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Exam 21: Partnerships

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Question 71

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Which of the following statements correctly reflects the rules regarding proportionate liquidating distributions?

A) Relief of liabilities is treated as a distribution of cash but only to the extent that the cash distribution does not exceed the partner's basis in the partnership interest.
B) A partner's basis in distributed unrealized receivables is the lesser of the partnership's basis in the receivables or their fair market value.
C) The basis of unrealized receivables cannot be stepped up to their fair market value unless the partner has adequate unabsorbed basis.
D) Assets are deemed distributed in the following order: cash, unrealized receivables and inventory and finally, capital assets.
E) The partner can recognize gain, but not loss, on a proportionate liquidating distribution.

F) A) and C)
G) C) and D)

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Question 72

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Allison and Taylor form a partnership by each making contributions of $90,000 cash to partnership capital.The partnership purchases an asset for $600,000, using the cash and financing the rest with a $420,000 recourse note.Allison is allocated 75% of partnership profits and losses until the date when the total partnership profits exceed total partnership losses.After that date, the profits and losses are shared equally between the two partners.The partners expect the partnership to have losses for the first three years of operations and profits thereafter.How will the recourse debt be shared between the partners for basis purposes immediately after the property is acquired? The recourse debt will be allocated $360,000 to Allison and $60,000 to Taylor.According to the constructive liquidation scenario, the $600,000 partnership asset is deemed worthless.The asset is deemed to be sold for the $0 value and the loss is allocated $450,000 to Allison and $150,000 to Taylor.This reduces Allison's capital account to a deficit of ($360,000) and Taylor's to a deficit of ($60,000).Each partner is then deemed to contribute cash to the partnership to eliminate this capital account deficit (Allison contributes $360,000; Taylor contributes $60,000).The partnership is deemed to use these cash contributions to pay the $420,000 partnership liability.

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Question 73

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A partnership is an association formed by two or more taxpayers (who must be individuals) to carry on a trade or business.

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

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?

Generally, gain is recognized on a proportionate current or liquidating distribution if the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Tyler's basis in his partnership interest is $110,000, including his share of partnership debt.Sarah buys Tyler's partnership interest for $60,000 cash and she assumes Tyler's $90,000 share of the partnership's debt.If the partnership owns no hot assets, Tyler will recognize a capital loss of $50,000.

Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits.During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax-exempt income of $4,000.The partnership distributed $10,000 cash to Sarah.Her share of partnership recourse liabilities on the last day of the partnership year was $20,000.What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?

Zach's partnership interest basis is $80,000.Zach receives a proportionate, liquidating distribution from a liquidating partnership of $60,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $26,000.Zach assigns a basis of $20,000 to the inventory and recognizes no gain or loss.

Which of the following statements is not a requirement of the substantial economic effect test?

If the partnership properly makes an election for treatment of a specific tax item, the partner is bound by that treatment.

Which of the following is a correct definition of a concept related to partnership taxation?

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations.If all three hurdles are met, the partner may deduct the loss.

Crystal contributes land to the newly formed CD Partnership in exchange for a 40% interest.The land has an adjusted basis and fair market value of $200,000 and is subject to a liability of $50,000, which the partnership assumes.None of this liability is repaid at year-end.At the end of the year, the partnership has trade accounts payable of $60,000.Assume all liabilities are allocated proportionately to the partners.Total partnership income for the year is $300,000.What is Crystal's basis in her partnership interest at the end of the year?

During the current tax year, Jordan and Whitney each contributed $50,000 to form the J&W LLC.Each member has a 50% interest in LLC capital, profits, and losses, except that depreciation expense is allocated 40% to Jordan and 60% to Whitney.During the first year, the LLC reported income (before depreciation expense) of $20,000 and had depreciation expense of $10,000.The LLC incurred recourse debt (that was personally guaranteed by both of the LLC members) of $60,000.Partnership assets are $170,000 at the end of the year.Under the constructive liquidation scenario, how is the recourse debt allocated to Jordan and Whitney?

Rick is a 30% partner in the ROC Partnership.At the beginning of the tax year, Rick's basis in the partnership interest was $60,000, including his share of partnership liabilities.During the current year, ROC reported net ordinary income of $40,000.In addition, ROC distributed $5,000 to each of the partners ($15,000 total) .At the end of the year, Rick's share of partnership liabilities increased by $20,000.Rick's basis in the partnership interest at the end of the year is:

In a proportionate liquidating distribution, Scott receives a distribution of $20,000 cash, accounts receivable (basis of $0, fair market value of $40,000) , and land (basis of $30,000, fair market value of $60,000) .In addition, the partnership repays all liabilities, of which Scott's share was $20,000.Scott's basis in the entity immediately before the distribution was $100,000.As a result of the distribution, what is Scott's basis in the accounts receivable and land, and how much gain or loss does he recognize?

Landon received $50,000 cash and a capital asset (basis of $70,000, fair market value of $80,000) in a proportionate liquidating distribution.His basis in his partnership interest was $100,000 prior to the distribution.How much gain or loss does Landon recognize and what is his basis in the asset received?

The MOG Partnership reports ordinary income of $60,000, long-term capital gain of $12,000, and tax-exempt income of $12,000.The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income.Their allocation of ordinary income will be reduced accordingly, and Olivia will be allocated a proportionately greater share of ordinary income.(In other words, each partner will receive allocations totaling 1/3 of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket.

In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000, fair market value of $8,000), and land (basis of $50,000, fair market value of $60,000).William's basis was $75,000 before the distribution.On the liquidation, William recognizes no gain or loss, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.