1. Betty contributed property with a $40,000 basis and fair market value of $85,000 to the Rust Partnership in exchange for a 50% interest in partnership capital and profits. During the first year of partnership operations, Rust had net taxable income of $30,000 and tax-exempt income of $28,000. The partnership distributed $12,000 cash to Betty.
Her share of partnership recourse liabilities on the last day of the partnership year was $16,000. Betty's adjusted basis (outside basis) for her partnership interest at year-end is:
a. $55,000.
b. $72,000.
c. $73,000.
d. $98,000.
e. Some other amount.
2. In the current year, Anderson formed an equal partnership with Camilla. Anderson contributed land with an adjusted basis of $60,000 and a fair market value of $225,000. Anderson also contributed $65,000 cash to the partnership. Camilla contributed land with an adjusted basis of $105,000 and a fair market value of $240,000. The land contributed by Anderson was encumbered by a $60,000 nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, the basis of Anderson's partnership interest is:
a. $95,000.
b. $125,000.
c. $240,000.
d. $300,000.
e. None of the above.
3. Phyllis and Edith formed the Coral Partnership four years ago. Because they decided the company needed some expertise in computer networking, they offered Ophelia a 1/3 interest in partnership capital and profits if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $50,000) was transferred to Ophelia. How should Ophelia treat the receipt of the partnership interest in the current year?
a. Nontaxable.
b. $50,000 of short-term capital gain.
c. $50,000 of long-term capital gain.
d. $50,000 of ordinary income.
e. None of the above.
4. Sandy and Teddy formed a partnership. Sandy received a 50% interest in partnership capital and profits in exchange for contributing land with a basis of $180,000 and a fair market value of $300,000. Teddy received a 50% interest in partnership capital and profits in exchange for contributing $300,000 of cash. Three years after the contribution date, the land contributed by Sandy is sold by the partnership to a third party for $380,000. How much taxable gain will Sandy recognize from the sale?
a. $100,000.
b. $120,000.
c. $160,000.
d. $200,000.
e. None of the above.
5. Monroe contributed $20,000 of cash in exchange for a 50% interest in the Salmon partnership capital and profits. During the first year of partnership operations, Salmon had net taxable income of $50,000. In addition Monroe received a $15,000 distribution of cash from the partnership and he has a 50% share in the $15,000 of partnership recourse liabilities on the last day of the partnership year. Monroe's adjusted basis (outside basis) for his partnership interest at year-end is:
a. $78,000.
b. $45,000.
c. $37,500.
d. $30,000.
e. None of the above.
6. Rosie is a partner in the Cardinal Partnership, which is not publicly traded. Her allocable share of Cardinal's passive ordinary losses from a nonrealty activity for the current year is ($100,000). Rosie has a $60,000 adjusted basis (outside basis) for her interest in Cardinal (before deduction of any of the passive losses). Her amount "at risk" under § 465 is $45,000 (before deduction of any of the passive losses). She also has $30,000 of passive income from other sources. How much of the $100,000 passive loss allocated to her can Rosie deduct on her current year's tax return?
a. $30,000
b. $45,000.
c. $60,000.
d. $100,000.
e. None of the above.
7. In the current year, Raquel formed an equal partnership with Kristen. Raquel contributed land with an adjusted basis of $150,000 and a fair market value of $250,000. Raquel also contributed $100,000 cash to the partnership. Kristen contributed land with an adjusted basis of $150,000 and a fair market value of $200,000. The land contributed by Raquel was encumbered by a $150,000 nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, the basis of Raquel's partnership interest is:
a. $0.
b. $100,000.
c. $175,000.
d. $225,000.
e. None of the above.
8. Juliae and Taylor do business as the Crimson Partnership, sharing profits and losses equally. Taylor is a material participant in the partnership, and the partnership has no outstanding debt. All parties use the calendar year for tax purposes. On January 1 of the current year, Taylor's basis in the partnership was $150,000; he made no withdrawals from the partnership during the year. The partnership sustained an operating loss of $400,000 in the current year. Taylor's personal income tax return for the current year should include:
a. An ordinary loss of $150,000.
b. An ordinary loss of $200,000.
c. An ordinary loss of $150,000 and a capital loss of $50,000.
d. An ordinary loss of $50,000 and a capital loss of $150,000.
e. None of the above.
9. Ophelia and Declan formed the Brick Partnership. Ophelia contributed $20,000 of cash in exchange for her 60% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had net taxable income of $70,000; Ophelia received a distribution of $17,000 cash from the partnership; and she had a 60% share in the $40,000 of partnership recourse liabilities on the last day of the partnership year. Ophelia's adjusted basis for her partnership interest at year-end is:
a. $20,000
b. $45,000.
c. $62,000.
d. $69,000.
e. None of the above.
10. Aris and Edith formed the Pink Partnership. Aris contributed $30,000 of cash in exchange for his 50% interest in the partnership capital and profits. Edith contributed property with an adjusted basis of $25,000 and a fair market value of $30,000 for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $120,000; Aris received a distribution of $16,000 cash from the partnership; and he had a 50% share in the $80,000 of partnership recourse liabilities on the last day of the partnership year. Aris's adjusted basis for his partnership interest at year-end is:
a. $30,000
b. $114,000.
c. $130,000.
d. $146,000.
e. None of the above.
11. Kenneth receives a proportionate, nonliquidating distribution from the Fern Partnership. The distribution consists of $10,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $58,000. Immediately before the distribution, Kenneth's adjusted basis for his partnership interest is $75,000. Kenneth's basis in the noncash property received is:
a. $25,000.
b. $40,000.
c. $58,000.
d. $65,000.
e. None of the above.
12. Harper is a partner in a continuing partnership. At the end of the current year, the partnership distributed to Harper in a proportionate, nonliquidating distribution cash of $50,000, inventory with a basis to the partnership of $45,000 and a fair market value of $80,000, and a parcel of land with a basis to the partnership of $130,000 and a fair market value of $90,000. Harper's basis in the partnership interest was $260,000 before the distribution. What basis does Harper take in the inventory and land, and what is his basis in the partnership interest following the distribution?
a. $45,000 basis in inventory; $90,000 basis in land; $75,000 basis in partnership.
b. $45,000 basis in inventory; $130,000 basis in land; $35,000 basis in partnership.
c. $80,000 basis in inventory; $90,000 basis in land; $40,000 basis in partnership.
d. $80,000 basis in inventory; $130,000 basis in land; $20,000 basis in partnership.
e. $80,000 basis in inventory; $130,000 basis in land; $0 basis in partnership.
13. Chuck has an outside basis of $190,000 in the Forest Partnership as of December 31 of the current year. On that date the partnership liquidates and distributes to Chuck a proportionate distribution of $140,000 cash and inventory with an inside basis to the partnership of $10,000 and a fair market value of $30,000. In addition, Chuck receives a desk which has an inside basis and fair market value of $3,400 and $4,600, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Chuck recognize on the distribution, and what basis will he take in the desk?
a. $36,600 loss; $3,400 basis.
b. $35,400 loss; $4,600 basis.
c. $15,400 loss; $4,600 basis.
d. $0 loss; $40,000 basis.
e. None of the above.
14. Larimer received $30,000 cash and a capital asset with a basis and fair market value of $55,000 in a proportionate liquidating distribution. His basis in his partnership interest was $100,000 prior to the distribution. How much gain or loss does Larimer recognize, and what is his basis in the capital asset received in the distribution?
a. $0 gain or loss; $55,000 basis.
b. $15,000 loss; $55,000 basis.
c. $15,000 gain; $55,000 basis.
d. $15,000 gain; $70,000 basis.
e. $0 gain or loss; $70,000 basis.
15. Cody contributed nondepreciable property with a basis of $45,000 and a fair market value of $56,000 to the Laurel Partnership in 2010 in exchange for a 40% interest in the partnership. In 2013, he receives a nonliquidating distribution from the partnership of other property with a basis to the partnership of $9,000 and a fair market value of $50,000. The basis in his partnership interest at the time of the distribution was $30,000. How much gain or loss does Cody recognize on the distribution? (Assume no other distributions have been made to Cody, the property he originally contributed is still owned by the partnership, and this is not a disguised sale transaction.)
a. $0 gain or loss.
b. $11,000 gain.
c. $20,000 gain.
d. $41,000 gain.
e. None of the above.
16. Kumar's interest in the equal Moss Partnership is sold to Charles for $100,000 cash. On the date of the sale, the partnership tax balance sheet and the agreed fair market values were as follows.
Adjusted
Basis FMV
Cash $180,000 $180,000
Inventory 200,000 100,000
Other assets 100,000 120,000
$480,000 $400,000
Kumar, capital $ 120,000 $100,000
Patterson, capital 120,000 100,000
Keegan, capital 120,000 100,000
Benedict, capital 120,000 100,000
$480,000 $400,000
Assume Kumar's basis for his partnership interest equals his capital account. As a result of the sale, Kumar recognizes
a. No gain or loss.
b. $20,000 capital loss.
c. $25,000 ordinary loss.
d. $20,000 capital gain.
e. $25,000 ordinary loss and $5,000 capital gain.
17. Partner Shin received a distribution of $60,000 cash from the Shamrock Partnership in complete liquidation of his partnership interest. If Shin's outside basis immediately before the distribution was $90,000, and if the partnership has a § 754 election in effect, which of the following statements is true? (Assume the partnership owns no "hot assets.")
a. Shin will recognize a $30,000 capital loss on the distribution.
b. The partnership will step-up the basis of its assets by $30,000.
c. The partnership is not allowed a step-up adjustment in this situation.
d. The partnership will step-up the basis of its capital and § 1231 assets by $30,000.
e. None of the above.
18. The Olive Partnership makes a proportionate distribution of its assets to Jerry, in complete liquidation of his partnership interest. The distribution consists of $40,000 in cash and capital assets with a basis to the partnership of $150,000 and a fair market value of $160,000. None of the payment is for partnership goodwill. At the time of the distribution, Jerry's partnership basis is $150,000 and the partnership has no liabilities and no "hot assets." If the partnership makes an optional basis adjustment election on a timely filed return, it recognizes:
a. Capital gain of $40,000 and increases the basis of its remaining assets by $40,000.
b. Capital loss of $40,000 and decreases the basis of its remaining assets by $40,000.
c. No gain or loss and increases the basis of its remaining assets by $40,000.
d. No gain or loss and decreases the basis of its remaining assets by $40,000.
e. None of the above.
19. On December 31 of last year, Harvey gave his son, Jeffrey, a gift of a 30% interest in a partnership in which capital is a material income-producing factor. For the current calendar year, the partnership's ordinary income was $150,000. Harvey and Jeffrey were the only partners in the current year. There were no guaranteed payments to partners. Harvey's services performed for the partnership were worth a reasonable compensation of $50,000 for the current year. Jeffrey has never performed any services for the partnership. What is Harvey's distributive share of partnership income for the current year?
a. $150,000.
b. $120,000.
c. $75,000.
d. $30,000.
e. None of the above.
20. On December 31 of last year, Henderson gave his son, Norbert, a gift of a 40% interest in a partnership in which capital is a material income-producing factor. For the current calendar year, the partnership's ordinary income was $140,000. Henderson and Norbert were the only partners in the current year. There were no guaranteed payments to partners. Henderson's services performed for the partnership were worth a reasonable compensation of $40,000 for the current year. Norbert has never performed any services for the partnership. What is Norbert's distributive share of partnership income for the current year?
a. $100,000.
b. $84,000.
c. $56,000.
d. $40,000.
e. None of the above.
Please answer question 21-23 based on the following fact pattern.
Sam and Drew are equal partners in SD LLC formed on June 1st of the current year. Sam contributed land that he inherited from his uncle in 2006. Sam's uncle purchased the land in 1981 for $30,000. The land was worth $100,000 when Sam's uncle died. The fair market value of the land was $200,000 at the date it was contributed to the partnership. Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normally bill a third party $50,000 for these efforts. Drew will also contribute $150,000 cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000. Please answer the following questions based on the facts stated above.
21. What basis will Sam take in his LLC interest?
a. $30,000
b. $100,000
c. $200,000
d. 150,000
22. How much gain or income will Drew recognize on the formation of the LLC?
a. $0
b. $50,000
c. $150,000
d. $200,000
23. What basis will Drew take in his LLC interest?
a. $0
b. $50,000
c. $150,000
d. $200,000
24. Cerulean, Inc., Coral, Inc., and Crimson, Inc. form the Three Cs Partnership on January 1st of the current year. Cerulean is a 50% partner, and Crimson and Coral are 25% partners. For reporting purposes, Crimson uses a fiscal year with an October 31st year-end, Coral uses the calendar year, and Cerulean uses a fiscal year with a February 28/29 year-end. What is the required tax year for Three Cs under the least aggregate deferral method?
a. 2/28 year-end
b. 10/31 year-end
c. 12/31 year-end
d. 6/1 year-end
25. In a disproportionate distribution, neither the partnership nor the distribute partner will be required to recognize ordinary income
a. True
b. False
26. In a sale of a partnership interest, the partner will always recognize capital gain to the extent that the selling price exceeds the partner's basis in the partnership interest.
a. True
b. False
27. A partner may make a§754 election if the partner recognizes gain on a distribution of cash from the partnership.
a. True
b. False
28. Vincent is a 50% partner in the TAV Partnership. He became a partner three years ago when he contributed land with a value of $60,000 and a basis of $30,000 (current value is $100,000). Tyler and Anita each contributed $30,000 cash for a 25% interest. Vincent's basis in his partnership interest is currently $150,000; the other partners' bases are each $75,000. The partnership has the following assets:
|
Basis FMV
|
|
Cash $200,000 $200,000
Accounts receivable 0 200,000
Marketable securities 70,000 100,000
Land 30,000 100,000
Total $300,000 $600,000
|
If TAV distributes a $50,000 interest in the land each to Tyler and Anita and $100,000 of accounts receivable to Vincent at the end of the current year. What is the tax consequence for the partners?
a. Tyler and Anita will not recognize ordinary income. Vincent will be taxed on built-in gain when the land is distributed to Tyler and Anita.
b. Tyler and Anita will recognize ordinary income. Vincent will be taxed on built-in gain when the land is distributed to Tyler and Anita.
c. Tyler and Anita will not recognize ordinary income. Vincent will not be taxed on built-in gain when the land is distributed to Tyler and Anita.
d. Tyler and Anita will recognize ordinary income. Vincent will not be taxed on built-in gain when the land is distributed to Tyler and Anita.
29. Assume the same facts above, except the TAV distributes a $50,000 interest in the land and $50,000 of account receivable to Vincent and $25,000 of cash and $25,000 of accounts receivable each to Anita and Tyler. What is the tax consequence of the distribution?
a. Neither of the partners will recognize ordinary income and Vincent will recognize built-in gain/loss on the distribution of the land.
b. Tyler and Anita will recognize ordinary income and Vincent will recognize built-in gain/loss on the distribution of the land
c. Neither of the partners will recognize ordinary income and Vincent will not recognize built-in gain/loss on the distribution of the land
d. Tyler and Anita will recognize ordinary income and Vincent will not recognize built-in gain/loss on the distribution of the land
30. Rick and Cheryl each contributed $30,000 cash to the cash basis RC Partnership. The partnership uses $50,000 of the cash to purchase a depreciable asset. The partnership agreement provides that depreciation is allocated 75% to Rick and 25% to Cheryl. All other items of partnership income, gain, loss, or deduction are allocated equally between the two partners. During the first year of operations, the partnership produces $15,000 of income before depreciation and deducts $10,000 of depreciation. At the end of the first year, the partnership sells the depreciable asset for its $40,000 book value. Assume that nothing else happens in the first year that affects the partners' capital accounts. The partnership then distributes all cash to the partners and liquidates at the end of the first year. How much cash is distributed to each partner in the liquidating distribution under the economic effect test?
a. Rick receives $30,000 cash and Cheryl receives $35,000
b. Rick receives $37,500 cash and Cheryl receives $35,000
c. Rick receives $30,000 cash and Cheryl receives $37,500
d. Rick receives $37,500 cash and Cheryl receives $37,500