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Flashcards in Partnership Taxation Deck (71):
1

On June 1, 2015, Steve Maslan received a 20% capital interest in Gress Associates, a partnership, in return for services rendered plus a contribution of assets with a basis to Maslan of $15,000 and a fair market value of $20,000. The fair market value of Maslan’s 20% interest was $38,000.  How much is Maslan’s basis for his interest in Gress?

  1. $15,000
  2. $20,000
  3. $33,000
  4. $38,000

$33,000

Since Maslan received a capital interest with a FMV of $38,000 in exchange for property worth $20,000 and services, Maslan must recognize compensation income of $18,000 ($38,000 − $20,000) on the transfer of services for a capital interest. Thus, Maslan’s basis for his partnership interest consists of the $15,000 basis of assets transferred plus the $18,000 of income recognized on the transfer of services, a total of $33,000.

2

On January 1, 2015, the partners’ interests in the capital, profits, and losses of Mulford Partnership were

  • Percent of capital, profits, and losses
    • Rick - 25%
    • Tim - 20%
    • Jon - 55%

On January 7, 2015, Tim sold his entire interest to an unrelated person.  Rick sold his 25% interest in Mulford to another unrelated person on July 7, 2015.  No other transfers of partnership interests took place during 2015.  For tax purposes, which of the following statements is correct with respect to the Mulford Partnership?

  1. Mulford terminated as of January 7, 2015.
  2. Mulford terminated as of July 7, 2015.
  3. Mulford terminated as of December 31, 2015.
  4. Mulford did not terminate.

Mulford did not terminate.

A partnership is terminated for tax purposes when there is a sale or exchange of 50% or more of the total interests in partnership capital and profits within any 12-month period. Since Tim sold his 20% interest on January 7, 2015, and Rick sold his 25% interest on July 7, 2015, there has been a sale of only 45% of the total interests in partnership capital and profits. Therefore, the partnership did not terminate.

3

A $100,000 increase in partnership liabilities is treated in which of the following ways?

  1. Increases each partner’s basis in the partnership by $100,000.
  2. Increases the partners’ bases only if the liability is nonrecourse.
  3. Increases each partner’s basis in proportion to their ownership.
  4. Does not change any partner’s basis in the partnership regardless of whether the liabilities are recourse or nonrecourse.

Increases each partner’s basis in proportion to their ownership.

Since partners are liable for partnership liabilities, a change in the amount of partnership liabilities affects a partner’s basis for a partnership interest. When partnership liabilities increase, the increase is treated as if each partner individually borrowed money and then made a capital contribution of the borrowed amount. As a result, an increase in partnership liabilities increases each partner’s basis in the partnership by each partner’s share of the increase.

4

Ted King’s adjusted basis for his partnership interest in Troy Company was $24,000. In complete liquidation of his interest in Troy, King received cash of $4,000 and realty having a fair market value of $40,000. Troy’s adjusted basis for this realty was $15,000.  King’s basis for the realty is

  1. $ 9,000
  2. $15,000
  3. $16,000
  4. $20,000

$20,000

In a liquidating distribution, a partner’s basis for a partnership interest is first reduced by the amount of cash received and by the partnership’s basis for any unrealized receivables and inventory received. Any remaining basis is then allocated to other property received. Here, King’s partnership basis of $24,000 is first reduced by the $4,000 cash to $20,000. This $20,000 becomes the basis of the distributed realty. Note that even though the FMV of the realty is $40,000, King recognizes no gain, since gain is recognized on a distribution only if the cash received exceeds the basis of the partnership interest.

5

Campbell acquired a 10% interest in Vogue Partnership by contributing a building with an adjusted basis of $40,000 and a fair market value of $90,000. The building was subject to a $60,000 mortgage that was assumed by Vogue. The other partners contributed cash only. The basis of Campbell's partnership interest in Vogue is

  1. $84,000
  2. $34,000
  3. $30,000
  4. $0

$0

Basis in the partnership is computed as follows:

  • Adjusted basis of building contributed $40,000
  • Less: Debt assumed by partnership ($60,000)
  • Plus: Campbell's 10% share of debt $6,000
  • = ($ 14,000)

Gain recognized $14,000

Ending basis-$0

The computation above reflects that Campbell transferred 90% of the debt to other partners. The $14,000 of gain is recognized because basis cannot be negative. Therefore, ending basis is zero.

6

Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers?

  1. $50,000
  2. $60,000
  3. $90,000
  4. $150,000

$50,000

Turner and Reed do not recognize gain on the formation since they contributed property in return for their partnership interests. Sumner received her interest in return for services, so she must recognize $50,000 of wage income.

7

The method used to depreciate partnership property is an election made by

  1. The partnership and must be the same method used by the "principal partner."
  2. The partnership and may be any method approved by the IRS.
  3. The "principal partner."
  4. Each individual partner.

The partnership and may be any method approved by the IRS.

The partnership elects the method used to depreciate partnership property with the results passed through to the partners. This method may be any type approved by the IRS.

If any of the partners do not use the same treatment as the partnership and do not notify the IRS of the different treatment, the IRS may adjust the partner's return to conform to the return of the partnership with the additional tax being assessed.

8

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date

  1. The partner is admitted to the partnership.
  2. The partner transfers the asset to the partnership.
  3. The partner's holding period of the capital asset began.
  4. The partner is first credited with the proportionate share of partnership capital.

The partner's holding period of the capital asset began. 

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner's holding period of the capital asset began.

9

Juan contributed land with a basis of $10,000 and a fair market value of $15,000 to the Sounds Partnership. He also contributed services with a value of $25,000. In return, he received a partnership interest in Sounds with a value of $40,000.

What is Juan's basis in his partnership interest?

  1. $0
  2. $10,000
  3. $35,000
  4. $40,000

$35,000

Juan receives basis in his partnership interest equal to the basis of the property contributed. He also must recognize $25,000 of wage income for receiving a portion of the partnership interest in return for services rendered. Therefore, he also receives $25,000 of basis for this income recognition. Thus, his total basis is $10,000 + $25,000, or $35,000.

10

Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. 
The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution.

What was Strom's basis in Ace?

  1. $0
  2. $16,000
  3. $26,000
  4. $32,000

$0

A partner's initial basis in a partnership is equal to the amount of cash that the partner contributed plus the partner's adjusted basis for property when contributed. If the partnership assumes indebtedness from the contributed property, the contributing partner's basis is reduced by the amount of indebtedness assumed by the other partners.

Strom's basis in the contributed property was $16,000. However, the property was subject to a $24,000 mortgage. Strom's partners assumed $18,000 of the mortgage, $24,000 multiplied by 75 percent (the percentage of the partnership not owned by Strom). Subtracting the $18,000 in liabilities assumed by the other partners, gives Strom a negative basis. However, a partner's basis in the partnership's interest cannot be negative. Thus, Strom's basis in the partnership is zero. Note that Strom also recognizes a gain of $2,000 to insure that the basis is not negative.

11

Dean is a 25 percent partner in Target Partnership. Dean's tax basis in Target on January 1, 2015, was $20,000. At the end of 2015, Dean received a nonliquidating cash distribution of $8,000 from Target. 
Target's 2015 accounts recorded the following items:

  • Municipal bond interest income $12,000
  • Ordinary income $40,000

What was Dean's tax basis in Target on December 31, 2015?

  1. $15,000
  2. $23,000
  3. $25,000
  4. $30,000

$25,000

A partner's basis in the partnership interest is increased by:

  1. additional contributions;
  2. additional interest's purchased or inherited;
  3. the partner's share of the partnership's income (including tax-exempt income); and
  4. any increases in the partner's share of partnership liabilities.

A partner's basis in the partnership interest is decreased by:

  1. cash and the partnership's adjusted basis of property received by the partner in a nonliquidating distribution;
  2. the adjusted basis allocable to any part of the partner's interest sold or transferred;
  3. the partner's share of the partnership's losses; and
  4. any decreases in the partner's share of partnership liabilities.

Thus, Dean's basis in the partner's interest would be increased by Dean's share of the partnership's income (including tax-exempt income) and decreased by the nonliquidating cash distribution. The partnership's income is $52,000, ordinary income of $40,000 plus municipal bond interest income of $12,000. Dean's 25 percent share is $13,000. Hence, adding the $13,000 in income and subtracting the $8,000 distribution to Dean's beginning tax basis in the partnership of $20,000, puts Dean's ending tax basis in the partnership at $25,000.

This response correctly added Dean's share of the tax-exempt income to and subtracts the nonliquidating distribution from the basis.

12

Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?

  1. $2,000
  2. $5,000
  3. $8,000
  4. $10,000

$5,000

Upon a partnership formation the partnership's basis in the assets received from the contributing partners is the basis in the hands of the partner. Thus, Apple's basis is $5,000.

There is no mention of the liability being assumed by the partnership!

13

On June 1, 2015, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of $70,000 and a fair market value of $100,000.

In Kelly's 2015 income tax return, what amount must Kelly include as income from transfer of partnership interest?

  1. $7,000 ordinary income.
  2. $7,000 capital gain.
  3. $10,000 ordinary income.
  4. $10,000 capital gain.

$10,000 ordinary income.

When an individual contributes services to a partnership for a capital interest in the partnership, the individual reports taxable income equal to the fair market value of the transferred capital interest.

Capital interests received are treated as guaranteed payments, which means the capital interest is viewed a salary payment and, as such, reported as ordinary income by the partner.

Since the fair market value of the partnership's net assets is $100,000 and Kelly contributed services for a 10 percent interest in the partnership, Kelly must recognize $10,000 of ordinary income.

14

What is the tax treatment of net losses in excess of the at-risk amount for an activity?

  1. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
  2. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
  3. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
  4. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.

Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.

15

Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale's basis?

  1. $16,500
  2. $17,500
  3. $18,500
  4. $21,500

$18,500

Dale's basis is computed as follows:

  • Cash contributed $10,000
  • Equipment debt (50%) $5,000
  • Taxable income (50%) $7,500
  • Tax-exempt income (50%) $1,000
  • Debt reduction (50%) ($2,000)
  • Distribution ($3,000)
  • Ending basis $18,500

16

Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2015. On December 15, 2015, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's 2015 income, with the $23,000 balance paid to Dale in May 2016.

In addition, Dale received a $10,000 interest-free loan from the partnership in 2015. 

This $10,000 is to be offset against Dale's share of 2015 partnership income.

What total amount of partnership income is taxable to Dale in 2015?

  1. $23,000
  2. $37,000
  3. $50,000
  4. $60,000

$50,000

Partners must report their share of the partnership's income, deductions and other items on the partner's income tax return in the calendar year in which the partnership's tax year ends. Dale's share of Dale and Eck's 2015 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2015.

Partners cannot defer their share of partnership income by deferring payment and that loans from the partnership to a partner are included in the partner's share of partnership income.

17

Don Wolf became a general partner in Gata Associates on January 1, 2015 with a 5% interest in Gata's profits, losses, and capital.

Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2015, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment.

Wolf's passive loss for 2015 is

  1. $0
  2. $4,000
  3. $5,000
  4. $6,000

 

$5,000

Passive activity losses are the amount that total losses from passive activities exceed total gains from passive activities. The characterization of a partner's share of the partnership's income as passive or nonpassive depends on the partner's participation in the partnership's income earning activities.

Since Wolf did not materially participate in the partnership business, his share of the partnership's operating loss, $5,000, is considered a loss from a passive activity. Passive income does not include portfolio income.

As a result, Wolf's share of the $20,000 in interest income would not be passive. Therefore, since Wolf had no gains from passive activities to offset the loss from his share of the partnership's operating loss, Wolf would have a passive loss of $5,000, equal to his share of the partnership's operating loss.

18

Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses?

  1. At-risk
  2. Passive loss  

BOTH.

At-risk rules limit the amount of loss deductions from investment activities to the amount the taxpayer had at-risk. The amount that a taxpayer had at risk is the amount of cash and basis of property contributed to an activity. Borrowed amounts are considered to be at risk to the extent that the taxpayer is personally liable for repayment. At-risk rules do not apply to partnerships, but the rules do apply to the individual partners.

Passive activity rules prevent the offsetting of nonpassive income with passive losses and credits from passive activities. Passive activity rules do not apply to partnerships, but the rules do apply to the individual partners.

This response correctly indicates that at-risk and passive activity rules apply in determining a partner's deduction for that partner's share of partnership losses.

19

Alt Partnership, a cash basis calendar year entity, began business on October 1, 2015. Alt incurred and paid the following in 2015:

  • Legal fees to prepare the partnership agreement $12,000
  • Accounting fees to prepare the representations in offering materials $15,000

Ignoring amortization, what was the maximum amount that Alt could expense on the 2015 partnership return?

$5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations. Deductions are not allowed to the partnership or any partner for expenses incurred to sell partnership interests. Hence, $5,000 of the legal fees to prepare the partnership agreement may be deducted.

However, the accounting fees to prepare the representations in offering materials may not be expensed or amortized because these expenses are related to selling partnership interests.

20

PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items:

  • Revenues$120,000
  • Interest income6,000
  • Gain on sale of securities8,000
  • Salaries36,000
  • Guaranteed payments10,000
  • Rent expense21,000
  • Depreciation expense18,000
  • Charitable contributions3,000

What would PDK report as nonseparately stated income for year 1 tax purposes?

$35,000.

Non-separately stated income is the ordinary business income of the LLC, computed as follows:

  • Revenues $120,000
  • Salaries ($36,000)
  • Guaranteed payments ($10,000)
  • Rent expense ($21,000)
  • Depreciation expense ($18,000)
  • Ordinary income $35,000

21

Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000?

  1. $0
  2. $1,000
  3. $3,000
  4. $5,000

$3,000

The realized gain on the sale of the assets is $3,000 ($18,000 – $15,000 basis in assets). Abe's built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the lower of the realized gain or built-in gain, so $3,000 is the allocation.

22

Peters has a one-third interest in the Spano Partnership. During 2015, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 2015 operating loss of $70,000 before the guaranteed payment.

What is(are) the net effect(s) of the guaranteed payment?

  • I. The guaranteed payment increases Peters's tax basis in Spano by $16,000.
  • II. The guaranteed payment increases Peters's ordinary income by $16,000.

2 ONLY

Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.

23

Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for

  1. Payments of principal on secured notes honored at maturity.
  2. Timely payments of periodic interest on bona fide loans that are not treated as partners' capital.
  3. Services or the use of capital without regard to partnership income.
  4. Sales of partners' assets to the partnership at guaranteed amounts regardless of market values.

Services or the use of capital without regard to partnership income.

Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for services or the use of capital without regard to partnership income.

Thus, guaranteed payments are treated similarly to salary payments to the partner, not as partnership distributions.

24

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.

  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Both I and II.

Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, receive similar treatment under the Internal Revenue Code. Therefore, in contrast to provisions applying to other withdrawals of assets from partnerships by partners, guaranteed payments are deductible by the partnership. The deduction for guaranteed payments may create an ordinary loss for the partnership. Guaranteed payments are required to be reported separately from the partner's share of the partnership's income on the partner's K-1.

Thus, 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 deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss) and included on schedules K-1 to be taxed as ordinary income to the partners.

25

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.

1 ONLY.

Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income.

Thus, a guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay a salary of $5,000 monthly without regard to partnership income and may not include an agreement to pay 25 percent interest in partnership profits.

26

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2015 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2015 partnership income consisted of:

  • Net business income before guaranteed payments $80,000
  • Net long-term capital gains $10,000

What amount of income should Evan report from Vista Partnership on her 2015 tax return?

  1. $37,500
  2. $27,500
  3. $22,500
  4. $20,000

$37,500

Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2015 tax return. She also must report her share of the partnership's net income. Since the guaranteed payments qualify as a deductible expense, Vista's partnership income may be reduced by the amount of the expense. Hence, the partnership's income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan's 25 percent share of the partnership's income would be $17,500 (25 percent × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2015 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership's income ($17,500).

27

When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?

  1. Each partner reports a capital gain of $33,333.
  2. The entire gain of $100,000 must be specifically allocated to Acre.
  3. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
  4. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

28

White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the 2015 calendar 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 2015 tax return?

  1. $3,000
  2. $10,000
  3. $11,000
  4. $13,000

$13,000

Guaranteed payments to partners from their partnership for partnership services or capital are not treated as partnership distributions. Instead, the payments are treated as salary payments to employees or interest payments.

Hence, White would have to include the $3,000 guaranteed payment on his 2015 tax return. In addition, since partnerships are pass-through for tax purposes, White must include his share of the partnership's income on his tax return. White share of the partnership's income would be $10,000 (= $30,000 in partnership income multiplied by White's 1/3 share in profits and losses).

Therefore, the total amount that White must include from Rapid Partnership as taxable income in his 2015 tax return is $13,000, the sum of the $3,000 in guaranteed payments made to White and White's share of the partnership's income.

29

Baker is a partner in BDT with a partnership basis of $60,000.  BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker.  What amount of gain or loss should Baker report?

  1. $35,000 loss
  2. $20,000 loss
  3. $0
  4. $15,000 gain

$0 - Only a money distribution can cause gain recognition. 

Generally no gain or loss is recognized upon the complete liquidation of a partner’s partnership interest, although a loss can be recognized if the liquidating distribution consists of only cash, receivables, and inventory. Since Baker received land in complete liquidation of the partnership interest, Baker’s loss cannot be recognized and his unrecovered partnership basis of $60,000 becomes the basis for the land to Baker.

30

Hart’s adjusted basis for his interest in a partnership was $30,000.  He received a nonliquidating distribution of $24,000 cash plus a parcel of land with a fair market value and partnership basis of $9,000.  Hart’s basis for the land is

  1. $9,000
  2. $6,000
  3. $3,000
  4. $0

$6,000

If both cash and noncash property are received in a single distribution, the basis for the partner’s partnership interest is first reduced by the cash, before the noncash property. Although a partner’s basis for distributed property is generally the same as the partnership’s former basis for the property (a transferred basis), the distributed property’s basis will be limited to the partner’s basis for the partnership interest reduced by any money received in the same distribution. Here, the basis of Hart’s partnership interest of $30,000 is first reduced by the $24,000 of cash received, with the remaining basis of $6,000 allocated as the basis for the parcel of land received.

31

In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is

  1. A tax year that results in the greatest aggregate deferral of income.
  2. A calendar year.
  3. A tax year of one or more partners with a more than 50% interest in profits and capital.
  4. A tax year of a principal partner having a 10% or greater interest.

A tax year of one or more partners with a more than 50% interest in profits and capital.

A partnership generally is restricted in choosing a tax year in order to prevent the deferral of income to partners that could otherwise occur. Thus, a newly formed partnership is required to adopt the same taxable year as is used by its one or more partners owning a more than 50% interest in profits and capital. This insures that there will be no deferral of reporting of income for more than 50% of the partnership's income.

32

Fern received $30,000 in cash and an automobile with an adjusted basis and market value of $20,000 in a proportionate liquidating distribution from EF Partnership. Fern’s basis in the partnership interest was $60,000 before the distribution. What is Fern’s basis in the automobile received in the liquidation?

  1. $0
  2. $10,000
  3. $20,000
  4. $30,000

$30,000

Although no gain or loss is generally recognized upon the receipt of property in a proportionate liquidating distribution, a loss can be recognized if the distributee partner receives only cash, receivables, and inventory. In this case, since cash and an automobile were received, Fern is not allowed to recognize a loss, and the cash and automobile must absorb all of Fern’s $60,000 partnership basis. Here, Fern’s $60,000 partnership basis is first reduced by the $30,000 of cash received, with the remaining $30,000 becoming the basis of the automobile to Fern.

33

The partnership of Bond and Felton has a fiscal year ending September 30. John Bond files his tax return on a calendar-year basis. The partnership paid Bond a guaranteed salary of $1,000 per month during the calendar year 2014 and $1,500 a month during the calendar year 2015. After deducting this salary the partnership realized ordinary income of $80,000 for the year ended September 30, 2015, and $90,000 for the year ended September 30, 2016. Bond's share of the profits is the salary paid him plus 40% of the ordinary income after deducting this salary. For 2015, Bond should report taxable income from the partnership of

  1. $36,500
  2. $44,000
  3. $48,500
  4. $50,000

$48,500

This answer is correct. Both distributable shares of income and guaranteed payments are reported by partners for the year in which the end of the partnership fiscal year occurs. Thus, Bond would calculate his income as follows:

Guaranteed payments (10/1/14 to 9/30/15): 

  • $1,000 × 3 months $3,000
  • $1,500 × 9 months $13,500

Share of ordinary income 

  • $80,000 × 40% $32,000

$48,500

34

The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution.  Partner Chang had an outside basis in Chang’s partnership interest of $12,000.  In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?

  1. $0 gain or loss.
  2. $0 ordinary gain and $1,000 capital loss.
  3. $1,000 ordinary gain and $1000 capital loss.
  4. $1,000 ordinary gain and $0 capital loss.

$1,000 ordinary gain and $1000 capital loss.

No gain or loss would be recognized by Chang upon the receipt of the cash, inventory, and land in complete liquidation of his partnership interest. The $12,000 basis for Chang’s partnership interest would first be reduced by the $4,000 of cash received, then reduced by the $4,000 basis of the inventory received, with the remaining $4,000 of partnership basis becoming the basis of the land to Chang. The subsequent sale of the inventory with a basis of $4,000 for a selling price of $5,000 results in $1,000 of ordinary income. Chang must recognize the gain from the sale of inventory as ordinary income because the inventory was sold within 5 years of its receipt. Finally, assuming that Chang held the land as a capital asset, the sale of the land with a basis of $4,000 for a selling price of $3,000 results in a $1,000 capital loss.

35

The partnership of Felix and Oscar had the following items of income during the taxable year ended December 31, 2015:

  • Income from operations $156,000
  • Tax-exempt interest income $8,000
  • Dividends from foreign corporations $6,000
  • Net rental income $12,000

What is the total ordinary income of the partnership for 2015?

  1. $156,000
  2. $174,000
  3. $176,000
  4. $182,000

$156,000

Income from operations is considered ordinary income and as such would be included in the calculation. Tax-exempt interest, dividends, and net rental income must be separately stated and allocated to the partners and are thus excluded from the computation of ordinary income. Therefore, total ordinary income for the partnership is $156,000.

36

Clark and Lewis are partners who share profits and losses 60% and 40%, respectively.  The tax basis of each partner’s interest in the partnership as of December 31, 2014 was as follows: 

  • Clark$24,000
  • Lewis$18,000

During 2015, the partnership had ordinary income of $50,000 and a long-term capital loss of $10,000 from the sale of securities.  There were no distributions to the partners during 2015.  What is the amount of Lewis’ tax basis as of December 31, 2015?

  1. $33,000
  2. $34,000
  3. $38,000
  4. $42,000

$34,000

Since Lewis’ share of profits and losses is 40%, Lewis’ December 31, 2013 basis of $18,000 is increased by $20,000 (40% of $50,000) and decreased by $4,000 (40% of $10,000) resulting in a basis of $34,000 at December 31, 2014.

37

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date

  1. The partner is admitted to the partnership.
  2. The partner transfers the asset to the partnership.
  3. The partner’s holding period of the capital asset began.
  4. The partner is first credited with the proportionate share of partnership capital.

The partner’s holding period of the capital asset began.

The holding period for a partnership interest that is acquired through a contribution of property depends upon the nature of the contributed property. If the contributed property was a capital asset or Section 1231 asset to the contributing partner, the holding period of the acquired partnership interest includes the period of time that the capital asset or Sec. 1231 asset was held by the partner. For all other contributed property, a partner’s holding period for a partnership interest begins when the partnership interest is acquired.

38

The basis of property (other than money) distributed by a partnership to a partner, in complete liquidation of the partner’s interest, shall be an amount equal to the

  1. Adjusted basis of such partner’s interest in the partnership, increased by any money distributed in the same transaction.
  2. Adjusted basis of such partner’s interest in the partnership, reduced by any money distributed in the same transaction.
  3. Fair market value of the property.
  4. Book value of the property.

Adjusted basis of such partner’s interest in the partnership, reduced by any money distributed in the same transaction.

In a complete liquidation of a partner’s interest in a partnership, the property distributed will have a basis equal to the adjusted basis of the partner’s partnership interest reduced by any money received in the same distribution. Generally, in a liquidating distribution, the basis for a partnership interest is (1) first reduced by the amount of money received; (2) then reduced by the partnership’s basis for any unrealized receivables and inventory received; (3) with any remaining basis for the partnership interest allocated to other property received in the distribution.

39

On January 1, 2015, Fred was a 25% equal partner in Reingold General Partnership, which had partnership liabilities of $500,000.  On January 2, 2015, a new partner was admitted and Fred’s interest was reduced to 20%. On May 9, 2015, Reingold repaid a $150,000 general partnership loan.  Ignoring any income, loss, or distributions for 2015, what was the net effect of the two transactions on Fred’s tax basis in his Reingold partnership interest?

  1. Has no effect.
  2. Decrease of $25,000
  3. Increase of $25,000
  4. Decrease of $55,000

Decrease of $55,000

A partner’s basis for a partnership interest consists of the partner’s capital account plus the partner’s share of partnership liabilities. A decrease in the partner’s share of partnership liabilities is considered to be a deemed distribution of money and reduces a partner’s basis for the partnership interest. Here, Fred’s partnership interest was reduced from 25% to 20% on January 2, resulting in a reduction in Fred’s share of partnership liabilities of 5% × $500,000 = $25,000. Subsequently, on May 9, when there was a $150,000 repayment of partnership loans, there was a further reduction in Fred’s share of partnership liabilities of 20% × $150,000 = $30,000. Thus, the net effect of the reduction of Fred’s partnership interest from 25% to 20%, and the repayment of $150,000 of partnership liabilities would be to reduce Fred’s basis for the partnership interest by $25,000 + $30,000 = $55,000.

40

Dale was a 50% partner in D&P Partnership.  Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 ordinary income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt.  At the end of the first year of operation, what amount would be Dale’s basis?

  1. $16,500
  2. $17,500
  3. $18,500
  4. $21,500

$18,500

A partner’s beginning basis is increased by the partner’s distributive share of all income items (including tax-exempt income) and is decreased by all loss and deduction items, as well as distributions received from the partnership. Additionally, a partner’s basis is increased by a net increase in partnership liabilities during the year, or decreased if there is a net decrease in partnership liabilities. Since Dale is a 50% partner, his beginning basis of $10,000 is increased by his 50% share of ordinary income ($7,500), 50% share of tax-exempt income ($1,000), 50% share of the net increase in partnership liabilities ($3,000), and decreased by the $3,000 distribution that Dale received, resulting in a basis of $18,500.

41

At December 31, 2014, Lincoln and Ebert were equal partners in a partnership with net assets having a tax basis and fair market value of $150,000.  On January 2, 2015, Gregory contributed securities with a fair market value of $75,000 (purchased in 2011 at a cost of $51,000) to become an equal partner in the new firm of Lincoln, Ebert, and Gregory. The securities were sold on July 1, 2015, for $78,000.  How much of the partnership’s capital gain from the sale of these securities should be allocated to Gregory?

  1. $0
  2. $9,000
  3. $24,000
  4. $25,000

$25,000

Since the securities were sold for more than their fair market value on the date of contribution, the entire precontribution gain of $24,000 ($75,000 − $51,000) would be allocated to Gregory. In addition, Gregory would be allocated 1/3 of the postcontribution gain from the securities, which is $1,000 [($78,000 − $75,000) × 1/3]. Gregory should therefore be allocated $25,000 ($24,000 + $1,000) of the partnership’s capital gain.

42

During the current year, Dave Burr acquired a 20% interest in a partnership by contributing a parcel of land.  At the time of Burr’s contribution, the land had a fair market value of $35,000, an adjusted basis to Burr of $8,000, and was subject to a mortgage of $12,000.  Payment of the mortgage was assumed by the partnership.  Burr’s basis for his interest in the partnership is

  1. $0
  2. $5,600
  3. $8,000
  4. $23,000

$0

Burr’s basis is the $8,000 adjusted basis of the land contributed reduced (but not below zero) by the net decrease in his individual liabilities resulting from the assumption by the partnership of his liabilities (80% × $12,000 = $9,600). Thus, Burr’s basis for the partnership interest is zero. Note that Burr would have to recognize a gain of $9,600 − $8,000 = $1,600.

43

The partnership of Spencer and Rey realized an ordinary loss of $42,000 in 2015.  Both the partnership and the two partners are on a calendar-year basis.  The partners materially participate in the partnership’s activities and share profits and losses equally.  At December 31, 2015, Rey had an adjusted basis of $18,000 for his partnership interest before taking the 2015 loss into consideration.  On his individual income tax return for 2015, Rey should deduct

  1. An ordinary loss of $18,000.
  2. An ordinary loss of $21,000.
  3. An ordinary loss of $18,000 and a capital loss of $3,000.
  4. A capital loss of $21,000.

An ordinary loss of $18,000.

The amount of partnership loss which may be deducted by a partner is limited to the partner’s basis in the partnership (at the end of the taxable year of the partnership). Rey’s share of the loss is $21,000 (1/2 × $42,000), however, the loss deduction is limited to his basis of $18,000. The remaining $3,000 may be carried forward and taken as a deduction in a subsequent year in which he has basis to absorb the loss.

44

On November 1, 2015, Kerry and Payne, each of whom was a 20% partner in the calendar-year partnership of Roe Co., sold their partnership interests to Reed, who was a 60% partner.  For tax purposes, the Roe Co. partnership

  1. Was terminated as of November 1, 2015.
  2. Was terminated as of December 31, 2015.
  3. Continues in effect until a formal partnership dissolution notice is filed with the IRS.
  4. Continues in effect until a formal partnership dissolution resolution is filed in the office of the county clerk where Roe Co. had been doing business.

Was terminated as of November 1, 2015

The partnership was terminated on November 1, 2014, the date on which Kerry and Payne sold their interests to Reed. On that date, the business ceased to operate as a partnership because the operation of a partnership requires two or more partners.

45

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?

  1. Ordinary loss of $10,000.
  2. Ordinary gain of $15,000.
  3. Capital loss of $10,000.
  4. Capital gain of $15,000.

Capital gain of $15,000.

A partnership interest is a capital asset and a sale generally results in capital gain or loss, except that ordinary income must be reported to the extent of the selling partner’s share of unrealized receivables and appreciated inventory. Here, Clark realized $55,000 from the sale of his partnership interest ($30,000 cash + relief from his $25,000 share of partnership liabilities). Since the partnership had no unrealized receivables nor appreciated inventory and the basis of Clark’s interest was $40,000, Clark realized a capital gain of $55,000 − $40,000 = $15,000 from the sale.

46

Partnership Adams, Baxter, Carter, and Dudley has the following partners’ interests:

  • Partner / Partnership Interest
    • Adams / 45%
    • Baxter / 30%
    • Carter / 15%
    • Dudley / 10%

The partners agree to separate and form the partnerships of Baxter & Carter and Adams & Dudley.  What is (are) the effect(s) of the separation?

 I.Partnership Baxter & Carter is considered a new partnership and must adopt a taxable year, as well as make other tax accounting elections.

II.Partnership Adams & Dudley is treated as a continuation of the former partnership.

  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Both I and II.

Partnership Adams and Dudley is a continuation of the former partnership, as Adams and Dudley owned 55% (45% + 10%) of the former partnership. Since Baxter and Carter owned only 45% (30% + 15%) of the prior partnership, partnership Baxter & Carter is a new partnership. As a new partnership, partnership Baxter & Carter must adopt a taxable year, as well as make other tax accounting elections.

47

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 which had been contributed by its partners. What was Stone’s recognized gain or loss on the distribution?

  1. $18,000 ordinary income.
  2. $13,000 capital gain.
  3. $ 5,000 capital loss.
  4. $0.

$0.

Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner’s basis for the partnership interest. Additionally, gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner’s interest in partnership property. A distribution is disproportionate if the partner receives more than the partner’s share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner’s share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership’s unrealized receivables and substantially appreciated inventory. In this case, the Ace Partnership has no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners, so the distribution received by Stone cannot be disproportionate. Since gain will never be recognized in a proportionate noncash distribution of property, Stone recognizes no gain on the distribution and will have a transferred basis of $65,000 in the capital assets received and a basis of $5,000 for his continuing partnership interest.

48

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?

  1. $15,000
  2. $18,000
  3. $65,000
  4. $75,000

$18,000 - remember reduction in liabilities reduces partner's basis!

Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. As a result, Bailey’s basis for the partnership interest received consists of the $25,000 adjusted basis of the land contributed to the partnership, less the net reduction in Bailey’s individual liability resulting from the partnership’s assumption of the $10,000 mortgage. Since Bailey received a 30% partnership interest, the net reduction in Bailey’s individual liability is $10,000 × 70% = $7,000. As a result, Bailey’s basis for the partnership interest is $25,000 − $7,000 = $18,000.

49

During the current year, Peggy Pink contributed property to a new partnership in return for a 50% interest in capital and profits.  The property had a fair market value of $10,000, an adjusted basis of $6,000, and was subject to a $9,000 mortgage which was assumed by the partnership.  What was Pink’s basis in the partnership as a result of this contribution?

  1. $5,500
  2. $1,500
  3. $ 500
  4. $0

$1,500

Pink’s basis is the $6,000 adjusted basis of property contributed less the net decrease in her individual liability resulting from the partnership’s assumption of the mortgage (50% × $9,000 = $4,500). Thus, Pink’s basis is $1,500 ($6,000 − $4,500).

50

On July 1, 2015, Lydia Amador received a 10% interest in the capital of Nido Associates, a partnership, for services rendered.  Nido’s net assets at July 1 had a basis of $70,000 and a fair market value of $100,000.  What income must Lydia include in her 2015 tax return for the partnership interest transferred to her by the other partners?

  1. $0.
  2. $7,000 ordinary income.
  3. $10,000 ordinary income.
  4. $10,000 long-term capital gain.

$10,000 ordinary income

Compensation (ordinary) income is recognized if services are transferred in exchange for an interest in partnership capital. The amount recognized is $10,000 (10% of the FMV of partnership net assets of $100,000).

51

Jane, a 25% partner in Excel Partnership, received a $30,000 guaranteed payment in 2014 for services rendered to the partnership.  Guaranteed payments to other partners for services rendered totaled $50,000.  Excel’s 2014 partnership income consisted of

  • Net business income before guaranteed payments $160,000
  • Net long-term capital gains $50,000

What amount of income from Excel should Jane report from Excel Partnership on her 2014 tax return?

  1. $30,000
  2. $52,500
  3. $62,500
  4. $75,000

$62,500

A partnership is a pass-through entity and its items of income and deduction pass through to be reported on partners’ returns even though not distributed.  The amount to be reported by Jane consists of her guaranteed payment, plus her 25% share of the partnership’s business income and capital gains.  Since Jane’s $30,000 guaranteed payment and the $50,000 of guaranteed payments to other partners are for deductible services rendered to the partnership, they must be subtracted from the partnership’s net business income before guaranteed payments of $160,000 to determine the amount of net business income to be allocated among partners.  Jane’s reportable income from the partnership includes

  • Guaranteed payment $30,000
  • Business income [($160,000 − $80,000) × 25%] $20,000
  • Net long-term capital gain ($50,000 × 25%) $12,500
  •  $62,500

52

Gladys Peel owns an 80% interest in the capital and profits of the partnership of Peel & Poe.  On July 1, 2015, Peel bought surplus land from the partnership at the land’s fair market value of $10,000.  The partnership’s basis in the land was $16,000.  For the year ended December 31, 2015, the partnership’s net income was $94,000 after recording the $6,000 loss on the sale of land.  Peel’s distributive share of ordinary income from the partnership for 2015 was

  1. $70,400
  2. $75,200
  3. $78,200
  4. $80,000

$80,000

Recognition of loss is disallowed on a sale or exchange between a partnership and a person who owns (directly or constructively) more than a 50% partnership interest. Therefore, the $6,000 realized loss on the sale of land to Peel must be added back to the partnership’s net income of $94,000. Thus, Peel’s distributive share of ordinary income is $80,000 [80% × ($94,000 + $6,000)].

53

Nolan designed Timber Partnership’s new building.  Nolan received an interest in the partnership for the services.  Nolan’s normal billing for these services would be $80,000 and the fair market value of the partnership interest Nolan received is $120,000.  What amount of income should Nolan report?

  1. $0
  2. $40,000
  3. $80,000
  4. $120,000

$120,000

A taxpayer must recognize income when a capital interest in a partnership is received as compensation for services rendered. The amount of income to be reported is the fair market value of the partnership interest received, $120,000.

54

Beck and Nilo are equal partners in B&N Associates, a general partnership.  B&N borrowed $10,000 from a bank on an unsecured note, thereby increasing each partner’s share of partnership liabilities.  As a result of this loan, the basis of each partner’s interest in B&N was

  1. Decreased.
  2. Increased.
  3. Unaffected.
  4. Dependent on each partner’s ability to meet the obligation if called upon to do so.

Increased.

Since partners are individually liable for their share of partnership liabilities, a change in the amount of partnership liabilities affects a partner’s basis for a partnership interest. An increase in a partnership’s liabilities increases each partner’s basis in the partnership by each partner’s share of the increase. A decrease in a partnership’s liabilities is considered to be a distribution of money to each partner and reduces each partner’s basis in the partnership by the partner’s share of the decrease.

55

Molloy contributed $40,000 in cash in exchange for a one-third interest in the RST Partnership.  In the first year of partnership operations, RST had taxable income of $60,000.  In addition, Molloy received a $5,000 distribution of cash and, at the end of the partnership year, Molloy had a one-third share in the $18,000 of partnership recourse liabilities.  What was Molloy’s basis in RST at year-end?

  1. $55,000
  2. $61,000
  3. $71,000
  4. $101,000

$61,000

Molloy’s initial basis of $40,000 would be increased by his 1/3 share of taxable income (1/3 × $60,000 = $20,000), and his 1/3 share of the increase in partnership liabilities (1/3 × $18,000 = $6,000), and reduced by the $5,000 distribution of cash, resulting in a basis of $61,000 at year-end.  Note that since partners are individually liable for partnership liabilities, an increase in partnership liabilities increases a partner’s basis for a partnership interest.

56

In January 2015, Martin and Louis formed a partnership with each contributing $75,000 cash. The partnership agreement provided that Martin would receive a guaranteed payment of $20,000 and that partnership profits and losses (computed after deducting Martin’s guaranteed payment) would be shared equally. For the year ended December 31, 2015, the partnership’s operations resulted in a loss of $18,000 after deducting the $20,000 guaranteed payment made to Martin. The partnership had no outstanding liabilities as of December 31, 2015. What is the amount of Martin’s basis for his partnership interest as of December 31, 2015?

  1. $46,000
  2. $66,000
  3. $76,000
  4. $86,000

$66,000

Generally, a partner’s original basis in the partnership consists of his capital contribution. It is increased by the partner’s distributive share of income, and decreased by distributions from the partnership and the partner’s distributive share of any partnership losses. In this case, Martin’s basis in the partnership is his original contribution of $75,000 less his one-half share of the $18,000 loss. Therefore, his basis is $66,000. The guaranteed payment of $20,000 is already reflected as a deduction in the computation of the partnership’s loss of $18,000, and the receipt of the guaranteed payment must be reported as ordinary income by Martin.

57

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.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

1 ONLY.

A partner’s share of partnership losses is generally deductible by the partner to the extent of the partner’s at-risk basis for the partnership interest at the end of the partnership year. Note that these at-risk rules apply at the partner level, rather than at the partnership level. Also note that a partnership will never have a net operating loss carryover, since the partnership’s expenses and losses pass through to partners each year.

58

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?

  1. $0
  2. $50,000
  3. $65,000
  4. $80,000

$50,000

Generally, no gain or loss is recognized on the transfer of a property to a partnership in exchange for a partnership interest. As a result, the basis of the partnership interest received is an exchanged basis, equal to the basis of the property transferred. Here, the basis for Marcus’s partnership interest after formation is the $50,000 adjusted basis of the land that Marcus transferred.

59

In August 2015, Jason Teeters bought 200 shares of a listed stock for $25,000.  In September 2015, Teeters sold this stock for its fair market value of $28,000 to the partnership of Bass, Bell, and Teeters.  Teeters had a one-third interest in this partnership.  In Teeters’ 2015 tax return, what amount should be reported as short-term capital gain as a result of this transaction?

  1. $0
  2. $1,000
  3. $2,000
  4. $3,000

$3,000

If a person engages in a transaction with a partnership other than as a partner of such partnership, any resulting gain or loss is generally recognized just as if the transaction had occurred with a nonpartner. Here Teeters’ gain of $28,000 − $25,000 = $3,000 is fully recognized. Since the stock was not held for more than 12 months, Teeters’ $3,000 gain is treated as a short-term capital gain.

60

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?

  1. $0
  2. $ 1,000
  3. $13,000
  4. $15,000

$1,000

If both cash and noncash property are received in a liquidating distribution, the basis for the partner’s partnership interest is first reduced by the cash, before being reduced by noncash property. This is important because a distributee partner must recognize gain to the extent that the cash received exceeds the basis for his partnership interest. Here, Reid recognizes a gain of $61,000 cash − $60,000 basis = $1,000. The basis for the land that Reid received will be zero.

61

The adjusted basis of Smith’s interest in EVA partnership was $230,000 immediately before receiving the following distribution in complete liquidation of EVA:

  • Basis to EVAFair market value
  • Cash$150,000$150,000
  • Real estate  120,000  146,000

What is Smith’s basis in real estate?

  1. $146,000
  2. $133,000
  3. $120,000
  4. $80,000

$80,000

Generally, neither a partnership nor a distribute partner will recognize gain or loss on proportionate distributions in complete liquidation of a partnership. As a result, a partner’s basis for distributed property is generally the same as the partnership’s former basis for the property. However, since a distribution cannot reduce the basis for a partner’s partnership interest below zero, the distributed property’s basis to the partner is limited to the partner’s basis for the partnership interest before the distribution. Here, Smith’s partnership basis of $230,000 is first reduced by the $150,000 of cash received, to $80,000, which then becomes the basis of the real estate to Smith.

62

A partnership had four equal 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?

  1. $170,000
  2. $120,000
  3. $117,500
  4. $110,000

$110,000

A partner’s basis for a partnership interest is increased by the partner’s distributive share of partnership income, and decreased by distributions and the partner’s distributive share of expenses and losses. Here, each partner’s beginning basis of $100,000 would be increased by 1/4 × $80,000 = $20,000, and would be decreased by a $10,000 distribution, resulting in a basis of $110,000 at the end of the year.

63

White has a one-third interest in the profits and losses of Rapid Partnership.  Rapid’s ordinary income for the 2014 calendar 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 gross income in his 2014 tax return?

  1. $3,000
  2. $10,000
  3. $11,000
  4. $13,000

$13,000

A partnership is a pass-through entity and income and deduction items pass through to be reported on partners’ returns even though not distributed. Here, White must include his one-third distributive share of the partnership’s income on his return, $30,000 × 1/3 = $10,000. Additionally, White must report the $3,000 guaranteed payment that was deducted in arriving at partnership ordinary income.

64

Owen’s tax basis in Regal Partnership was $18,000 at the time Owen received a nonliquidating 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?

  1. $9,000
  2. $8,000
  3. $7,000
  4. $6,000

$8,000

Owen’s beginning partnership basis of $18,000 would be reduced by the $3,000 of cash distributed, and the $7,000 adjusted basis of the land, resulting in a basis of $8,000 for Owen’s partnership interest after the distribution.

65

Brown, a 50% partner in Brown & White, received a distribution of $12,500 in the current year.  The partnership’s income for the year was $25,000.  What is the character of the payment that Brown received?

  1. Partial liquidation.
  2. Liquidating distribution.
  3. Disproportionate distribution.
  4. Current distribution.

Current distribution.

Partnership distributions are categorized as either liquidating distributions or current (nonliquidating) distributions. A liquidating distribution completely terminates a partner's entire interest. All other distributions are current (nonliquidating) distributions. When a partnership makes a current distribution, the distribution is generally nontaxable to the partners because it generally represents the distribution of earnings that have already been taxed to partners and have already increased the basis for the partners' partnership interests.

66

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?

  1. $58,000
  2. $60,000
  3. $63,000
  4. $70,000

$60,000

A distributee partner can recognize loss only upon the complete liquidation of the partner’s interest and then only if what is received consists of solely money, unrealized receivables, or inventory. Since Olson received land in the liquidating distribution, no loss can be recognized and the land must absorb all of Olson’s remaining partnership basis after it is first reduced by the cash received. Here, Olson’s partnership basis of $70,000 is first reduced by the $10,000 of cash to $60,000, which then becomes the basis for the land to Olson.

67

When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership

  1. Increases by the partner’s share of the increase.
  2. Decreases by the partner’s share of the increase.
  3. Decreases, but not to less than zero.
  4. Is not affected.

Increases by the partner’s share of the increase

Since partners are individually liable for their share of partnership liabilities, a change in the amount of partnership liabilities affects a partner’s basis for a partnership interest. An increase in partnership liabilities increases each partner’s basis in the partnership by each partner’s share of the increase. Thus, when partnership liabilities increase, it effectively is treated as if each partner individually borrowed money and then made a capital contribution of the borrowed funds.

68

Heath acquired a 50% interest in the Dentists Partnership by contributing property with an adjusted basis of $100,000. Heath would recognize 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 $50,000.

NEITHER.

Generally, no gain is recognized when appreciated property is transferred to a partnership in exchange for a partnership interest. However, gain will be recognized if the transferred property is encumbered by a mortgage, and the partnership’s assumption of the mortgage results in a net decrease in the transferor’s individual liabilities that exceeds the basis of the property transferred. Here, the basis of the property transferred is $100,000, and the net decrease in Heath’s individual liabilities is $25,000 (i.e., $50,000 × 50%), so no gain is recognized.

69

On December 31, 2015, 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?

  1. Ordinary loss of $10,000.
  2. Ordinary gain of $15,000.
  3. Capital loss of $10,000.
  4. Capital gain of $15,000.

Capital gain of $15,000

If a partner sells his/her interest in the partnership, the partner recognizes a capital gain equal to the amount that the payment exceeds the partner's adjusted basis in the partnership.

Clark's adjusted basis in the partnership is $40,000 immediately before the sale. The assumption of Clark's share of the partnership's liabilities is viewed as a distribution to Clark. Thus, Clark's adjusted basis must be reduced by the assumption of his share of the partnership's liabilities, putting his adjusted basis at $15,000. The payment of $30,000 received by Clark exceeds his adjusted basis of $15,000 by the amount of $15,000. Hence, Clark must recognize a capital gain of $15,000.

70

Cobb, Danver, and Evans each owned a one-third interest in the capital and profits of their calendar-year partnership.

On September 18, 2014, Cobb and Danver sold their partnership interests to Frank, and immediately withdrew from all participation in the partnership. On March 15, 2015, Cobb and Danver received full payment from Frank for the sale of their partnership interests.

For tax purposes, the partnership

  1. Terminated on September 18, 2014.
  2. Terminated on December 31, 2014.
  3. Terminated on March 15, 2015.
  4. Did not terminate.

Terminated on September 18, 2014.

For tax purposes, a partnership terminates when it no longer does business as a partnership or 50 percent or more interest in partnership capital and profits is exchanged within 12 months. 
When the partnership's business and financial operations are continued by other members, there is a deemed distribution of assets to the remaining partners and the purchaser and a hypothetical recontribution of assets to a new partnership.

Hence, the partnership terminated on September 18, 2014, when Cobb and Danver sold their partnership interests to Frank, and immediately withdrew from all participation in the partnership.

71

"Hot assets" of a partnership would include which of the following?

  1. Cash.
  2. Unrealized receivables.
  3. Section 1231 assets.
  4. Capital assets.

Unrealized receivables.

"Hot assets" for a partnership includes ONLY inventory and unrealized receivables.