bisk reg 16

Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in Year 1. On December 15, Year 1, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's Year 1 income, with the $23,000 balance paid to Dale in May Year 2. In addition, Dale received a $10,000 interest-free loan from the partnership in Year 1. This $10,000 is to be offset against Dale's share of Year 2 partnership income. What total amount of partnership income is taxable to Dale in Year 1?

Answer: C Explanation: A partner has to recognize her/his portion of a partnership's income for the partnership's taxable year that ends within or with the partner's taxable year, even when the cash associated with that income is not distributed to the partner. Since Dale's distributive share of income from the Dale & Eck partnership was $50,000, and the partnership's year falls within Dale's taxable year, Dale has to recognize the full $50,000 of income in Year 1.

CPA Exam Online Printed on:Regulation 6/24/2008 6:11 PM

Question: 1 of 60 ID: 1714 Bisk: 47-1-1 Type: Multiple Choice Total Points: 1

nmlkj $27,000nmlkj $37,000nmlkj $50,000nmlkj $60,000

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06/24/2008http://www.cpaexam.com/Scripts/Testing/ExamContents.aspx?ExamStatisticID=769672...

Which one of the following statements regarding a partnership's tax year is correct?

Answer: B Explanation: Code §444 now requires a partnership to use a calendar year or a year that does not create a deferral period which exceeds three months. A partnership formed during the year can only elect to have a taxable year that ends in September, October, November, or December.


nmlkj A partnership formed on July 1 is required to adopt a tax year ending on June 30.nmlkj A partnership may elect to have a tax year other than the generally required tax year if the deferral

period for the tax year elected does not exceed three months.nmlkj A "valid business purpose" can no longer be claimed as a reason for adoption of a tax year other

than the generally required tax year.nmlkj Within 30 days after a partnership has established a tax year, a form must be filed with the IRS as

notification of the tax year adopted.

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

Answer: B Explanation: Section 703(b) provides that any election affecting the taxable income of a partnership shall be made by the partnership with three noted exceptions. None of the exceptions applies to the depreciation method.


nmlkj The partnership and must be the same method used by the "principal partner"nmlkj The partnership and may be any method approved by the IRSnmlkj The "principal partner"nmlkj Each individual partner

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

Alt elected to amortize costs. What was the maximum amount that Alt could deduct on the Year 1 partnership return?

Answer: C Explanation: Section 709(b)(1)(A) allows a partnership to deduct up to $5,000 of organization costs incurred in the tax year its business begins. However, the $5,000 deduction is reduced on a dollar-for-dollar basis for those expenses in excess of $50,000. Alt's deduction is not affected by this limit. Any remaining balance must be amortized of 15 years under §709(b)(1)(B). Legal fees to prepare the partnership agreement are considered an organization cost eligible for amortization under Reg. §1.709-2(a). However, Reg. §1.709-2(b) specifically disallows accounting fees to prepare the representations in offering materials as an organization cost eligible for amortization. These costs must be capitalized and not amortized. (Prior to AJCA '04, a corporation could elect to amortize organizational costs incurred before the end of the first tax year in which the corporation is in business over a period of at least 60 months.)


Legal fees to prepare the partnership agreement $12,000

Accounting fees to prepare the representations in offering materials 15,000

nmlkj $0nmlkj $600nmlkj $5,000nmlkj $6,750

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Basic Partnership, a cash-basis calendar year entity, began business on February 1, Year 1. Basic incurred and paid the following in Year 1:

Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the Year 1 partnership return?

Answer: B Explanation: Section 709(b)(1)(A) allows a partnership to deduct up to $5,000 of organization costs incurred in the tax year its business begins. However, the $5,000 deduction is reduced on a dollar-for-dollar basis for those expenses in excess of $50,000. Basic's deduction is not affected by this limit. Any remaining balance must be amortized over 15 years under §709(b)(1)(B). Legal fees to prepare the partnership agreement are considered an organization cost eligible for amortization under Reg. §1.709-2(a). However, Reg. §1.709-2(b) specifically disallows accounting fees to prepare the representations in offering materials as an organization cost eligible for amortization. These costs must be capitalized and not amortized.


Filing fees incident to the creation of the partnership $3,600 Accounting fees to prepare the representations in offering materials 12,000

nmlkj $360nmlkj $3,600nmlkj $5,000nmlkj $15,600

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Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?

Answer: C Explanation:

Each state statute creating the limited liability company (LLC) business form is extremely flexible. Characteristically, the owners may participate in management while limiting personal liability. Every state allows both single member and multi-member LLC’s. A partnership generally may have as many partners as wanted, as long as it has at least two. A single-member LLC is disregarded as a separate entity by the IRS. Accordingly, if the single member is an individual, the LLC is taxed as a proprietorship. If the single member is a corporation, the LLC is treated as a division of a corporation. An LLC with multiple members (none corporations) is treated as a partnership for federal tax purposes. Candidates with concerns regarding the placement of this question in the REG, rather than the BEC, exam section should contact the AICPA.


nmlkj The entity may avoid taxation. nmlkj The entity may have any number of owners. nmlkj The owner may participate in management while limiting personal liability. nmlkj The entity may make disproportionate allocations and distributions to members.

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

Answer: C Explanation: A partner's loss deduction generally cannot exceed the amount "at risk" in the activity at the end of the year. Once the amount of loss that is unrestricted by the basis limitation and at risk rules is determined, pass through losses may be further restricted by the passive activity rules. The partnership provides all partners with a breakdown of income, credit and deduction items from each of its passive activities, because passive activity losses can generally only offset passive activity income.


At-risk Passive loss nmlkj Yes No

nmlkj No Yesnmlkj Yes Yesnmlkj No No

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

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

Answer: A Explanation: Section 707(c) provides that guaranteed payments are to be considered as made to one who is not a member of the partnership for purposes of determining gross income under §61(a) and the deductibility of business expenses under §162(a). Thus, the $20,000 guaranteed payment is includible in Evan's gross income under §61(a) and is deductible by the partnership under §162(a). Evan also includes a share of the remainder of the partnership's ordinary income under §702(a)(8). Evan also includes this 25% share of the partnership's net long term capital gains under §702(a)(2). Evan's income from Vista Partnership is determined as follows:


Net business income before guaranteed payments $80,000

Net long-term capital gains $10,000


Guaranteed Payment $20,000 Net Business Income ($80,000 - $20,000) x 25% 15,000 Net Long Term Capital gain ($10,000 x 25%) 2,500 Evan's Share of Vista Partnership's Income $37,500

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Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership on January 1, Year 1. Decor's net business income before guaranteed payments for the year was $45,000. During Year 1, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What total amount from Decor is includible in Flagg's Year 1 tax return?

Answer: B Explanation: ($45,000 - $7,500) x 0.50 = $18,750



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Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership on January 1, Year 1. Decor's net business income before guaranteed payments for the year was $45,000. During Year 1, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What is Miles' tax basis in Decor on December 31, Year 1?

Answer: C Explanation: As Miles' guaranteed payment was paid, it did not increase Miles' basis. ($45,000 - $7,500) x 0.50 + $200,000 = $218,750



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The partnership of Marks & Sparks sustained an ordinary loss of $42,000 in Year 1. The partnership, as well as the two partners, are on a calendar-year basis. The partners share profits and losses equally. At December 31, Year 1, Marks had an adjusted basis of $18,000 for his partnership interest, before consideration of the loss. On his Year 1 individual tax return, Marks should deduct an(a)

Answer: A Explanation:

Because Marks and Sparks share profits and losses equally, Marks is allocated $21,000 of the ordinary loss (e.g., 50% of $42,000). Section 704(d) provides that a partner’s distributive share of partnership loss is allowed only to the extent of the adjusted basis in that partner’s partnership interest. Any loss disallowed under §704(d) will be allowed as a deduction at the end of the first succeeding taxable year to the extent that the partner’s adjusted basis at the end of such year exceeds zero [Reg. §1.704-1(d)(1)]. Thus, Marks should deduct an ordinary loss of $18,000. The remaining $3,000 is carried forward and may be deducted in succeeding tax years.


nmlkj Ordinary loss of $18,000 nmlkj Ordinary loss of $21,000 nmlkj Ordinary loss of $18,000 and a capital loss of $3,000 nmlkj Capital loss of $21,000

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Don and Lisa are equal partners in the capital and profits of Sabal & Noel, but are otherwise unrelated. The following information pertains to 300 shares of Mast Corp. stock sold by Lisa to Sabal & Noel:

The amount of long-term capital loss that Lisa realized on the sale of this stock was

Answer: A Explanation: If a partner enters into a sale of an asset with the partnership and the partner owns more than 50% of the partnership, then no loss is recognized on the sale. Since Lisa owns only 50% of Sabal & Noel, the entire loss on the sale of the stock, or $5,000, ($9,000 - $4,000) is recognized by Lisa as a long-term capital loss.


Year of purchase Year 1 Year of sale Year 4 Basis (cost) $9,000 Sales price (equal to fair market value) $4,000

nmlkj $5,000nmlkj $3,000nmlkj $2,500nmlkj $0

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Which two are allowed as deductions in computing the ordinary income of a partnership?

Answer: B D Explanation: Section 162(a) allows a deduction for all ordinary and necessary business expenses, including depreciation expense.

Question: 13 of 60 ID: 4482 Bisk: 47-1-3 Type: Multiple Selection Total Points: 2

gfedc Contributions to recognized charities gfedc Depreciation expense gfedc First $100 of dividends received from qualifiying domestic corporations gfedc Guaranteed payments to partners

gfedc Short-term capital losses

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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

Answer: C Explanation: Section 707(c) provides that payments made to a partner for services or the use of capital determined without reference to the income of the partnership are to be considered as made to a person that is not a member of the partnership only for the purposes of (1) §61(a) relating to gross income and (2) §162(a) relating to the deductibility of ordinary and necessary business expenses, subject to the requirements of §263 to capitalize costs that are properly chargeable to a capital account. Thus, the guaranteed payments are includible as ordinary gross income on the recipient partners' respective income tax returns. The guaranteed payments are also deductible by the partnership as an ordinary and necessary business expense.


nmlkj I onlynmlkj II onlynmlkj Both I and IInmlkj Neither I nor II

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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

Answer: A Explanation: Section 707(c) states that guaranteed payments are payments to a partner for services or for the use of capital to the extent determined without regard to the income of the partnership. The $5,000 monthly salary is guaranteed because it is not determined by any reference to the income of the partnership. The payment of 25% of the partnership's profits is not a guaranteed payment because it is determined by taking into account the income of the partnership.



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Peters has a one-third interest in the Spano Partnership. During the year, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 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' tax basis in Spano by $16,000. II. The guaranteed payment increases Peters' ordinary income by $16,000.

Answer: B Explanation: Generally, a guaranteed payment to a partner is treated as if the partner were unrelated, and thus is a deduction from partnership income and ordinary income to the partner. As there is no indication that the payment was credited to Peters' ownership account as opposed to being paid outright, Peters' partnership basis doesn't increase.



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Freeman, a single individual, reported the following income in the current year:

What amount of Freeman's income is subject to self employment tax?

Answer: C Explanation: Guaranteed payments from a partnership for services rendered are income from self-employment. Ordinary income received from an S corporation was earned by the S corporation, not Freeman, and retains its character as it passes through to the taxpayer.


Guaranteed payment from services rendered to a partnership $50,000Ordinary income from an S corporation $20,000


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Kaye owns an 85% interest in the capital and profits of Amor Antiques, a partnership. In Year 3, Kaye sold an oriental lamp to Amor for $6,000. Kaye bought this lamp in Year 1 for her personal use at a cost of $2,000 and had used the lamp continuously in her home until the lamp was sold to Amor. Amor purchased the lamp as inventory for sale to customers in the ordinary course of business. What is Kaye’s reportable gain in Year 3 on the sale of the lamp to Amor?

Answer: A Explanation: While a partner may engage in a transaction with her/his partnership in a capacity other than as a member of such partnership [§707(a)], if the partner owns, directly or indirectly, more than 50% of the capital or profits interests in such partnership, then the gain upon the sale or exchange of property between them which, in the hands of the transferee, is not a capital asset as defined in §1221, shall be considered as ordinary income [§707(b)]. Since Kaye owned 85% of the capital and profits interest of the partnership, her $4,000 (e.g., $6,000 - $2,000) gain is characterized as ordinary income.


nmlkj $4,000 ordinary income nmlkj $4,000 capital gain nmlkj $3,400 ordinary income nmlkj $3,400 capital gain

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On June 1, Year 2, Stephen Farr received a 10% interest in the capital of Rev Company, a partnership, for services rendered. Rev's net assets at June 1 had a basis of $35,000 and a fair market value of $50,000. What income must Farr include in his Year 2 tax return for the partnership interest transferred to him by the other partners?

Answer: B Explanation: Under §83, an individual will recognize ordinary income if he receives a partnership interest in exchange for the rendering of services. The amount of income which will be recognized is the fair market value of the partnership times the interest which is received by such individual. Since the fair market value of the net assets of the partnership equals $50,000, Stephen Farr would recognize $5,000 ($50,000 x 0.10) of ordinary income.


nmlkj $5,000 capital gainnmlkj $5,000 ordinary incomenmlkj $3,500 capital gainnmlkj $3,500 ordinary income

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Ola Associates is a limited partnership engaged in real estate development. Hoff, a civil engineer, billed Ola $40,000 for consulting services rendered. In full settlement of this invoice, Hoff accepted a $15,000 cash payment plus the following:

What amount should Hoff, a cash-basis taxpayer, report on his return as income for the services rendered to Ola?

Answer: C Explanation: Gross income can be received in different forms, such as money, property, or services. The fair market value of property or services received must be included in gross income. Thus, Hoff must include the fair market value of the surveying equipment in gross income. Additionally, where a partnership interest is received in exchange for the contribution of services, the contributing partner includes in ordinary income an amount equal to the excess of FMV of the partnership interest received for the services performed less the amount paid for the partnership interest. Therefore, the amount included in gross income for services rendered equals the cash received plus the fair market value of the partnership interest and the surveying equipment, or $32,000 ($15,000 + $10,000 + $7,000).


Fair market value

Carrying amounton Ola's books

3% limited partnership interest in Ola $10,000 N/A Surveying equipment 7,000 $3,000


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

Answer: C Explanation: A partner's holding period for a partnership interest acquired through contribution of a capital asset, or an asset used in the partner's trade or business, includes the holding period for the contributed property. The holding period begins on the date the partnership interest is acquired only if the contributed property is not a capital asset or was not used in the partner's trade or business.


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

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On June 1, 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 income tax return, what amount must Kelly include as income from transfer of partnership interest?

Answer: C Explanation: Kelly has ordinary gross income from services rendered in an amount equal to the fair value of the property received as compensation under §§61(a) and 83(a). Regs. §1.61-2(d)(1) states '...if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation.' Thus, Kelly has $10,000 gross income ($100,000 X 10%). Although the partnership interest obtained will be a capital asset, the income for services performed to obtain such partnership interest is ordinary under § 64.


nmlkj $ 7,000 ordinary incomenmlkj $ 7,000 capital gainnmlkj $10,000 ordinary incomenmlkj $10,000 capital gain

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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?

Answer: C Explanation: Black's basis in her/his partnership is increased by the $7,000 adjusted basis of property contributed under §722. Under §752(a), a partner's increase in her/his share of the debts of the partnership is deemed to be a contribution of money to the partnership for which the partner obtains basis under §722. The partnership's debts increased by the $3,000 mortgage debt on the contributed debt. Black's 50 percent share is $1,500, and her/his basis is increased by that amount. Under §752(c) a liability to which property is subject is considered as the debt of the owner of the property. Under §752(b), a decrease in a partner's debts because the partnership assumed such debts is treated as a distribution of money from the partnership to the partner. Under §733 the partner's basis in her/his partnership interest is reduced by the amount of money distributed to the partner. Thus, Black's basis is reduced by $3,000.



Adjusted basis of property contributed $7,000 Increase in share of partnership's debts ($3,000 x 50%) 1,500 Decrease in partner's debts (3,000) Basis in new partnership interest $5,500

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Instructions:

To receive full credit on this simulation, be sure to answer all parts of the simulation.

Scenario: During Year 2, the Dex Partnership breaks even but decides to make distributions to each partner. FOR ITEMS 3 THROUGH 7, determine whether the statement is true (T) or false (F).

Statements: During Year 2, the Dex Partnership breaks even but decides to make distributions to each partner. FOR ITEMS 3 THROUGH 7, determine whether the statement is true (T) or false (F).

Question: 24 of 60 ID: 5037 Bisk: 47-2-1 Type: Text Total Points: 3 0

Statements Answer

3. A nonliquidating cash distribution may reduce the recipient partner’s basis in her/his partnership interest below zero.

4. A nonliquidating distribution of unappreciated inventory reduces the recipient partner’s basis in her/his partnership interest.

5.

In a liquidating distribution of property other than money, where the partnership’s basis of the distributed property exceeds the basis of the partner’s interest, the partner’s basis in the distributed property is limited to her/his predistribution basis in the partnership interest.

6.Gain is recognized by the partner who receives a nonliquidating distribution of property, where the adjusted basis of the property exceeds her/his basis in the partnership interest before the distribution.

7.In a nonliquidating distribution of inventory, where the partnership has no unrealized receivables or appreciated inventory, the basis of inventory that is distributed to a partner cannot exceed the inventory’s adjusted basis to the partnership.

Statements Answer

3. A nonliquidating cash distribution may reduce the recipient partner’s basis in her/his partnership interest below zero.

4. A nonliquidating distribution of unappreciated inventory reduces the recipient partner’s basis in her/his partnership interest.

5.

In a liquidating distribution of property other than money, where the partnership’s basis of the distributed property exceeds the basis of the partner’s interest, the partner’s basis in the distributed property is limited to her/his predistribution basis in the partnership interest.

Gain is recognized by the partner who receives a nonliquidating distribution of property, where the adjusted basis of the property

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Research: What code section and subsection, if applicable, provides guidance regarding the affect on the other partners’ bases in their partnership interests when the partnership makes a nonliquidating distribution of encumbered property to a partner who assumes the mortgage?

Example: §1(a)

Reference:

Answer: Scenario: Q 1 $8,000.00 Q 2 $25,500.00 Statements: Q 1 2 Q 2 1 Q 3 1 Q 4 2 Q 5 1 §752(b) Explanation: Scenario: Q 1 Brinks’ basis in the partnership interest includes the $12,000 adjusted basis of property contributed in exchange for such interest under §722. The $5,000 mortgage assumed by the partnership on the land contributed by Brinks reduces Brinks’ basis in the partnership interest by $5,000 under §733. Brinks’ 20% share of the mortgage assumed by the partnership is a deemed contribution of money to the

6. exceeds her/his basis in the partnership interest before the distribution.

7.

In a nonliquidating distribution of inventory, where the partnership has no unrealized receivables or appreciated inventory, the basis of inventory that is distributed to a partner cannot exceed the inventory’s adjusted basis to the partnership.

Enter the code section and subsection, if applicable, citation from the reference material that addresses the question on the Research tab in the space provided.

Section & Subsection Answer:

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partnership by Brinks.

Q 2 Carson obtains a basis in the partnership interest equal to the $24,000 adjusted basis of the inventory contributed under §722. In addition, Carson is deemed to have contributed money to the partnership equal to Carson’s share of the partnership’s debts. Thus, Carson is deemed to have contributed $1,500 ($5,000 x 30%) in money for which Carson obtains additional basis. Therefore, Carson’s initial basis in the Dex partnership interest is $25,500 ($24,000 + $1,500). Statements: Q 1 Section 733 states that a partner’s basis in her/his partnership interest is to be reduced—but not below zero—by money distributed to the partner in a nonliquidating distribution. Q 2 Section 733 states that a partner’s basis in her/his partnership interest is to be reduced—but not below zero—by a nonliquidating distribution of property other than money by the amount of the basis to such partner of distributed property, as determined under §732. Section 732(a)(1) provides that in the case of a nonliquidating distribution, the partner’s basis in distributed property is the adjusted basis of the distributed property in the hands of the partnership. However, §732(a)(2) limits the partner’s basis in the distributed property to the adjusted basis in the partnership interest. Q 3 Section 732(b) provides that in a liquidating distribution, the partner’s basis in distributed property is equal to the adjusted basis in her/his partnership interest reduced by any money distributed in the same transaction. Q 4 Section 731(a)(1) provides that gain will not be recognized on a distribution to a partner, except to the extent that money distributed exceeds the adjusted basis of the partnership interest immediately before the distribution. If the adjusted basis of the property distributed exceeds the adjusted basis in the partnership interest, no gain is recognized, and the adjusted basis in the partnership interest becomes the partner’s adjusted basis in the distributed property. The partner’s adjusted basis in the partnership interest would then be reduced to zero. Q 5 The basis of inventory distributed to a partner in a nonliquidating distribution is the partnership’s adjusted basis in the inventory, not to exceed the partner’s adjusted basis in the partnership interest under §732(a). The partnership’s adjusted basis in the inventory cannot exceed itself. §752(b)Code §752(b) states, `Any decrease in a partner's share of the liabilities of a partnership, or any decrease in a partner's individual liabilities by reason of the assumption by the partnership of such individual liabilities, shall be considered as a distribution of money to the partner by the partnership.`` [§733 ``In the case of a distribution by a partnership to a partner other than in liquidation of a partner's interest, the adjusted basis to such partner of his interest in the partnership shall be reduced (but not below zero) by (1) the amount of any money distributed to such partner, and (2) the amount of the basis to such partner of distributed property other than money...``

Adjusted basis of property transferred $ 12,000Less: Debt assumed by partnership (5,000)Add: Share of partnership's debt ($5,000 X 20%) __1,000Initial basis in Dex partnership interest $ 8,000

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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?

Answer: A Explanation: Under §722 and §705(a) Strom's basis in the partnership interest is increased by the adjusted basis of property contributed. Under §752(a), an increase in a partner's share of the debts of the partnership is considered as a contribution of money to the partnership for which the partner receives an increase in the basis of his partnership interest under §722 and §705(a). Strom's share of the partnership's debts increased by $6,000 ($24,000 x 25%). However, Strom was relieved of the $24,000 mortgage as a personal debt. Section 752(b) provides that a decrease in a partner's personal liabilities because the partnership assumed such liabilities is treated as a distribution of money from the partnership to the partner. Section 752(c) provides that to the extent of the property's fair market value a liability to which property is subject shall be considered as a liability of the owner. The $24,000 deemed cash distribution reduces the partner's basis in his partnership interest below zero under §733. Thus, Strom's basis in his partnership interest is reduced to zero. The excess of the deemed cash distribution over the partner's adjusted basis in his or her partnership interest is treated as a $2,000 gain on the sale of the partnership interest under §731(a)(1). The following computation summarizes the effects on Strom's basis in the Ace Partnership interest:



Contribution of property $ 16,000 Increase in share of partnership debts ($24,000 x 25%) 6,000 Basis before deemed cash distribution $ 22,000 Reduction in personal debts ($24,000 limited to $22,000) $(22,000)

Strom's basis in Ace Partnership $0

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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

Answer: B Explanation: Barker obtains an increase in basis for the cash and the building under §722. Under §752(b) the partnership's assumption of the mortgage is a reduction in Barker's debt that is treated as a distribution of money from the partnership to Barker. This deemed distribution reduces Barker's basis by $10,000 under §733. However, as a 50% partner, Barker's share of the partnership's mortgage debt has increased by $5,000 ($10,000 x 50%). This increase in Barker's share of the partnership's debt is treated as a contribution under §752(a). This deemed contribution increases Barker's basis under §722. Thus, Barker's basis is determined as follows:



Cash contributed $20,000 Adjusted basis of building contributed 26,000 Increase in share of partnership's debt 5,000 Less: decrease in personal debt (10,000) Barker's basis in partnership interest $41,000

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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.

Answer: D Explanation: Section 721(a) provides that no gain or loss is recognized by the partnership or by any partner on the contribution of property to the partnership in exchange for a partnership interest. The net debt relief is less than the adjusted basis of the property.



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Jones and Curry formed Major Partnership as equal partners by contributing the assets below:

The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Curry’s initial basis in the partnership interest?

Answer: C Explanation: Curry’s initial basis in the partnership interest is Curry’s adjusted basis in the land less the debt assumed by the partnership plus Curry’s portion of the debt assumed by the partnership. [$30,000 - $12,000 + (.5 x $12,000)]


Asset Adjusted Basis Fair Market Value Jones Cash $45,000 $45,000 Curry Land $30,000 $57,000


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Jones and Curry formed Major Partnership as equal partners by contributing the assets below:

The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Jones’ initial basis in the partnership interest?

Answer: A Explanation: Jones’ initial basis in the partnership interest is Jones’ adjusted basis in the cash plus Jones’ portion of the debt assumed by the partnership. [$45,000 + (.5 x $12,000)]


Asset Adjusted Basis Fair Market Value Jones Cash $45,000 $45,000 Curry Land $30,000 $57,000


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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?

Answer: B Explanation:

Generally, no gain or loss is recognized when a partner contributes assets to a partnership in exchange for a partnership interest. The partner’s basis in the partnership interest is the partner’s basis in the contributed assets, adjusted for any debt relief or debt assumed. Marcus’s basis in the partnership interest is the land’s adjusted basis of $50,000.


nmlkj $0 nmlkj $50,000 nmlkj $65,000 nmlkj $80,000

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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?


Generally, no gain or loss is recognized when a partner contributes assets to a partnership in exchange for a partnership interest. The partner’s basis in the partnership interest is the partner’s basis in the contributed assets, adjusted for any debt relief or debt assumed. Smith’s basis in the partnership interest is Smith’s basis in the cash, stock, and computer: $3,000 + $2,000 + $2,500 = $7,500.


nmlkj $10,500 nmlkj $7,500 nmlkj $5,500 nmlkj $3,000

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The basis to a partner of property distributed "in kind" in complete liquidation of the partner's interest is the

Answer: B Explanation: The basis of property (other than money) distributed to a partner in a liquidating distribution is equal to the adjusted basis of the partner's interest in the partnership, reduced by any cash received by the partner in the liquidation. The partnership's adjusted basis in the property becomes the partner's basis in a nonliquidation distribution. A shareholder takes the fair market value of property distributed by a corporation as the basis in the property, not a partner.


nmlkj Adjusted basis of the partner's interest increased by any cash distributed to the partner in the same transaction

nmlkj Adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction

nmlkj Adjusted basis of the property to the partnershipnmlkj Fair market value of the property

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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?

Answer: C Explanation: In general, under §732(a)(1) a partner's basis in property distributed to her/him by the partnership as a nonliquidating distribution is the same basis that the partnership had in the property. However, §732(a)(2) limits the partner's basis in the distributed property to hr/his adjusted basis in the partnership reduced by any money distributed in the same transaction. Because the partnership's $6,000 basis in the land exceeds Curry's $5,000 adjusted basis in Vantage Partnership, Curry's basis in the land is limited to $5,000. Curry's adjusted basis in his partnership interest is reduced to zero under §733.



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Ryan's adjusted basis in his Lux Partnership interest was $18,000 at the time Ryan received the following nonliquidating distributions of partnership property:

What is Ryan's tax basis in the land received from the partnership?

Answer: B Explanation: The basis of property distributed to a partner is generally its adjusted basis to the partnership immediately before the distribution. Section 732(a)(2) limits the adjusted basis to the adjusted basis in the partner's interest in the partnership reduced by any money distributed in the same transaction. ($18,000 - $10,000 = $8,000)


Cash $10,000 Land--Adjusted basis 14,000 Land--Fair market value 20,000

nmlkj $0nmlkj $ 8,000nmlkj $14,000nmlkj $20,000

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Anderson's basis in the SBF Partnership is $80,000. Anderson received a nonliquidating distribution of $50,000 cash, and land with an adjusted basis of $40,000 and a fair market value of $50,000. What is Anderson's basis in the land?

Answer: C Explanation: The basis of property distributed to a partner is generally its adjusted basis to the partnership immediately before the distribution. Section 732(a)(2) limits the adjusted basis to the adjusted basis of the partner's interest in the partnership reduced by any money distributed in the same transaction. See correct answer for an expanded explanation.



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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?


Under §732(a)(1), the basis of property other than money distributed to a partner in a nonliquidating distribution is equal to the basis of such property in the partnership’s hands immediately before the distribution. However, if the basis of the property distributed may not exceed the basis of the partner’s interest in the partnership (as reduced by any money distributed in the same transaction) under §732(a)(2). Owen’s tax basis in Regal after the distribution is computed as follows.

Owen’s basis before distribution $ 18,000

Less: Cash distribution (3,000)

Limit on basis of land $ 15,000

Basis of land (lesser of partnership’s land basis or limit on basis of land) (7,000)

Owen’s tax basis after distribution $ 8,000



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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?


Bailey's basis in the partnership interest includes the $25,000 adjusted basis of property contributed in exchange for such interest under §722. The $10,000 recourse mortgage assumed by the partnership on the land contributed by Bailey reduces Bailey’s basis in the partnership interest by $10,000 under §733. Bailey’s 30% share of the mortgage assumed by the partnership is a deemed contribution of money to the partnership by Bailey. Bailey’s basis in his partnership interest is calculated as follows.

Adjusted basis of property transferred $ 25,000 Less: Debt assumed by partnership (10,000) Add: Share of partnership's debt ($10,000 × 30%) 3,000 Initial basis in partnership interest $ 18,000



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Which of the following should be used in computing the basis of a partner's interest acquired from another partner?

Answer: D Explanation: If a partner acquires a partnership interest from another partner, the basis of the acquired interest is equal to the sum of the cash and the fair market value of the other consideration paid for the interest. An assumption of partnership liabilities is considered a contribution of money by the partner and increases the basis of a partner's interest. Further, the partnership's assumption of a partner's liabilities is considered a distribution of money from the partnership resulting in a decrease in the basis of a partner's interest.


Cash paid by transferee to transferor

Transferee's share of partnership liabilities

nmlkj No Yes nmlkj Yes No nmlkj No No nmlkj Yes Yes

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

Answer: A Explanation: The partner's share of an increase in partnership liabilities is treated as a contribution of money from the partner to the partnership under §752(a). The partner then gets to increase her/his basis in the partnership for this deemed contribution of money under §722.


nmlkj Increases by the partner's share of the increasenmlkj Decreases by the partner's share of the increasenmlkj Decreases, but not to less than zeronmlkj Is not affected

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Gray is a 50% partner in Fabco Partnership. Gray's tax basis in Fabco on January 1 was $5,000. Fabco made no distributions to the partners during the year, and recorded the following:

What is Gray's tax basis in Fabco on December 31?

Answer: A Explanation: Section 705(a)(1)(A) provides that a partner's basis in her/his partnership interest shall be increased by his distributive share of the taxable income of the partnership. Section 705(a)(1)(B) provides that a partner's basis in her/his partnership interest is also increased by her/his distributive share of the partnership's tax-exempt income. Section 702(a)(7) provides that the Secretary of the Treasury may require that certain items of partnership income, in addition to those listed in other paragraphs of this subsection, be separately stated. Section 702(a)(8) provides that each partner's share of taxable income other than separately stated items be taken into account by each partner. Thus, each partner must take into account her/his share of the separately stated portfolio income as well as the other ordinary taxable income. Gray's tax basis in his Fabco partnership interest is computed below:


Ordinary income $20,000 Tax exempt income 8,000 Portfolio income 4,000


Beginning Basis, January 1 $ 5,000 Ordinary Income ($20,000 x 50%) 10,000 Tax Exempt Income ($8,000 x 50%) 4,000

Portfolio Income ($4,000 x 50%) 2,000 Tax Basis in Fabco, December 31 $21,000

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On January 1, Year 1, Paul owned a 25% interest in Associates partnership. During Year 1, a new partner was admitted and Paul's interest was reduced to 20%. The partnership liabilities at January 1, Year 1, were $150,000, but decreased to $100,000 at December 31, Year 1. Paul's and the other partners' capital accounts are in proportion to their respective interests. Disregarding any income, loss or drawings for the year, the basis of Paul's partnership interest at December 31, Year 1, compared to the basis of his interest at January 1, was

Answer: C Explanation: Under Section 752(a), a partner's share of the debts of the partnership is treated as a contribution of money to the partnership for which the partner obtains basis under §722. Under Section 752(b), a decrease in a partner's share of the debts of the partnership is treated as a distribution of money from the partnership to the partner. This deemed distribution reduces the partner's basis in his partnership interest under §733.


nmlkj Decreased by $37,500nmlkj Increased by $20,000nmlkj Decreased by $17,500nmlkj Decreased by $5,000

Paul's Share of Debts, Jan. 1 ($150,000 x 25%) $37,500 Paul's Share of Debts, Dec. 31 ($100,000 x 20%) (20,000) Decrease in Basis in Paul's Partnership Interest $17,500

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Dean is a 25 percent partner in Target Partnership. Dean's tax basis in Target on January 1, Year 1, was $20,000. At December 31, Year 1, Dean received a nonliquidating cash distribution of $8,000 from Target. Target's accounts recorded municipal bond interest income of $12,000 and ordinary income of $40,000 for the year. What was Dean's tax basis in Target on December 31, Year 1?

Answer: C Explanation: Dean's basis in the partnership interest is increased by the distributive share of the partnership's ordinary income under §705(a)(1)(A). Dean's basis in the partnership interest is increased by the distributive share of the partnership's tax-exempt income under §705(a)(1)(B). Dean's basis in the partnership interest is reduced, but not below zero, by cash distributions under §733 and 705(a)(2).



Basis, January 1 $20,000 Share of municipal bond interest ($12,000 x 25%) 3,000 Share of ordinary income ($40,000 x 25%) 10,000 Basis before distribution $33,000 Less: Distribution (8,000) Basis, December 31 $25,000

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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. 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

Answer: A Explanation: Smith's share of the partnership's liability is $16,000 ($40,000 x 40%). An increase in a partner's share of the partnership's liabilities is treated as a contribution of money by the partner to the partnership. This deemed contribution of money increases the partner's basis in the partnership interest under §722. Thus, Macro's liability increases Smith's basis in the partnership interest by $16,000.


nmlkj Increases Smith's partnership basis by $16,000nmlkj Increases Smith's partnership basis by $20,000nmlkj Increases Smith's partnership basis by $24,000nmlkj Has no effect on Smith's partnership basis

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On January 1, Kane was a 25% equal partner in Maze General Partnership, which had partnership liabilities of $300,000. On January 2, a new partner was admitted and Kane's interest was reduced to 20%. On April 1, Maze repaid a $100,000 general partnership loan. Ignoring any income, loss, or distributions for the year, what was the net effect of the two transactions on Kane's tax basis in Maze partnership interest?


The reduction from 25% to 20% in Kane's partnership interest on January 2 resulted in a $15,000 reduction in Kane's share of liabilities (5% x $300,000 = $15,000). The repayment of $100,000 reduces Kane’s portion of general partnership debt by 20%. $100,000 x 20% = $20,000, the decrease of debt decreases the basis of the partners liable for that debt. (It might have reduced Kane’s portion by 25%, but that option is not given.) Thus, the net effect of the two transactions is $35,000 ($15,000 + $20,000).


nmlkj Has no effectnmlkj Decrease of $35,000nmlkj Increase of $15,000nmlkj Decrease of $75,000

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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?


Thompson’s basis in the partnership interest is increased by the long-term capital gain under §705. Thompson’s basis in the partnership interest is reduced, but not below zero, by cash distributions under §1367.



Thompson’s basis at beginning of the year $60,000 Less: Cash distribution (20,000) Add: Long-term capital gain 15,000 Basis before loss $ 55,000 Ordinary loss $65,000 Deductible loss for the period (Smaller of basis or ordinary loss) $55,000

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Acme and Buck are equal members in Dear, an LLC. Dear has not elected to be taxed as a corporation. Acme contributed $7,000 cash and Buck contributed a machine with an adjusted basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Acme's basis in Dear?

Answer: C Explanation: Having elected not to be treated as a corporation for tax purposes, Dear thus is treated as a partnership. Acme's initial basis in the partnership interest is Acme's adjusted basis in the cash plus Acme's portion of the debt assumed by the partnership.[$7,000 + (50% x $3,000) = $8,500]



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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?

Answer: D Explanation:

A partner’s basis is increased by the partner’s share of income as well as reduced by the partner’s share of losses and actual distributions to the partner. The question states the income in total and the distributions in a per-partner manner. $100,000 + ($80,000 / 4) - $10,000 = $110,000



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The adjusted basis of Jody's partnership interest was $50,000 immediately before Jody received a current distribution of $20,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $35,000. What amount of taxable gain must Jody report as a result of this distribution?

Answer: A Explanation: Section 731(a)(1) provides that no gain shall be recognized on a distribution from a partnership to a partner except to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership. The adjusted basis in Jody's partnership interest was $50,000. The money distributed of $20,000 is less than the adjusted basis in Jody's partnership interest.



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The adjusted basis of Jody's partnership interest was $50,000 immediately before Jody received a current distribution of $20,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $35,000. What is Jody's basis in the distributed property?

Answer: B Explanation: Section 733 provides that the adjusted basis in the partnership interest shall be reduced by the amount of money distributed. Thus, Jody's adjusted basis in the partnership interest is reduced by $20,000 to $30,000. Section 732(a)(1) provides that the adjusted basis of property distributed in a current distribution to a partner is generally equal to the adjusted basis of the property in the hands of the partnership. This would give Jody a $40,000 basis in the property. However, §732(a)(2) provides a limitation on this amount. The limit is the adjusted basis of the partnership interest. Thus, Jody's adjusted basis in the partnership of $30,000 is less than the $40,000 adjusted basis of the property in the hands of the partnership. Therefore, Jody's basis in the property is $30,000. Jody's basis in the partnership interest is reduced by this $30,000 under §733. This leaves Jody with a zero basis in the partnership interest.



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The adjusted basis of Vance's partnership interest in Lex Associates was $180,000 immediately before receiving the following distribution in complete liquidation of Lex:

What is Vance's basis in the real estate?

Answer: C Explanation: Section 732(b) provides that the adjusted basis of property received by a partner in complete liquidation of the partner's interest in the partnership shall be an amount equal to the partner's adjusted basis in the partnership reduced by any money distributed in the same transaction. Thus, the basis of the property to Vance is $80,000 ($180,000 - $100,000).


Basis to Lex Fair Market Value Cash $100,000 $100,000 Real Estate $70,000 $96,000


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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 receivable, appreciated inventory, or properties which had been contributed by its partners. What was Stone's recognized gain or loss on the distribution?

Answer: D Explanation: Section 731(a)(1) provides that a partner does not recognize on receiving a distribution from a partnership except to the extent that any money distributed exceeds the adjusted basis of her/his partnership interest immediately before the distribution. Section 731(a)(2) provides that a partner does not recognize loss on a distribution of property from the partnership except in certain liquidating distributions. Section 731(b) also provides that the partnership does not recognize any gain or loss on a distribution to a partner. Since the distribution was a nonliquidating distribution, Stone recognizes no gain or loss.


nmlkj $18,000 ordinary incomenmlkj $13,000 capital gainnmlkj $5,000 capital lossnmlkj $0

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Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest’s balance sheet was as follows:

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?


The $1,500 cash distribution received by Frazier is comprised of his portion of the partnership cash ($2,000 x 50%) and his portion of the gain from the sale of equipment ($3,000 – $2,000) x 50%. Gain is recognized to the extent that money distributed exceeds the partner’s adjusted basis in the partnership interest.


Cash $2,000Equipment (adjusted basis) 2,000Capital: Stone 3,000Capital: Frazier 1,000

nmlkj $0 nmlkj $250 nmlkj $300 nmlkj $500

Cash distribution $1,500Less: Basis in partnership (1,200)Gain recognized $ 300

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Smith, a partner in Ridge Partnership, had a basis in the partnership interest of $100,000 at the time Smith received a nonliquidating distribution of land with an adjusted basis of $75,000 to Ridge and a fair market value of $135,000. Ridge had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Which of the following statements is(are) correct regarding the distribution?

Answer: B Explanation: Section 731(a)(1) provides that a partner does not recognize gain on receiving a distribution from a partnership, except to the extent that any money distributed exceeds the adjusted basis of her/his partnership interest immediately before the distribution. Generally, partner's holding period for property received in a distribution from a partnership includes the holding period of the partnership respect to such property [§735(b)].


I. Ridge recognized a $60,000 capital gain from the distribution. II. Smith's holding period for the land includes the time it was owned by Ridge.

nmlkj I only nmlkj II only nmlkj Both I and II nmlkj Neither I nor II

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Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership, while Benz, Clark, and Day each owns a 20% interest. All use a calendar year. At November 1, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business. Which one of the following statements is correct for tax purposes?

Answer: A Explanation: Since more than 50% ownership of the prior partnership continues as the Abel & Benz Partnership, that partnership is considered to be a continuation of Partnership Abel, Benz, Clark & Day. No tax is generally imposed on a person who contributes property to a partnership. A partnership does not need IRS approval to separate a business nor does a partnership have to file its formal dissolution on a prescribed form with the IRS.


nmlkj Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day.

nmlkj In forming Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day.

nmlkj Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS.

nmlkj Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form.

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On January 3, the partners' interest in the capital, profits, and losses of Able Partnership were:

On February 4, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20. No other transactions took place during the year. For tax purposes, which of the following statements is correct with respect to Able?

Answer: B Explanation: Section 708(b)(1) provides that a partnership is considered as terminated if within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. Poe sold a 30% interest on February 4, and Dean sold his 25% interest on December 20. Thus, on December 20, 55% of the interest in the partnership's capital and profits had been sold within a 12-month period.


Partner % of capital, profits and losses Dean 25% Poe 30% Ritt 45%

nmlkj Able terminated as of February 4.nmlkj Able terminated as of December 20.nmlkj Able terminated as of December 31.nmlkj Able did not terminate.

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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.

Answer: C Explanation: Regs. §1.708-1(b)(1)(iv) provides that if a partnership is terminated by a sale or exchange of an interest that (1) the partnership is deemed to have distributed its properties to the purchaser and the remaining partners in proportion to their respective interests in the partnership properties and (2) immediately thereafter, the purchaser and the other remaining partners are deemed to contribute such properties to the partnership.



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Under which of the following circumstances is a partnership that is not an electing large partnership considered terminated for income tax purposes?

I. Fifty-five percent of the total interest in partnership capital and profits is sold within a 12-month period.

II. The partnership’s business and financial operations are discontinued.

Answer: C Explanation: Under §708(b), except for electing large partnerships, a partnership terminates if no part of its business is carried on within a 12-month period, or if within a 12-month period, 50% or more of the total interest in the partnership are sold.



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The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, Year 1:

Carr, an equal partner, sold his partnership interest to Dole, an outsider for $154,000 cash on January 1, Year 2. In addition Dole assumed Carr's share of the partnership's liability. What was the total amount realized by Carr on the sale of his partnership interest?

Answer: A Explanation: The amount which a partner realizes on the sale of a partnership interest includes any cash received, plus any partnership liabilities which are assumed by the buyer. The total amount realized by Carr on the sale of his partnership interest is $174,000 ($154,000 of cash plus $20,000 of partnership liabilities).


AssetsAdjusted

basis per books Market value Cash $102,000 $102,000 Unrealized accounts receivable -- $420,000

Totals $102,000 $522,000

Liabilities and Capital Note payable $60,000 $60,000 Capital accounts: Allen $14,000 $154,000 Baker $14,000 $154,000 Carr $14,000 $154,000 Totals $102,000 $522,000


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Carr, an equal partner, sold his partnership interest to Dole, an outsider for $154,000 cash on January 1, Year 2. In addition Dole assumed Carr's share of the partnership's liability. What amount of ordinary income should Carr report in his Year 2 income tax return on the sale of his partnership interest ?

Answer: D Explanation: If a partner sells his or her partnerhsip interest and the partnership has unrealized receivalbes that have not been recognized as income by the partnerhsip, then the partner must recognize the proceeds received for the unrealized receivables as ordinary income. Since Carr's share of the partnership's unrealized receivables is $140,000 (that is, $420,000 / 3), Carr must recognize this amount as ordinary income.

Question: 59 of 60 ID: 1713 Bisk: 47-3-2 Type: Multiple Choice Total Points: 1 Liabilities and Capital Note payable $60,000 $60,000 Capital accounts: Allen $14,000 $154,000 Baker $14,000 $154,000 Carr $14,000 $154,000 Totals $102,000 $522,000

nmlkj $0 nmlkj $20,000 nmlkj $34,000 nmlkj $140,000

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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 receivable or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest?

Answer: D Explanation: The amount realized by Clark is $55,000, equal to the $30,000 cash and the $25,000 debt relief under §1001(b). The $55,000 amount realized less the $40,000 adjusted basis equals a gain realized of $15,000 under §1001(a). The sale of a partnership interest is considered the sale of a capital asset under §741 except as provided in §751 for unrealized receivable and substantially appreciated inventory ('hot assets'). There were no hot assets in this partnership. Thus, Clark realized a capital gain of $15,000.


nmlkj Ordinary loss of $10,000nmlkj Ordinary gain of $15,000nmlkj Capital loss of $10,000nmlkj Capital gain of $15,000

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bisk reg 16

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