EA2 Study Unit 11.1-11.2 Disposition of a Partner’s Interest

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Questions and Answers

What constitutes the adjustment to the basis of partnership assets when a partner's interest is transferred?

The market value of the partnership interest at the time of transfer.
The difference between the partnership's overall assessed value and liquidated losses.
The total value of unrealized receivables allocated to the selling partner.
The difference between the transferee partner’s basis for the partnership interest and the proportionate share of the basis of all partnership property. (correct)

Under what condition are gains from inventory distributions taxed as ordinary income?

When the inventory's fair market value is less than the partnership's adjusted basis.
When the fair market value of the inventory equals the partnership's adjusted basis.
When the inventory is liquidated without any loss.
When the fair market value of the inventory exceeds 120% of the partnership’s adjusted basis in the inventory. (correct)

Will loss be recognized if a partner receives property other than money, unrealized receivables, and inventory during a liquidation?

No, but it may affect the partner's basis in the future.
Yes, loss will be recognized based on the fair market value of the distributed property.
Yes, but only if the property is part of the capital gain.
No, loss will not be recognized. (correct)

How should unrealized receivables be categorized in terms of income for a selling partner?

As ordinary income. (A) Signup and view all the answers

Sunshine Partnership is owned equally by partners Buddy, Jeb, and Bob. Sunshine owns an intangible asset with a basis of $0 and a fair market value of $800, a printing machine with a basis of $300 and a fair market value of $2,000, and a collating machine with a basis of $150 and a fair market value of $200. Bob has a basis of $400 in his partnership interest. The intangible asset and the collating machine are distributed to Bob in liquidation of his interest. What are Bob's bases in his intangible asset and collating machine?

Machine $165 Intangible $235 (A) Signup and view all the answers

You are a partner in ABC Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is true?

All of the statements are true. (A) Signup and view all the answers

Archie sells his 50% interest in XYZ Partnership to Hal for $5,000 cash. His outside basis in the partnership is $3,500. The partnership has inventory and a capital asset with respect to basis of $6,000 and $2,000, respectively. The respective fair market values of the inventory and capital asset are $8,000 and $1,000. How much should Archie properly recognize?

Archie should recognize a total gain of $1,500, with $1,000 classified as ordinary income. The sale of a partnership interest generally results in a capital gain or loss. The gain or loss is the difference between the amount realized and the adjusted basis of the partnership interest. The total gain would equal $1,500 ($5,000 amount realized – $3,500 outside basis). Only $1,000 of the gain would be classified as ordinary income ($2,000 appreciation of inventory × 50% ownership percentage). Signup and view all the answers

Partner Z has a basis in the partnership of $100,000. In complete liquidation of Partner Z's interest, Partner Z received $10,000 in cash and office equipment with a FMV of $80,000. What is the amount and character recognized by Partner Z from this liquidating distribution?

$0 (B) Signup and view all the answers

The adjusted basis of Eliot's interest in a partnership was $60,000. He received a non-liquidating distribution of $48,000 cash plus a piece of equipment with a fair market value and a partnership adjusted basis of $18,000. What is Eliot's basis for the equipment?

$12,000 Signup and view all the answers

Which of the following statements about the liquidation of a partner's interest is false?

The remaining partners' distributive shares of partnership income are reduced by payments in exchange for a retiring partner's interest in partnership property. (D) Signup and view all the answers

Feel Good Partnership operates a business. Its tax year ends on December 31. Partner X dies on April 15. Partner X and his estate's distributive share of partnership income (considered to be earnings from self-employment) for the year of death is $12,000. What amount of income must be used to figure Partner X's self-employment tax for his final Form 1040?

$4,000 (C) Signup and view all the answers

Mr. Gorda, in liquidation of his partnership interest, receives Property 1. Mr. Gorda has a basis of $10,000 for his one-third interest in the partnership. The partnership assets are cash of $4,000, Property 1 with a basis of $11,000 and fair market value of $11,000, and Property 2 with a basis of $15,000 and fair market value of $18,000. The distributed property takes Mr. Gorda's basis of $10,000 in his hands. If the partnership elects optional basis adjustment of partnership assets, what is the basis of Property 2 retained by the partnership?

Property 2 Basis is $16,000. Although the partnership usually does not adjust its basis for its retained property when it distributes other property to a partner, under Sec. 754, the partnership may elect to increase basis if the basis to the partnership of the distributed property exceeds the basis at which the distributee may take that property. In this case, the $1,000 ($11,000 basis of Property 1 - $10,000 basis of Mr. Gorda's partnership interest) that is “unused” in the basis of the distributed property may be added to the basis of Property 2 retained by the partnership. Thus, the basis of Property 2 is $16,000 ($15,000 basis of property 2 + $1,000 “unused” basis). Signup and view all the answers

DUG Partnership operates a business. Its tax year ends on December 31. A partner dies on August 20 of the current year. The deceased partner's (and his or her estate's) distributive share of partnership income for the year of death is $18,000. What is the partner's share of self- employment income from the partnership?

$12,000 (B) Signup and view all the answers

What is the primary difference in tax consequences between the sale of a partnership interest and a liquidating distribution?

Sales can result in capital gains/losses, while liquidations involve different rules for asset distributions and income recognition. (D) Signup and view all the answers

When a partner sells their share of a Partnership, which of the following is included in the amount realized?

The cash received from the buyer, plus the relief of any liabilities assumed by the buyer. (D) Signup and view all the answers

If a partner sells their interest in a partnership for $50,000 cash and their share of partnership liabilities is $15,000, what total amount is considered the selling price before considering the basis?

$65,000 (B) Signup and view all the answers

What does 'inside basis' refer to in the context of a partnership?

The basis the partnership has in its assets. (A) Signup and view all the answers

When can a partnership make an election for an optional adjustment to the basis of partnership assets?

In the year a partner's interest is transferred. (A) Signup and view all the answers

What is the adjustment to the basis of partnership assets related to when a partner's interest is transferred based on?

The difference between the transferee partner’s basis for the partnership interest and the proportionate share of the basis of all partnership property. (A) Signup and view all the answers

Which of the following scenarios is treated as a liquidating distribution?

A partner sells their interest back to the partnership. (A) Signup and view all the answers

What does a sale of a partnership interest relate to?

The partner's outside basis, or adjusted basis, in the partnership. (C) Signup and view all the answers

When does a partnership terminate for federal tax purposes?

Only when the operations of the partnership cease. (B) Signup and view all the answers

How is the sale or exchange termination of a partnership treated for tax purposes?

As a distribution of assets immediately followed by the contribution of those assets to a new partnership. (C) Signup and view all the answers

When a partnership liquidates, which of the following scenarios describes the priority of asset distribution?

Loans to the partnership, regardless of whether they are from general or limited partners, are paid before any partner's shares. (C) Signup and view all the answers

What happens to the tax year of a partnership when a partner's entire interest terminates due to death?

The tax year of the partnership closes only with respect to the deceased partner. (C) Signup and view all the answers

XYZ Partnership is undergoing liquidation. After all assets are sold and debts are paid, there remains $50,000 to be distributed. Partner X is a general partner with a loan of $10,000 to the partnership and owns 40% of the partnership shares. Partner Y is a limited partner and owns 30% of the partnership shares. Partner Z is a general partner and owns 30% of the partnership shares. How much will Partner X receive in total from this liquidating distribution?

$26,000 (C) Signup and view all the answers

If a partner sells unrealized receivables received in a distribution from a partnership, how is the gain or loss treated?

As an ordinary income or loss. (A) Signup and view all the answers

To whom is a deceased partner's allocable share of partnership items taxed?

To the decedent on his or her final income tax return for items up to the date of death. (C) Signup and view all the answers

When inventory is distributed by a partnership to a partner, the subsequent gain or loss from the sale of that inventory by the partner depends on what factor?

The nature of the property in the hands of the distributee. (B) Signup and view all the answers

What is required when a partner's interest terminates mid-year?

A return must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. (A) Signup and view all the answers

A partner receives a distribution of unrealized receivables. The distribution does not liquidate the partnership. What is the impact on the partner's basis in the partnership interest?

The basis is reduced by the partnership's adjusted basis of the receivables (typically zero). (A) Signup and view all the answers

What is the tax implication of converting a partnership to an LLC?

It is not considered a sale, exchange, or liquidation of any partnership interest. (C) Signup and view all the answers

How are payments to a retired partner determined by partnership income treated?

They are treated as a distributive share of partnership income. (D) Signup and view all the answers

Partnership ABC is liquidating. They have the following assets: Cash $20,000, Building (basis $50,000, FMV $70,000), and Liabilities of $30,000. Partners have capital balances totaling $40,000. What is the first step in the liquidation process after reviewing the assets and debts?

Sell the building. (C) Signup and view all the answers

Which of the following is NOT a common step in the liquidation of a partnership?

Distributing assets to partners before settling debts. (A) Signup and view all the answers

What results in ordinary income or loss when a partner receives money or property for part of a partnership interest?

The amount due to their share of the partnership’s unrealized receivables or inventory items. (C) Signup and view all the answers

Partnership DEF is in the process of liquidation. After selling all assets and paying off debts, there's $60,000 remaining. Partner D has a loan to the partnership of $15,000. Partners E and F do not. How is this remaining amount initially distributed?

$15,000 to Partner D, and the remaining $45,000 split according to the profit/loss sharing agreement. (B) Signup and view all the answers

Flashcards

Unrealized Receivables Income

Unrealized receivables must be allocated as ordinary income.

Capital Gain vs. Ordinary Income

Realized gain becomes a capital gain after unrealized receivables are allocated.

Partnership Adjustment Calculation

Adjustment is the difference between the transferee's basis and the partnership's property basis.

Substantially Appreciated Rule

Gains from inventory distributions are taxed as ordinary income if fair market value exceeds 120% of adjusted basis.