Partnerships Distributions, Sales, and Exchanges
TRUE-FALSE QUESTIONS CHAPTER 20
1. Only a cash basis partnership is concerned with the problem of unrealized receivables.
2. The inclusion of accounts receivable of an accrual basis partnership in the determination of its substantially appreciated inventory items reduces the chances of the partnership being affected by Section 751.
3. A partner’s interest in a partnership is a capital asset.
4. When a partner acquires an interest in a partnership by purchase, the basis of the underlying assets of the partnership must be adjusted to reflect the price the incoming partner paid for his interest.
5. Where property for which a special basis adjustment was made because a partnership interest was purchased is distributed to a nonpurchasing partner, the basis adjustment carries over to the distributee partner.
6. With respect to the allocation of a basis adjustment to partnership assets, the total fair market value of all of the assets is compared with the total adjusted basis of those same assets and the difference between the two amounts is allocated to each asset based upon its relative adjusted basis.
7. A partner who receives a current property distribution (other than cash), made pro rata to all the partners, will not have to report a gain with respect to the distribution.
8. As a general rule, property distributed to a partner, not in liquidation of an interest in the partnership, takes the same basis in the hands of the partner as it had in the hands of the partnership.
9. If the partnership agreement is silent but the partners recognize that a retiring partner had created substantial goodwill for the partnership while a partner, the retiring partner may report as capital gain so much of the payments for the partnership interest as are designated as payment for goodwill.
10. A partnership may elect to adjust the basis of its property merely because one partner sells an interest to another partner and there is no transfer of any partnership assets involved.
MULTIPLE CHOICE QUESTIONS CHAPTER 20
11. On April 1, George Hart, Jr. acquired a 25 percent interest in the Wilson, Hart, and Company partnership by gift from his father. The 25 percent partnership interest had been acquired by a $50,000 cash investment by Hart, Sr. 10 years ago. The fair market value of Hart, Sr.’s partnership interest was $60,000 at the time of the gift. Hart, Jr. sold the 25 percent interest for $85,000 on December 17. What type and amount of capital gain should Hart, Jr. report on his tax return?
a. Long-term capital gain of $25,000
b. Short-term capital gain of $25,000
c. Long-term capital gain of $35,000
d. Short-term capital gain of $35,000
12. Ralph Elin contributed a plot of land to the partnership of Anduz and Elin. Elin’s adjusted basis for this land was $50,000, and its fair market value was $75,000. Under the partnership agreement, Elin’s capital account was credited with the full fair market value of the land. Anduz matched Elin’s contribution with a $75,000 cash contribution to the partnership. Thus, each partner’s capital account was credited with $75,000. Elin and Anduz share profits and losses equally. What is the adjusted basis of Elin’s interest in the partnership?
13. On July 1, Clark Cootes acquired a 20 percent interest in the partnership of Davis & Denny, by contributing a parcel of land for which his basis was $8,000. At the date of the contribution, the land had a fair market value of $20,000 and was subject to a mortgage of $4,000. Responsibility for the mortgage was assumed by the partnership. Assuming there are no other partnership liabilities, the basis of Clark’s interest in the partnership is:
14. For 20 years, Henry Humboldt has been a 25 percent partner in HIG, a calendar year, cash basis partnership. This year, HIG averaged ordinary partnership income of $20,000 each month. As of September 30, when Henry’s adjusted basis for his partnership interest, prior to consideration of the current year operations, was $40,000, he sold his interest to George for $90,000. Henry should include in his current year return as income from the partnership:
a. $70,000 long-term capital gain
b. $50,000 long-term capital gain
c. $20,000 long-term capital gain and $50,000 ordinary income
d. $5,000 long-term capital gain and $45,000 ordinary income
e. $70,000 ordinary income
15. John Albin is a retired partner of Brill & Crum, a personal service partnership. Albin has not rendered any services to Brill & Crum since his retirement over 10 years ago. Under the provisions of Albin’s retirement agreement, Brill & Crum is obligated to pay Albin 10 percent of the partnership’s net income each year. In compliance with this agreement, Brill & Crum paid Albin $25,000 this year. How should Albin treat this $25,000?
a. Not taxable
b. Ordinary income
c. Short-term capital gain
d. Long-term capital gain
16. A partnership has no Section 751 assets. Assuming that the partnership has a Code Sec. 754 election in effect, the partnership would make all of the following adjustments except:
a. Increase the basis of partnership property because of capital gain which a distributee partner recognizes in a current distribution.
b. Decrease the basis of partnership property because of capital loss which a distributee partner recognizes in a liquidating distribution.
c. Increase the basis of partnership property because the distributee partner’s basis for the partnership interest limits the basis assigned to partnership property received in a current distribution.
d. Decrease the basis of partnership property because the amount of the distributee partner’s basis assigned to partnership property distributed in a liquidating distribution exceeds the partnership’s pre-distribution basis in the property.
e. Decrease the basis of partnership property for the excess of the amount a purchasing partner pays for a partnership interest over the partner’s proportionate share of the partnership’s basis in its properties.
17. Mark, Pete and Mickey are equal partners in the 2MP Partnership. At the beginning of the year, Mark’s basis in his partnership interest was $15,000, Pete’s basis was $10,000, and Mickey’s basis was $20,000. The partnership reported taxable income of $30,000 (allocated equally among the partners). At year-end, the partnership made a nonliquidating distribution of $25,000 cash to Pete. How much income or gain will Pete recognize on receipt of the distribution (assume the partnership has no hot assets)? Assume the partnership has no liabilities.
e. none of the above
18. Ellen is a 25 percent partner in Heartland Partners. Her tax basis in her partnership interest is $18,000. She received a non-liquidating distribution of land with a tax basis of $23,000 and a fair market value of $45,000. The partnership has no liabilities. What will be Ellen’s tax basis in the land received in the non-liquidating distribution?
e. none of the above
Partnerships Distributions, Sales, and Exchanges