31. Paul’s and the other partners’ capital accounts are in proportion to their respective interests. Disregarding any income, loss or drawings for the taxable year, the basis of Paul’s partnership interest at December 31 compared to the basis of his interest at January 1 was:
a.
Decreased by $37,500.
b.
Decreased by $5,000.
c.
Increased by $20,000.
d.
Decreased by $17,500.
Choice “d” is correct. Paul’s partnership interest consists of his capital plus his share of liabilities. Paul’s share of liabilities on January 1 was 25% x $150,000, or $37,500. On December 31 Paul’s share was 20% x $100,000, or $20,000; a decrease during the year of $17,500.
Choices “a”, “c”, and “b” are incorrect. Paul’s basis in his partnership interest consists of his capital account plus his share of liabilities.
Day’s adjusted basis in LMN Partnership interest is $50,000. During the year Day received a nonliquidating distribution of $25,000 cash plus land with an adjusted basis of $15,000 to LMN and a fair market value of $20,000. How much is Day’s basis in the land?
a.
$20,000
b.
$25,000
c.
$15,000
d.
$10,000
Choice “c” is correct. In a nonliquidating distribution, the partner takes the partnership basis for assets distributed. This basis cannot exceed the partner’s partnership interest.
Choice “d” is incorrect. This is Day’s remaining basis in the partnership, not the basis for the land.
Choices “a” and “b” are incorrect. In a nonliquidating distribution, the partner takes the partnership basis for assets distributed.
Pert contributed land with a fair market value of $20,000 to a new partnership in exchange for a 50% partnership interest. The land had an adjusted basis to Pert of $12,000 and was subject to a $4,000 mortgage, which the partnership assumed. What is the adjusted basis of Pert’s partnership interest?
a.
$18,000
b.
$10,000
c.
$12,000
d.
$20,000
Choice “b” is correct. Pert’s adjusted basis in the partnership is equal to the $12,000 adjusted basis of the land he contributed to the partnership less the 50% allocable percentage of the $4,000 mortgage assumed by the other partners.
Land basis $ 12,000
50%* × $4,000 mortgage (2,000)
Pert’s basis in the partnership $ 10,000
* Other partners’ percentage ownership
Choice “c” is incorrect. The amount of the liability assumed by the other partners must be subtracted from the adjusted basis.
Choice “a” is incorrect. Use the land’s $12,000 adjusted basis as the starting point, not its $20,000 fair market value.
Choice “d” is incorrect. Use the land’s $12,000 adjusted basis as the starting point, not its $20,000 fair market value, and subtract the percentage of the liability assumed by the other partners.
The method used to depreciate partnership property is an election made by:
a.
The “principal partner.”
b.
The partnership and may be any method approved by the IRS.
c.
The partnership and must be the same method used by the “principal partner.”
d.
Each individual partner.
Choice “b” is correct. Under entity theory, the partnership elects the depreciation method to be used and may use any method approved by the IRS.
Choice “c” is incorrect. The method need not be the same as that used by the principal partner.
Choice “a” is incorrect. The election is not made by the principal partner.
Choice “d” is incorrect. The election is not made by each individual partner.
Under Section 444 of the Internal Revenue Code, certain partnerships can elect to use a tax year different from their required tax year. One of the conditions for eligibility to make a Section 444 election is that the partnership must:
a.
Choose a tax year where the deferral period is not longer than three months.
b.
Have less than 75 partners.
c.
Be a limited partnership.
d.
Be a member of a tiered structure.
Choice “a” is correct. Sec. 444 permits a partnership to elect a tax year different from the required tax year if the deferral period (i.e., the number of months between the beginning of the tax year and the end of the required tax year) is 3 months or less.
Choice “c” is incorrect. The partnership need not be a limited partnership.
Choice “d” is incorrect. The partnership need not be a member of a tiered structure.
Choice “b” is incorrect. The partnership need not have less than 75 partners.
In computing the ordinary income of a partnership, a deduction is allowed for:
a.
Guaranteed payments to partners.
b.
Contributions to recognized charities.
c.
Short-term capital losses.
d.
The first $100 of dividends received from qualifying domestic corporations.
Choice “a” is correct. Guaranteed payments to partners are deductible in arriving at the partnership’s ordinary income. Ordinary income is the “taxable income” of the partnership excluding all items required to be separately-stated. Charitable contributions, dividend income, and capital losses are all separately-stated items.
Choice “b” is incorrect. Charitable contributions are not deducted to arrive at ordinary income. They are a separately stated item.
Choice “d” is incorrect. Dividend income is not deducted to arrive at ordinary income. It is a separately stated item.
Choice “c” is incorrect. Net short-term capital losses are not deducted to arrive at ordinary income. They are a separately stated item.
When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership:
a.
Increases by the partner’s share of the increase.
b.
Decreases by the partner’s share of the increase.
c.
Is not affected.
d.
Decreases, but not to less than zero.
Choice “a” is correct. When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership increases by his share of the increase. Since the partner has unlimited liability, the partnership liabilities are treated as if the partner personally borrowed the money and then contributed it to the partnership.
Choice “b” is incorrect. It increases, not decreases, the partner’s basis by his share of the increase in the liabilities.
Choice “d” is incorrect. It increases, not decreases, the partner’s basis by his share of the increase in the liabilities.
Choice “c” is incorrect. The partner’s basis is affected; it increases by the partner’s share of the increase in liabilities.
Cobb, Danver, and Evans each owned a one-third interest in the capital and profits of their calendar-year partnership. On September 18, Year 5, Cobb and Danver sold their partnership interests to Frank and immediately withdrew from all participation in the partnership. On March 15, Year 6, Cobb and Danver received full payment from Frank for the sale of their partnership interests. For tax purposes, the partnership:
a.
Terminated on September 18, Year 5.
b.
Did not terminate.
c.
Terminated on March 15, Year 6.
d.
Terminated on December 31, Year 5.
Choice “a” is correct. A partnership terminates for tax purposes if within a 12-month period there is a sale or exchange of at least 50% of the total interest in partnership capital and profits. In this case, the partnership terminates September 18, Year 5, the date that 2/3 interest in the partnership is sold to new partner Frank.
Choice “d” is incorrect. The partnership terminated on the date that at least 50% of the partnership interest was sold, not the end of the partnership year in which the sale occurred.
Choice “c” is incorrect. The partnership terminated on the date that at least 50% of the partnership interest was sold, not the date of full payment between the old and new partners.
Choice “b” is incorrect. The partnership terminated on the date that at least 50% of the partnership interest was sold.
On June 30, Year 8, Berk retired from his partnership. At that time, his capital account was $50,000 and his share of the partnership’s liabilities was $30,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, Year 8. Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of:
~Year 8
~Year 9
a.
$20,000
$20,000
b.
–
$40,000
c.
$40,000
–
d.
$13,333
$26,667
Choice “b” is correct. Payments made in liquidation of the interest of a retiring partner are considered a distribution by the partnership. Therefore, a retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions:
Berk’s partnership basis on 6/30/Yr 8 $ 80,000
$5,000 x 6 months, Year 8 cash distributions nontaxable, basis reduction (30,000)
Relief of debt (30,000)
Berk’s partnership basis on 12/31/Yr 8 20,000
$5,000 x 12 months, Year 9 distributions (60,000)
Negative basis (40,000)
Capital gain to eliminate negative basis 40,000
Berk’s basis on 12/31/Yr 9, liquidated $ 0
Choices “d”, “a”, and “c” are incorrect. Payments made in liquidation of the interest of a retiring partner are considered a distribution by the partnership. Therefore, a retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions.
Owen’s tax basis in Regal Partnership was $18,000 at the time Owen received anonliquidating distribution of $3,000 cash and land with an adjusted basis of $7,000 to Regal and a fair market value of $9,000. Regal did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Disregarding any income, loss, or any other partnership distribution for the year, what was Owen’s tax basis in Regal after the distribution?
a.
$7,000
b.
$8,000
c.
$6,000
d.
$9,000
Choice “b” is correct. In a nonliquidating distribution, the partner’s basis is reduced first by the amount of cash received and then by the adjusted basis of any property received. Thus, Owen’s basis after the distribution is determined as follows:
Owen’s beginning basis $ 18,000
Cash received (3,000)
Basis of property received (7,000)
Owen’s adjusted basis after the distribution $ 8,000
Choices “d”, “a”, and “c” are incorrect, per the above explanation.
Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey’s $10,000 recourse mortgage on the land. What is Bailey’s basis for his partnership interest?
a.
$18,000
b.
$65,000
c.
$15,000
d.
$75,000
Choice “a” is correct.
A partner’s original basis for a partnership interest acquired by a contribution is the amount of cash plus the adjusted basis of any property contributed less the amount of incoming partner’s liabilities assumed by the other partners. Bailey’s basis is calculated as follows:
Adjusted basis of property contributed $ 25,000
Less: The amount of Bailey’s debtassumed by the other partners (70% of $10,000) (7,000)
Bailey’s basis $ 18,000
Choices “c”, “b”, and “d” are incorrect, per the above explanation.
A partnership had four partners. Each partner contributed $100,000 cash. The partnership reported income for the year of $80,000 and distributed $10,000 to each partner. What was each partner’s basis in the partnership at the end of the current year?
a.
$120,000
b.
$117,500
c.
$110,000
d.
$170,000
RULE: The basis in a partnership is increased by investment, pro-rata share of income, and liabilities for which the partner is personally liable. The basis of a partnership is decreased by distributions, pro-rata share of losses, and liabilities for which the partner is personally relieved of.
Choice “c” is correct. Per the above rule, each partner’s basis in the partnership is $110,000 at the end of the current year, calculated as follows:
Contributions$100,000
Pro-rata income allocation
20,000
[$80,000 / 4 partners]
Pro-rata income allocation
(10,000)
Basis at year-end
$110,000
Choice “d” is incorrect. The partnership reported income of $80,000, and this amount must be allocated pro-rata to each partner. The mistake made here is that the entire $80,000 was included for each partner as an increase in basis when it should only have been ¼ of that amount (or $20,000). Applying all other facts correctly, this answer was calculated as $100,000 + $80,000 - $10,000 = $170,000.
Choice “a” is incorrect. The distribution of $10,000 must be deducted from the basis of each partner. Applying all other facts correctly, this answer was calculated as $100,000 + $20,000 = $120,000.
Choice “b” is incorrect. Each partner received a distribution of $10,000. Therefore, the total distributions for the partnership were $40,000. The mistake made here was that the $10,000 distribution was incorrectly assumed to be the total distribution made by the partnership. $10,000 divided by 4 = $2,500. Applying all the other facts correctly, this answer was calculated as $100,000 + $20,000 - $2,500 = $117,500.
Kerr and Marcus form KM Partnership with a cash contribution of $80,000 from Kerr and a property contribution of land from Marcus. The land has a fair market value of $80,000 and an adjusted basis of $50,000 at the date of the contribution. Kerr and Marcus are equal partners. What is Marcus’s basis immediately after formation?
a.
$50,000
b.
$0
c.
$80,000
d.
$65,000
RULE: Generally, no gain or loss is recognized on the contribution of property to a partnership in return for a partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor’s basis of the contributed property; however, if the fair market value of the property differs from the basis, the amount of the unrealized gain or loss at the date of contribution is specially allocated to the contributing partner upon the sale of that contributed property.
Choice “a” is correct. Per the above rule, Marcus’ basis in the partnership immediately after formation is $50,000, which is Marcus’ basis in the land at the date of contribution.
Choice “b” is incorrect. Marcus has a basis in the partnership in the amount of Marcus’ basis in the property upon contribution.
Choice “d” is incorrect. Per the above rule, Marcus’ basis in the partnership immediately after formation is $50,000, which is Marcus’ basis in the land at the date of contribution.
Choice “c” is incorrect. Per the above rule, Marcus’ basis in the partnership immediately after formation is $50,000, which is Marcus’ basis in the land at the date of contribution. The basis is not the fair market value at the date of contribution.
Smith received a one-third interest of a partnership by contributing $3,000 in cash, stock with a fair market value of $5,000 and a basis of $2,000, and a new computer that cost Smith $2,500. Which of the following amounts represents Smith’s basis in the partnership?
a.
$7,500
b.
$5,500
c.
$3,000
d.
$10,500
Rule: Generally, no gain or loss is recognized on the contribution of property to a partnership in return for partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor’s basis of the contributed property; however, if the fair market value of the property differs from the basis, the amount of the unrealized gain or loss at the date of contribution is specially-allocated to the contributing partner upon the sale of that contributed property.
Choice “a” is correct. Applying the rule above, Smith’s basis in the partnership upon contribution is calculated as follows:
Cash contributed $ 3,000
Basis of stock contributed 2,000
Basis of computer contributed 2,500
Basis in partnership $ 7,500
Choice “d” is incorrect. This answer assumes that the fair market value of the stock ($5,000) is used to calculate the basis of the partnership, but this is an incorrect assumption (the basis of $2,000 is used).
Choice “b” is incorrect. This answer neglected to include in the basis of the partnership the $2,000 basis of the stock contributed.
Choice “c” is incorrect. This answer neglected to include in the basis of the partnership the property contributed to the partnership and only considered the cash contributed.
Walker transferred property used in a sole proprietorship to the WXYZ partnership in exchange for a one-fourth interest. The property had an original cost of $75,000, an adjusted tax basis to Walker of $20,000, and fair market value of $50,000. The partnership has no liabilities. What is Walker’s basis in the partnership interest?
a.
$0
b.
$50,000
c.
$20,000
d.
$75,000
Choice “c” is correct. Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest. The partner’s original basis for a partnership interest acquired by contribution of property is the adjusted tax basis of the property (unless the property is subject to excess liability, which is not the case in this question).
Choice “a” is incorrect. Walker’s adjusted tax basis in the property is $20,000. There are no partnership liabilities, and the facts do not indicate that the property was subject to excess liability. The facts in the question do not support a zero basis in the partnership interest.
Choice “b” is incorrect. The $50,000 fair market value is not used to determine the initial basis in the partnership interest; however, upon the sale of the property, the fair market value will be used in the calculation of the special allocation to the contributing partner of the built-in gain on the sale.
Choice “d” is incorrect. The $75,000 original cost of the property is not used to determine the contributing partner’s basis. The amount to use is the adjusted tax basis (cost less depreciation or other basis reduction) upon contribution.
Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson’s basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson’s basis in the land?
a.
$63,000
b.
$60,000
c.
$70,000
d.
$58,000
Choice “b” is correct.
In a liquidating distribution, the partner’s basis for the distributed property is the same as the adjusted basis of his partnership interest (as the partner is simply exchanging his partnership interest for the distributed assets), reduced by any monies received in the same transaction.
Olson’s basis before distribution $70,000
Less: Cash received (10,000)
Remaining basis in partnership 60,000
Less: Allocate basis to land (60,000)
Liquidated partnership basis $ 0
Choice “d” is incorrect. This would be the answer if the distribution were a non-liquidating distribution (which would then mean that partner would still have a partnership interest with a basis of $2,000 ($60,000 - $58,000 land basis).
Choice “a” is incorrect. The fair market value of the asset is not considered in a liquidation.
Choice “c” is incorrect. The allocable basis must first be reduced by the amount of cash received.
The at-risk limitation provisions of the Internal Revenue Code may limit:
I.
A partner’s deduction for his or her distributive share of partnership losses.
II.
A partnership’s net operating loss carryover.
a.
II only.
b.
Both I and II.
c.
Neither I nor II.
d.
I only.
Choice “d” is correct. A partner’s tax deduction for his or her distributive share of partnership losses is limited to the partner’s adjusted basis in the partnership, which is increased by any partnership liabilities that he or she is personally liable for (called the “at-risk” provision). Any unused loss can be carried forward and used in a future year when basis becomes available; therefore, the at-risk limitation does not limit a partner’s net operating loss carryover.
Choices “a”, “b”, and “c” are incorrect, based on the above discussion.
On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark’s partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark’s gain or loss on the sale of his partnership interest?
a.
Capital gain of $15,000.
b.
Ordinary gain of $15,000.
c.
Ordinary loss of $10,000.
d.
Capital loss of $10,000.
Choice “a” is correct. A partner who sells his interest in a partnership has a recognized gain or loss that is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. If there are any partnership liabilities allocated to the interest and transferred to the buyer, they are considered part of the amount realized. Any gain that represents a partner’s share of “hot assets” (unrealized receivables of appreciated inventory) is treated as ordinary income if cash is taken. Clark’s capital gain on the sale is calculated as follows:
Amount realized on the sale:
Cash $ 30,000
Liabilities relieved of 25,000 55,000
Less: Basis in the partnership (40,000)
Capital gain on sale* $ 15,000
* Note: The facts tell us that the partnership had no unrealized receivables or substantially appreciated inventory; therefore, there are no “hot assets” to cause Clark to categorize any of the gain as ordinary income. The entire gain is capital gain.
Choice “c” is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. Further, as the partnership has no unrealized receivables or appreciated inventory, ordinary income recognition is not applicable.
Choice “b” is incorrect. This answer option correctly calculates the gain on the sale as $15,000, but it incorrectly categorizes the gain as ordinary, when there are no unrealized receivables or appreciated inventory items that would cause ordinary income recognition to be applicable.
Choice “d” is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. However, the classification of the gain as capital is correct because the partnership has no unrealized receivables or appreciated inventory that would cause ordinary income recognition to be applicable.
Reid, Welsh, and May are equal partners in the RWM partnership. Reid’s basis in the partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest?
a.
$13,000
b.
$1,000
c.
$15,000
d.
$0
Choice “b” is correct. With a liquidating distribution, the partner’s basis for the distributed property is the same as the adjusted basis of his partnership interest, first reduced by any monies received. The partner will recognize gain only to the extent that money received exceeds the partner’s basis in the partnership.
Basis before liquidating distribution $ 60,000
Less: Cash received (61,000)
Cash received in excess of basis (1,000)
Gain to be recognized 1,000
Basis after gain recognition $ 0
Note: The basis of the land to Reid is zero, as Reid has no remaining basis in the partnership to allocate to the land (i.e., Reid has exchanged his entire interest in the partnership for the cash and the land).
Choice “d” is incorrect. Gain is recognized because the cash received exceeded the basis in the partnership before the liquidation.
Choice “a” is incorrect. This answer option incorrectly assumes that the adjusted basis of the land reduced the basis in the partnership before the cash received reduced the basis. As mentioned above, cash received must first reduce the basis before any allocation of basis can be made to the remaining non-cash property [$60,000 - $12,000 = $48,000; $48,000 - $61,000 = ($13,000) in excess of basis].
Choice “c” is incorrect. This answer option incorrectly assumes that the fair market value of the land (fair market value would not be used even if cash were not received, however) reduced the basis in the partnership before the cash received reduced the basis. As mentioned above, cash received must first reduce the basis before any allocation of basis can be made to the remaining non-cash property [$60,000 - $14,000 = $46,000; $46,000 - $61,000 = ($15,000) in excess of basis].
