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Exam 21: Dispositions of Partnership Interests and Partnership Distributions

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Question 21

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Jackson is a 30% partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash. At the time of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is Jackson's gain or loss on the sale of his interest?

A) $48,000 capital gain.
B) $48,000 ordinary income.
C) $24,000 capital gain and $24,000 ordinary income.
D) Gain or loss cannot be determined.

E) B) and C)
F) All of the above

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Question 22

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At the end of last year, Cynthia, a 20% partner in the five-person CYG partnership, has an outside basis of $30,000 including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?

A) $7,500 capital loss.
B) $7,500 ordinary loss.
C) $7,500 capital gain.
D) $7,500 ordinary income.

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

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Question 23

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A disproportionate distribution of hot assets is treated as though the partnership distributes a proportionate share of hot assets to the partner and then the partner sells those hot assets back to the partnership at fair market value in exchange for a portion of the assets actually received in the distribution.

The SSC Partnership balance sheet includes the following assets on December 31 of the current year: $\begin{array} { | l | r | r | } \hline & \text { Basis } & \text { FMV } \\\hline \text { Cash } & \$ 180,000 & \$ 180,000 \\\hline \text { Accounts receivable } & - 0 - & 60,000 \\\hline \text { Land } & 90,000 & 120,000 \\\hline \text { Total } & \underline { \$ 270,000 } & \$ 360,000 \\\hline\end{array}$ Susan, a 1/3 partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $100,000 cash, what is the amount and character of Susan's gain or loss from the sale?

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

Inventory is substantially appreciated if the fair market value of all inventory items exceeds 100% of their basis to the partnership.

Joan is a 1/3 partner in the PDJ Partnership. On May 1, Joan sells her interest to Freddie for a cash payment of $75,000. On January 1, Joan's basis in PDJ is $57,000. PDJ generates $60,000 of ordinary income and $9,000 of tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale date: $\begin{array}{lll}&Basis&\text{Fair Market Value}\\\hline\text { Cash } & \$ 45,000 & \$ 45,000 \\\text { Land held for investment } & \$ 45,000 & \$ 90,000\end{array}$ What is the amount and character of Joan's gain or loss on the sale?

When determining a partner's gain on sale of his partnership interest, the selling partner must include her share of partnership debt in the amount realized.

Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside basis is $22,000). Tyson's outside basis is $105,000 including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?

Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a pro-rata operating distribution to Teresa of $40,000 cash and stock with a fair value of $20,000 (inside basis of $7,000). What is the amount and character of Teresa's recognized gain or loss? What is Teresa's remaining basis in HT?

If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income (loss).

BPA Partnership is an equal partnership in which each of the partners has a basis in her partnership interest of $20,000. BPA reports the following balance sheet: $\begin{array}{l}\begin{array}{c}\\Inventory\\Land\\Total\\\end{array}\begin{array}{c}\text { Basis } \\\$ \mathbf{4 0 , 0 0 0} \\\underline{\mathbf{2 0 , 0 0 0}} \\\$ \mathbf{6 0 , 0 0 0} \\\hline\end{array}\begin{array}{c}{\text { FMV }}\\{\$ 60,000} \\\underline{\mathbf{3 0 , 0 0 0}} \\\hline \mathbf{9 0 , 0 0 0} \\\end{array}\end{array}$ Brooke, capital $\quad\quad\$20,000$ Penelope, capital $\quad\quad20,000$ Amanda, capital $\quad\quad\underline{20,000}$ Total $\quad\quad\quad\quad\quad\quad\$60,000$ a. Identify the hot assets if Brooke decides to sell her interest in BPA. b. Are these assets "hot" for purposes of distributions?

In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when the partnership assets include cash and land held for 5 years as an investment.

The PW partnership's balance sheet includes the following assets immediately before it liquidates: $\begin{array}{lrr}&\underline{Basis}&\underline{FMV}\\\text { Cash } & \$ \mathbf{\$ 1 0 , 0 0 0} & \$ \mathbf{\$ 1 0 , 0 0 0} \\\text { Unrealized receivables } & \underline{-0-} & \underline{\mathbf{\$ 2 0 , 0 0 0}} \\\text { Total } &\underline{\underline{{\mathbf{\$ 1 0 , 0 0 0}}}}& \underline{\underline{\$20,000}}\end{array}$ In complete liquidation PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners) . Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Wade's recognized gain or loss?

Federico is a 30% partner in the FRM Partnership when he sells his entire interest to Maria for $98,000. At the time of the sale, Federico's basis in FRM is $74,000. FRM does not have any debt. In addition, FRM's assets include accounts receivable with zero tax basis and $21,000 fair market value at the date of the sale. Federico will recognize ordinary income of $24,000 on the sale of his partnership interest.

Which of the following statements regarding liquidating distributions is true?

Scott is a 50% partner in the LS Partnership. Scott has a basis in his partnership interest of $84,000 at the end of the current year, prior to any distribution. On December 31, Scott receives an operating distribution of $9,000 cash and a parcel of land with a $21,000 fair market value and a $12,000 basis to the partnership. LS has no debt or hot assets. What is the amount and character of Scott's recognized gain or loss? What is Scott's basis in the distributed property? What is Scott's ending basis in his partnership interest?

Which of the following statements is true regarding partnership operating distributions?

Kathy is a 25% partner in the KDP Partnership and receives a parcel of land with a fair value of $150,000 (inside basis of $100,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $200,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. What is KDP's special basis adjustment from the distribution?

Tyson is a 25% partner in the KT Partnership. On January 1, KT distributes $16,000 cash, inventory with a $10,000 fair value (inside basis $4,000) , land A with a fair value of $8,000 (inside basis of $12,000) and land B with a fair value of $6,000 (inside basis of $4,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in KT is $23,000. What is Tyson's basis in the distributed inventory, land A and land B?