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Exam 11: Partnerships Distributions Transfer of Interests and Terminations

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Question 1

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The December 31, 2016, balance sheet of the RST General Partnership reads as follows. $\begin{array}{lrr}&\text { Adjusted } \\&\text { Basis }&\text { FMV }\\\text { Cash } & \$ 65,000 & \$ 65,000 \\\text { Receivables } & -0- & 7,500 \\\text { Capital and } \S 1231 \text { assets } & 55,000 & 100,000 \\\text { Total } & \mathbf{\$ 1 2 0 , 0 0 0} & \mathbf{\$ 1 7 2 , 5 0 0}\\\\\text { Roy, capital } & \$ 40,000 & \$ 57,500 \\\text { Sue, capital } & 40,000 & 57,500 \\\text { Ted, capital } & 40,000 & 57,500 \\\text { Total } & \mathbf{\$ 1 2 0 , 0 0 0} & \mathbf{\$ 1 2 7 , 5 0 0} \\\end{array}$ The partners share equally in partnership capital, income, gain, loss, deduction and credit. Ted's adjusted basis for his partnership interest is $40,000. On December 31, 2016, he retires from the partnership, receiving a $60,000 cash payment in liquidation of his interest. The partnership agreement states that $2,500 of the payment is for goodwill. Which of the following statements about this distribution is false?

A) If capital is NOT a material income-producing factor to the partnership, the § 736(a) payment will be $2,500.
B) If capital IS a material income-producing factor, the entire $60,000 payment will be a § 736(b) property payment.
C) The payment for Ted's share of goodwill will create $2,500 of ordinary income to him.
D) The partnership can deduct any amount that is a § 736(a) payment because it will be determined without regard to partnership profits.
E) All statements are false.

F) A) and E)
G) B) and C)

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Question 2

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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. ​ Discuss from Cindy's viewpoint how you would structure the liquidation of her interest under § 736. Answer as if you are her advocate. Do you think the other partners will agree with this structure? If not, what structure would they prefer?

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Cindy will prefer to treat the cash rece...

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Question 3

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In the year a donor gives a partnership interest to a donee, their share of the partnership's income is prorated between the donor and donee.

Landis received $90,000 cash and a capital asset (basis of $50,000, fair market value of $60,000) in a proportionate liquidating distribution. His basis in his partnership interest was $120,000 prior to the distribution. How much gain or loss does Landis recognize and what is his basis in the asset received?

A cash distribution from a partnership to a partner is generally taxable to the partner.

Randi owns a 40% interest in the capital and profits of the RAY Partnership. Immediately before she receives a proportionate nonliquidating distribution from RAY, the basis for her partnership interest is $60,000. The distribution consists of $45,000 in cash and land with a fair market value of $72,000. RAY's adjusted basis in the land immediately before the distribution is $36,000. As a result of the distribution, Randi recognizes a gain of $21,000.

Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000) . The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

The December 31, 2016, balance sheet of DBW, LLP, a service-providing partnership is as follows: $\begin{array}{lcc}&\text { Adjusted}\\&\text { Basis}&\text { FMV}\\\text { Cash } & \$ 180,000& \$ 180,000 \\\text { Receivables } & -0- &60,000\\\text { Capital assets } & 90,000 &120,000\\\text { Total } & \$ 270,000 &\$360,000\\\\\text { Dana capital } & \$ 90,000 & \$ 120,000 \\\text { Brooke, capital } & 90,000 & 120,000 \\\text { Whitney, capital } & 90,000 & 120,000 \\\text { Total } & \underline{\mathbf{\$ 2 7 0 , 0 0 0}} & \underline{\mathbf{\$ 3 6 0 , 0 0 0}} \end{array}$ The partners share equally in partnership capital, income, gain, loss, deduction, and credit. Capital is not a material income-producing factor to the partnership. On December 31, 2016, partner Dana (who is an active managing partner in the partnership) receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736. Dana's outside basis for the partnership interest immediately before the distribution is $90,000. How much is Dana's gain or loss on the distribution and what is its character?

Marcie is a 40% member of the M&A LLC. Her basis is $10,000 immediately before the LLC distributes to her $30,000 of cash and land (basis to the LLC of $20,000 and fair market value of $25,000). As a result of the proportionate, nonliquidating distribution, Marcie recognizes a gain of $20,000 and her basis in the land is $0.

Compare the different tax results (gains, losses, basis) that might arise for a partner in a proportionate nonliquidating distribution vs. a proportionate liquidating distribution. Consider the general rules only.

Beth sold 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 calendar-year partnership has no hot assets, all of its income is earned evenly throughout the year, and the partnership uses the daily proration method to allocate its income among the partners. Beth recognizes a gain of $12,500 on the sale.

Julie is an active owner of a 52% interest in the JIR LLP, a consulting company (service provider). Her basis in the partnership interest is $100,000, and her share of the partnership's inside basis in assets is $120,000. Julie can sell her interest in the LLP on the first day of the tax year to Irene and Rachel (the other partners) for $100,000 each ($200,000 total). Alternatively, the LLP can distribute $200,000 of cash to redeem Julie's interest. Assume the following: $10,000 of the redemption payment would be for the LLP's goodwill (which is not provided for in the partnership agreement); Julie's share of JIR's unrealized receivables is $40,000; and JIR has a § 754 election in effect. What are the advantages and disadvantages of the sale versus the redemption from Julie's and JIR's perspective? What is your recommendation? Explain.

In a proportionate liquidating distribution, RST Partnership distributes to partner Riley cash of $30,000, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $65,000, fair market value of $50,000). Riley's basis was $40,000 before the distribution. On the liquidation, Riley recognizes a gain of $0, and her basis is $10,000 in the land and $0 in the accounts receivable.

Match the following independent descriptions as "hot" (i.e., ordinary income-producing) or nonhot assets with the statements below. -Land held by the partnership for the purpose of subdividing and selling lots.

A payment to a retiring general partner for his or her share of goodwill of a partnership in which capital is a material income-producing factor is classified as a § 736(a) income payment and results in ordinary income to the retiring partner and a current deduction to the partnership, as long as the goodwill payment is provided for in the partnership agreement.

Last year, Miguel contributed nondepreciable property with a basis of $50,000 and a fair market value of $75,000 to the Starling Partnership in exchange for a 25% interest in the partnership. In the current year, he receives a nonliquidating distribution from the partnership of other property with a basis to the partnership of $50,000 and a fair market value of $62,000. The basis in his partnership interest at the time of the distribution was $60,000. How much gain or loss does Miguel recognize on the distribution? (Assume no other distributions have been made to Miguel, the property he originally contributed is still owned by the partnership, and this is not a disguised sale transaction.)

Frank receives a proportionate nonliquidating distribution from the AEF Partnership. The distribution consists of $10,000 cash and property (adjusted basis to the partnership of $54,000 and fair market value of $60,000) . Immediately before the distribution, Frank's adjusted basis in the partnership interest was $50,000. His basis in the noncash property received is:

Match the following independent descriptions as "hot" (i.e., ordinary income-producing) or nonhot assets with the statements below. -Marketable securities (not held as inventory) .

Match the following statements with the best match from the choices below. Note: Choice L may be used more than once. -Disproportionate distribution

Bob received a proportionate nonliquidating distribution of land from the BZ Partnership. The land had a fair market value of $15,000 and a basis to the partnership of $10,000. The land was held for investment purposes by the partnership. Bob's basis in his partnership interest immediately before the distribution was $6,000. If the partnership has a § 754 election in effect, it will record a $4,000 step-down in the basis of remaining assets, and the step-down will be attributed to all partners in the partnership.