EA2 Study Unit 11.1-11.2 - Questions PDF

******EA2 Study Unit 11.1-11.2****** []{#anchor}****Disposition of a Partner's Interest  **** 1)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...

******EA2 Study Unit 11.1-11.2****** []{#anchor}****Disposition of a Partner's Interest  **** 1)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 Intangible A. Machine \$150 Intangible \$0 B. Machine \$200 Intangible \$200 Answer (B) is incorrect.\ The remaining basis is allocated in relation to the unrealized appreciation of the assets. C. Machine \$400 Intangible \$0 **D. Machine \$165 Intangible \$235** **Answer (D) is correct.\ Section 732(b) provides that the basis of property distributed by a partnership in a liquidating distribution to a partner is the adjusted basis of the partner's interest in the partnership, less any money received in the same distribution. The distributee partner's basis in his or her partnership interest is first allocated to unrealized receivables and inventory. If the distributee partner's allocable basis exceeds the basis the partnership had in the distributed unrealized receivables and inventory, that remaining basis is allocated among any other assets to the extent of the partnership's basis in the other distributed assets. To the extent allocable basis exceeds the partnership's basis in the other distributed assets, it is allocated in relation to the unrealized appreciation in those assets. Finally, any remaining basis is allocated among those assets based on the relative fair market value of those assets.** **Therefore, Bob must first allocate basis to the collating machine (\$150) since the intangible asset has no basis. Next, the remaining basis is allocated among the two assets based on the unrealized appreciation in those assets. The intangible asset would be allocated a basis of \$235 \[(\$800 unrealized appreciation ÷ \$850 total appreciation of both assets) × \$250\], and the collating machine would receive basis of \$15 {\[\$50 unrealized appreciation (\$200 -- \$150) ÷ \$850 total appreciation of both assets\] × \$250}. The total bases allocated to the collating machine and the intangible asset are \$165 and \$235, respectively.** === 3)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? 1. You report the entire amount as a gain since your adjusted basis in the partnership is zero. 2. You report \$5,000 as ordinary income from the sale of the partnership's depreciable property. 3. You report the remaining \$6,000 gain as capital gain. **A.All of the statements are true.** **Answer (A) is correct.\ The sale or exchange of an interest in a going partnership is similar to the sale of stock in a corporation. The gain or loss on the sale of the partnership interest is a capital gain or loss, subject to long- or short-term treatment depending upon the length of time the selling partner owned the interest in the partnership. An exception to this rule applies when the partnership owns unrealized receivables or inventory. In this case, the selling partner must allocate a portion of the sales proceeds to the unrealized receivables and to the inventory and, to that extent, will realize ordinary income.** B.All of the statements are false. C.2 and 3 are true, but 1 is false. D.1 is true, but 2 and 3 are false. Answer (D) is incorrect.\ The gain on the sale of a partnership interest is a capital gain, reduced by the amount attributable to the unrealized depreciable property that is classified as ordinary income. === 7)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. Archie should properly recognize **A.None of the answers are correct.** **Answer (A) is correct.\ 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). Thus, none of the other answers are correct.** B.Capital gain of \$1,500 on the sale of his partnership interest. Answer (B) is incorrect.\ Only \$1,000 of the gain is ordinary income. C.Ordinary income of \$1,500, the amount of cash he received. D.Ordinary income of \$2,000 and a capital loss of \$500. === **4)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?** A.\$10,000 capital loss. **B.\$0** **Answer (B) is correct.\ A loss is realized when money and the FMV of property distributed are less than the AB of the partnership interest. However, no loss is recognized** ****if any property other than money, unrealized receivables, and inventory is distributed in liquidation of the interest.**** **The \$10,000 difference \[\$100,000 basis -- (\$10,000 cash + \$80,000 equipment)\] is added to Partner Z's basis of the office equipment.** C.\$10,000 ordinary gain. D.\$10,000 ordinary loss. Answer (D) is **incorrect**.\ Loss recognized in a liquidating distribution is characterized as if from the sale of a capital asset. However, no loss is recognized if any property other than money, unrealized receivables, and inventory is distributed in liquidation of the interest. ****===**** ----------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 4)[]{#anchor-1} []{#anchor-2}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. Eliot's basis for the equipment is[]{#anchor-3} ----------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ****6)Which of the following statements about the liquidation of a partner's interest is false?**** **** ****A.The retiring partner will recognize a gain on a liquidating distribution to the extent that any money distributed is more than the partner's adjusted basis in the partnership.**** ****B.The remaining partners' distributive shares of partnership income are reduced by payments in exchange for a retiring partner's interest in partnership property.**** **** ****Answer (B) is correct.**** ****Payments made in liquidation of a partner's interest are considered a distribution under Sec. 736(b) to the extent the payments are made in exchange for the interest of the partner in the partnership property. The partnership is not allowed a deduction, and therefore the remaining partners' distributive shares are not affected.**** ****C.Payments in liquidation of an interest that are not made in exchange for the interest in partnership property are reported as ordinary income by the recipient.**** ****D.A retiring partner is treated as a partner until his or her interest in the partnership has been completely liquidated.**** **===** ------------------------------- --------------------------------------------------------------------------------------------------------------------- 10)[]{#anchor-4}[]{#anchor-5} []{#anchor-6}Which of the following statements about the liquidation of a partner's interest is false?[]{#anchor-7} ------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------ ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 8)[]{#anchor-8}[]{#anchor-9} []{#anchor-10}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?[]{#anchor-11} ------------------------------ ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 9)[]{#anchor-12}[]{#anchor-13} []{#anchor-14}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?[]{#anchor-15} -------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 12)[]{#anchor-16}[]{#anchor-17} []{#anchor-18}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. The partner's share of self-employment income from the partnership is[]{#anchor-19} --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 12)[]{#anchor-20}[]{#anchor-21} []{#anchor-22}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. The partner's share of self-employment income from the partnership is[]{#anchor-23} --------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------