REG 5 - Partnerships: Part 3

Question 1

What is a Section 754 basis adjustment?

Answer 1

A Section 754 basis adjustment is made by reason of sale or exchange of interest.

Question 2

How do you calculate a Section 743(b) adjustment?

Answer 2

Section 743(b) adjustment equals the difference between the partner’s amount paid for new interest (“OLD”) to the share of their (“INSIDE”) amount (partners’s share x partner’s percentage)

E.g. Oscar buys Bernice’s 25% interest for $500,000. There is a Section 754 election. The only partnership asset (a building) had an inside basis of $1,200,000.

Calculate the Section 743(b) basis adjustment?

Old partner paid - $500,000
Inside basis - $300,00 (1,200,000 x 25%)
Adjustment = $200,000

Question 3

What are three ways a partnership can liquidate?

Answer 3

1) Complete withdrawal
2) Sale of partnership interest
3) Retirement or death

Question 4

When are liquidation distributions nontaxable for a complete withdrawal?

Answer 4

Liquidation distributions are nontaxable for a complete withdrawal when:

Basis
Less: cash
Less: asset (NBV)
= 0

E.g. Tag’s interest in KJT is $24,000. Tag receives a $5,000 liquidating distribution in cash, and a liquidating distribution of property for $10,000 (NBV).

24,000 - Basis
Less: 5,000 - Cash
= 19,000 - ALLOCATE ENTIRE AMOUNT TO ZERO AND NONTAXABLE

Question 5

When are liquidation distributions a gain for a complete withdrawal?

Answer 5

Gain occurs when MONEY received is higher than basis

E.g. Tag’s interest in KJT is $24,000. Tag receives a $25,000 liquidating distribution in cash, and a liquidating distribution of property for $10,000 (NBV).

24,000 - Basis
Less: 25,000 - Cash
= -1,000 - GAIN

Question 6

When are liquidation distributions a gain for a complete withdrawal?

Answer 6

Loss occurs when money, unrealized receivables, or inventory are less than basis.

E.g. Tag’s interest in KJT is $24,000. Tag receives a $20,000 liquidating distribution in cash, and no property.

24,000 - Basis
Less: 20,000 - Cash
= 4,000 - LOSS

Question 7

Do partnerships recognize any entity level gain or loss in a complete withdrawal?

Answer 7

Partnerships don’t recognize any entity level gain or loss in a complete withdrawal.

Question 8

How do you calculate capital gain or loss in a sale of partnership interest (liquidation)?

Answer 8

Basis
Less: amount received (cash + assumption of liabilities )
= Capital gain or loss

E.g. Kristi sells her interest in KJT to the partnership for $15,000. The partnership agrees to assume her $5,000 share in partnership liabilities.

What is the amount received on the sale of Kristi’s partnership interest?

Cash + Liabilities assumed = $15,000 + $5,000 = $20,000

Question 9

What is the exception for a partner to recognize ordinary gain or loss instead of capital gain or loss for a sale of partnership interest?

Answer 9

There is ORDINARY gain or loss NOT capital if you sold your interest for:

1) Unrealized (cash basis) receivables
2) Appreciated inventory
3) “Recapture income” on depreciable assets owned by the partnership

Question 10

Are payments to a retired partner or deceased partner a capital gain or loss?

Answer 10

Payments for the interest in partnership to a retired partner or deceased partner are CAPITAL GAINS AND LOSSES

Question 11

How is a partner’s share of income for the year allocated if partner sold interest in the middle of the year?

Answer 11

E.g. Partner A, a 20% partner sells to new Partner X on 3/31. The partnership reported $80,000 income for the entire year.

What is the partnership income for Partner A and Partner X?

Partner A - As of 3/31 is 1/4 of tax year = (1/4 x 20% x 80,000) = 4,000

Partner X - As of 3/31 is 1/4 of tax year = (3/4 x 20% x 80,000) = 12,000