Exam 11: Partnerships: Distributions, transfer of Interests, and Terminations

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.

The BLM LLC's balance sheet on August 31 of the current year is as follows. The nonrecourse debt is shared equally among the LLC members.On that date,Lillie sells her one-third interest to Robyn for $170,000,including cash and relief of Lillie's share of the nonrecourse debt.Lillie's outside basis for her interest in the LLC is $50,000,including her share of the LLC's debt.How much capital gain and/or ordinary income will Lillie recognize on the sale?

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500.The partnership's assets consist of cash ($100,000),land (basis of $90,000,fair market value of $70,000),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 loss of $5,000.

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

Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year.Katie also assumed Beth's share of the partnership's liabilities.Beth's basis in her partnership interest at the beginning of the year was $40,000,including a $15,000 share of partnership liabilities.The partnership's income for the entire year was $100,000,and Beth's share of partnership debt was $10,000 as of the date she sold the partnership interest.Assume the partnership has no hot assets and that its income is earned evenly throughout the year.Beth recognizes a gain of $12,500 on the sale.

Matt,a partner in the MB Partnership,receives a proportionate,nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000.Matt's basis in the partnership is $10,000 before the distribution.In this situation,Matt will recognize a $6,000 gain,take a $16,000 basis in the property,and his basis in the partnership interest is reduced to zero.

A § 754 election is made for a tax year in which the partner recognizes gain or loss on a distribution from the partnership or the basis in distributed property is increased or decreased from the inside basis the partnership held in those assets.The election is made by a partner any time it is necessary to adjust his or her share of the inside basis of partnership assets.

The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated: $25,000 cash,land parcel A (basis of $5,000,fair market value of $30,000)and land parcel B (basis of $5,000,fair market value of $15,000).James's basis in his partnership interest was $85,000 immediately before the distribution.James will allocate bases of $40,000 to parcel A and $20,000 to parcel B,and he will have no remaining basis in his partnership interest.

The MBA Partnership makes a § 736(b)cash payment of $20,000 to partner Amanda in liquidation of her interest in the partnership.The partnership owns no hot assets.Amanda's basis in her partnership interest before the distribution was $50,000.If the partnership has a § 754 election in effect,it will record a $30,000 decrease in its inside basis in partnership assets,affecting all the remaining partners in the partnership.

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.

Beth has an outside basis of $100,000 in the BBDE 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 a computer (not inventory)which has an inside basis and fair market value of $0 and $3,000,respectively.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 computer?

Normally a distribution of property from a partnership does not result in gain recognition.However,a distribution of marketable securities may be treated,in part,as a distribution of cash that could result in gain recognition.

Jared owns a 40% interest in the capital and profits of the JAJ Partnership.Immediately before he receives a proportionate nonliquidating distribution from JAJ,the basis of his partnership interest is $60,000.The distribution consists of $40,000 in cash and land with a fair market value of $25,000.JAJ's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution,Jared recognizes no gain or loss and his basis in the land is $20,000.

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

Matt receives a proportionate nonliquidating distribution.At the beginning of the partnership year,the basis of his partnership interest is $60,000.During the year,he received a cash distribution of $25,000 and a property distribution (basis of $20,000,fair market value of $12,000).In addition,Matt's share of partnership liabilities was reduced by $20,000 during the year.How much gain or loss does Matt recognize;what is his basis in the property he received;and what is his remaining basis in the partnership interest?

Andrew receives a proportionate nonliquidating distribution from the AEF Partnership.The distribution consists of $50,000 cash and property (adjusted basis to the partnership of $34,000 and fair market value of $42,000).Immediately before the distribution,Andrew's adjusted basis in the partnership interest was $40,000.His basis in the noncash property received is:

Cindy,a 20% general partner in the CDE Partnership,wants to retire and has approached the other partners about having the partnership buy her out.The partnership is a cash basis,service oriented partnership in which Cindy is an active partner.The partnership's assets consist primarily of unrealized receivables and cash.The partnership also has substantial going concern value (goodwill)which is probably its most valuable asset.The other partners in the partnership are also active in the business and are not related to Cindy.

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.

Aaron owns a 30% interest in a continuing partnership.The partnership distributes a $35,000 year-end cash payment to all the partners.In a proportionate nonliquidating distribution,the partnership also distributed property (basis of $15,000,fair market value of $20,000)to Aaron.Immediately before the distribution,Aaron's basis in the partnership interest was $50,000.As a result of the distribution,Aaron recognizes:

Your client has operated a sole proprietorship for several years,and is now interested in raising capital for expansion.He is considering forming either a C corporation or an LLC.