Question 1

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $67,500. The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $110,000), and inventory (basis of $40,000, fair market value of $60,000). Nick's basis in his partnership interest was $57,500. On the sale, Nick will recognize ordinary income of $5,000 and a capital gain of $5,000.

Accepted Answer

A) True 
 B)False

Question 2

George is planning to retire from the GDP LLC, where he is an active managing member owning a 60% interest. Capital is not a material income-producing factor to GDP. The LLC can either redeem his interest under § 736 or he can sell his interest to Dale, who currently owns a 20% interest. The LLC's operating agreement is silent regarding treatment of goodwill. As to George's alternatives, which one of the following statements is true?

Accepted Answer

A)  Either the sale or the redemption would terminate the partnership.
B)  Payments to George for his share of GDP's goodwill would be treated the same for either a sale or redemption.
C)  George will report ordinary income related to his share of "hot assets" under either the sale or the redemption scenario.
D)  If GDP/Dale negotiate payments over several years, either an installment sale or a redemption over time would result in the same tax situation to George.
E)  All of the above statements are true.F) B) and E)
G) None of the above

Question 3

Match the following statements with the best match from the choices below. Note: Choice L may be used more than once.
-Nonliquidating distribution

Accepted Answer

A)  Cash basis accounts receivable, for example.
B)  Fair market value exceeds 120% of basis.
C)  Inside basis of partnership property can be adjusted to reflect the purchase price paid.
D)  Terminates the partner's interest in the partnership.
E)  Ordinary income-producing items.F) Cash, then inventory and unrealized receivables, then other assets.G) Does not eliminate the partner's interest in the partnership.H) Liquidation of the partner's interest in hot assets.I) Changes the partner's or the partnership's ordinary income potential.J) Any partnership assets other than cash, capital, or § 1231 assets.K) Sometimes treated as an unrealized receivable.L) No correct match provided.M) G) and L)
N) A) and I)

Question 4

Match the following statements with the best match from the choices below. Note: Choice N may be used more than once.
-Section 754

Accepted Answer

A)  Includes the partner's share of partnership liabilities.
B)  Could result from sale of a partnership interest for more than the partner's share of the inside basis of assets.
C)  Liquidation payments from this type of partnership are always § 736(b)  payments.
D)  Could arise if a distribution results in loss to the distributee partner.
E)  May be a § 736(a)  payment.F) May receive § 736(a)  payments.G) Probably treated as a general partner for § 736 purposesH) Sale of more than 50% in less than 12 months.I) Liquidation payments from this type of partnership may include § 736(a)  payments.J) A § 736(b)  payment.K) Adjustment designed to bring inside and outside bases into balance.L) Partnership asset basis is at least $250,000 > FMV.M) Would result if the partner contributes appreciated property to the partnership.N) No correct match is provided.O) I) and L)
P) A) and H)

Question 5

Mark receives a proportionate nonliquidating distribution. At the beginning of the partnership year, the basis of his partnership interest is $100,000. During the year, he received a cash distribution of $40,000 and a property distribution (basis of $30,000, fair market value of $25,000) . In addition, Mark's share of partnership liabilities was reduced by $10,000 during the year. How much gain or loss does Mark recognize; what is his basis in the property he received; and what is his remaining basis in the partnership interest?

Accepted Answer

A)  $25,000 loss; $25,000 basis in property; $0 remaining basis.
B)  $30,000 loss; $30,000 basis in property; $0 remaining basis.
C)  $0 gain or loss; $25,000 basis in property; $25,000 remaining basis.
D)  $0 gain or loss; $30,000 basis in property; $20,000 remaining basis.
E)  $0 gain or loss; $30,000 basis in property; $30,000 remaining basis.F) B) and D)
G) C) and E)

Question 6

Which of the following is not typically considered to be a "hot asset?"

Accepted Answer

A)  Accounts receivable of a cash basis partnership.
B)  Inventory with a basis of $16,000 and a fair market value of $15,000.
C)  Depreciation recapture potential.
D)  Land held for development.
E)  All of the above are typically considered to be "hot assets."F) A) and B)
G) B) and D)

Question 7

In a proportionate liquidating distribution, Sam receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $50,000) , and land (basis of $20,000, fair market value of $50,000) . In addition, the partnership repays all liabilities, of which Sam's share was $40,000. Sam's basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sam's basis in the accounts receivable and land, and how much gain or loss does he recognize?

Accepted Answer

A)  $0 basis in accounts receivable; $50,000 basis in land; $0 gain or loss.
B)  $0 basis in accounts receivable; $90,000 basis in land; $0 gain or loss.
C)  $50,000 basis in accounts receivable; $40,000 basis in land; $0 gain or loss.
D)  $50,000 basis in accounts receivable; $50,000 basis in land; $50,000 gain.
E)  $0 basis in accounts receivable; $70,000 basis in land; $30,000 loss.F) C) and D)
G) B) and E)

Question 8

A partnership has accounts receivable with a basis of $0 and a fair market value of $30,000 and depreciation recapture potential of $20,000. All other assets of the partnership are either cash, capital assets, or § 1231 assets. If a purchaser acquires a 40% interest in the partnership from another partner, the selling partner will be required to recognize ordinary income of $12,000.

Accepted Answer

A) True 
 B)False

Question 9

In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Accepted Answer

A) True 
 B)False

Question 10

Match the following statements with the best match from the choices below. Note: Choice L may be used more than once.
-Liquidating distribution

Accepted Answer

A)  Cash basis accounts receivable, for example.
B)  Fair market value exceeds 120% of basis.
C)  Inside basis of partnership property can be adjusted to reflect the purchase price paid.
D)  Terminates the partner's interest in the partnership.
E)  Ordinary income-producing items.F) Cash, then inventory and unrealized receivables, then other assets.G) Does not eliminate the partner's interest in the partnership.H) Liquidation of the partner's interest in hot assets.I) Changes the partner's or the partnership's ordinary income potential.J) Any partnership assets other than cash, capital, or § 1231 assets.K) Sometimes treated as an unrealized receivable.L) No correct match provided.M) J) and K)
N) E) and K)

Question 11

Rex and Scott operate a law practice in partnership form. Because Rex and Scott are brothers, the partnership is subject to the family partnership income reallocation rules.

Accepted Answer

A) True 
 B)False

Question 12

Beth has an outside basis of $100,000 in the BJDE Partnership as of December 31 of the current year. On that date the partnership liquidates and distributes to Beth a proportionate distribution of $50,000 cash and inventory with an inside basis to the partnership of $10,000 and a fair market value of $16,000. In addition, Beth receives an antique desk (not inventory)  which has an inside basis (and fair market value)  of $5,000. None of the distribution is for partnership goodwill. How much gain or loss will Beth recognize on the distribution, and what basis will she take in the desk?

Accepted Answer

A)  $40,000 loss; $0 basis.
B)  $35,000 loss; $5,000 basis.
C)  $0 gain or loss; $5,000 basis.
D)  $0 gain or loss; $40,000 basis.
E)  None of the above.F) D) and E)
G) A) and B)

Question 13

Match the following independent descriptions as "hot" (i.e., ordinary income-producing)  or nonhot assets with the statements below.
-Cash basis accounts receivable.

Accepted Answer

A)  Hot assets for purposes of distributions, liquidation of a partnership interest under § 736, and sale of a partnership interest.
B)  May be a hot asset for some but not all the purposes stated in (a) .
C)  Not a hot asset.D) None of the above
E) A) and B)

Question 14

In a proportionate liquidating distribution, Sara receives a distribution of $40,000 cash, accounts receivable (basis of $0, fair market value of $30,000) , and inventory (basis of $50,000, fair market value of $60,000) . Sara's basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sara's basis in the accounts receivable and inventory, and how much gain or loss does she recognize?

Accepted Answer

A)  $0 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.
B)  $0 basis in accounts receivable; $80,000 basis in inventory; $0 gain or loss.
C)  $40,000 basis in accounts receivable; $40,000 basis in inventory; $0 gain or loss.
D)  $30,000 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.
E)  $30,000 basis in accounts receivable; $60,000 basis in inventory; $10,000 gain.F) A) and B)
G) All of the above

Question 15

The ELF Partnership distributed $20,000 cash to Emma in a proportionate, nonliquidating distribution. Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain.

Accepted Answer

A) True 
 B)False

Question 16

On December 31 of last year, Maria gave her daughter, Chelsea, a gift of a 25% interest in a partnership in which capital is a material income-producing factor. For the current calendar year, the partnership's ordinary income was $100,000. Maria and Chelsea were the only partners, and there were no guaranteed payments. Maria's services performed for the partnership were worth $60,000, and Chelsea has never performed any services. What is Maria's distributive share of partnership income for the current year?

Accepted Answer

A)  $60,000
B)  $75,000
C)  $90,000
D)  $100,000
E)  None of the aboveF) C) and D)
G) B) and E)

Question 17

Taylor's basis in his partnership interest is $140,000, including his $60,000 share of partnership debt. Sandy buys Taylor's partnership interest for $100,000 cash and she assumes Taylor's $60,000 share of the partnership's debt. If the partnership owns no hot assets, Taylor will recognize a capital loss of $40,000.

Accepted Answer

A) True 
 B)False

Question 18

Scott owns a 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate nonliquidating distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognizes no gain or loss and his basis in the land is $10,000.

Accepted Answer

A) True 
 B)False

Question 19

Last year, Darby contributed land (basis of $60,000, fair market value of $80,000)  to the Seagull LLC in exchange for a 25% interest in the LLC. In the current year, the LLC distributes the land (now worth $82,000)  to Shelby, who is also a 25% owner. Immediately prior to the distribution, Darby's basis in the LLC was $70,000, while Shelby's basis in the LLC was $110,000. How much gain or loss must be recognized and by whom? What is Shelby's basis in the property she receives and Darby's basis in her partnership interest following the distribution?

Accepted Answer

A)  No gain or loss; Shelby's basis in the property is $80,000; Darby's basis in interest is $70,000.
B)  $20,000 gain recognized by Darby; Shelby's basis in the property is $80,000; Darby's basis in interest is $90,000.
C)  $22,000 gain recognized by Darby; Shelby's basis in the property is $82,000; Darby's basis in interest is $92,000.
D)  $20,000 gain recognized by Shelby; Shelby's basis in the property is $80,000; Darby's basis in interest is $90,000.
E)  $22,000 gain recognized by Shelby; Shelby's basis in the property is $82,000; Darby's basis in interest is $92,000.F) B) and E)
G) None of the above

Question 20

Match the following statements with the best match from the choices below. Note: Choice N may be used more than once.
-Active member of LLC

Accepted Answer

A)  Includes the partner's share of partnership liabilities.
B)  Could result from sale of a partnership interest for more than the partner's share of the inside basis of assets.
C)  Liquidation payments from this type of partnership are always § 736(b)  payments.
D)  Could arise if a distribution results in loss to the distributee partner.
E)  May be a § 736(a)  payment.F) May receive § 736(a)  payments.G) Probably treated as a general partner for § 736 purposesH) Sale of more than 50% in less than 12 months.I) Liquidation payments from this type of partnership may include § 736(a)  payments.J) A § 736(b)  payment.K) Adjustment designed to bring inside and outside bases into balance.L) Partnership asset basis is at least $250,000 > FMV.M) Would result if the partner contributes appreciated property to the partnership.N) No correct match is provided.O) E) and H)
P) A) and K)

Exam 11: Partnerships Distributions Transfer of Interests and Terminations

Rex and Scott operate a law practice in partnership form. Because Rex and Scott are brothers, the partnership is subject to the family partnership income reallocation rules.

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Which of the following is not typically considered to be a "hot asset?"

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In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.

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Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. -Section 754

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Match the following independent descriptions as "hot" (i.e., ordinary income-producing) or nonhot assets with the statements below. -Cash basis accounts receivable.

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The ELF Partnership distributed $20,000 cash to Emma in a proportionate, nonliquidating distribution. Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain.

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Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. -Nonliquidating distribution

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Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. -Liquidating distribution

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Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. -Active member of LLC

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Exam 11: Partnerships Distributions Transfer of Interests and Terminations

Rex and Scott operate a law practice in partnership form. Because Rex and Scott are brothers, the partnership is subject to the family partnership income reallocation rules.

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Which of the following is not typically considered to be a "hot asset?"

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In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.

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Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. -Section 754

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Match the following independent descriptions as "hot" (i.e., ordinary income-producing) or nonhot assets with the statements below. -Cash basis accounts receivable.

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The ELF Partnership distributed $20,000 cash to Emma in a proportionate, nonliquidating distribution. Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain.

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Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. -Nonliquidating distribution

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Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. -Liquidating distribution

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Match the following statements with the best match from the choices below. Note: Choice N may be used more than once. -Active member of LLC

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