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Exam 21: Partnerships

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Question 1

Multiple Choice

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Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?

A) Nonrecourse debt is allocated to the partners according to their loss-sharing ratios.
B) Recourse debt is allocated to the partners to the extent of the partnership's minimum gain in the property.
C) An increase in partnership debts results in a decrease in the partners' bases in the partnership interest.
D) A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest.
E) Partnership debt is not reflected in the partners' bases in their partnership interests.

F) A) and B)
G) None of the above

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Question 2

True/False

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Tim and Janet are equal partners in the TJ Partnership.Partnership income for the year is $20,000.Tim needs cash in order to pay tax on his share of the partnership income,but Janet wants to leave the cash in the partnership for expansion.If the partners agree,it is acceptable for TJ to distribute $5,000 to Tim,and no cash or other property to Janet.

A) True
B) False

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Question 3

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Matt,a partner in the MB Partnership,receives a proportionate,nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000.Matt's basis in the partnership is $10,000 before the distribution.In this situation,Matt will take a $10,000 basis in the property,and his basis in the partnership interest is reduced to zero.

A partnership has accounts receivable with a basis of $0 and a fair market value of $10,000 and depreciation recapture potential of $15,000.All other assets of the partnership are either cash,capital assets,or § 1231 assets.If a purchaser acquires a 30% interest in the partnership from another partner,the selling partner will be required to recognize ordinary income of $7,500.

Cindy is a 5% limited partner in C&C,Ltd.Her basis in the interest is $30,000 before loss allocations,including her $10,000 share of the partnership's nonrecourse debt.(This debt is not qualified nonrecourse financing. )Cindy is also a 10% limited partner in RSTU,in which her basis is $20,000.Cindy is allocated a $40,000 loss from C&C,and $10,000 of income from RSTU.How much of the loss from C&C may Cindy deduct? Under what Code provisions are the remaining losses suspended?

If a partnership allocates losses to the partners,the partners must first apply the basis limitation,then the at-risk limitations,and finally the passive loss limitations.If all three hurdles are met,the partner may deduct the loss.

A partnership cannot use the cash method of accounting if one of the partners is a C corporation.

George's basis in his partnership interest is $100,000,including his share of partnership debt.Sarah buys George's partnership interest for $60,000 cash and she assumes George's $60,000 share of the partnership's debt.If the partnership owns no hot assets,George will recognize a capital loss of $40,000.

Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000.His basis in his partnership interest was $15,000 immediately before the distribution.Carlos assigns a basis of $5,000 to the inventory,and recognizes a $2,000 capital loss.

Which of the following statements is true regarding accounting methods available to a partnership?

Adam contributes property with a fair market value of $3,000,000 and an adjusted basis of $1,200,000 to AP Partnership.Adam shares in $2,000,000 of partnership debt under the liability sharing rules,giving him an initial adjusted basis for his partnership interest of $3,200,000.One month after the contribution,Adam receives a cash distribution from the partnership of $3,000,000.Adam would not have contributed the property if the partnership had not contractually obligated itself to make the distribution.Assume Adam's share of partnership liabilities will not change as a result of this distribution.

Which of the following statements best describes Congress's rationale for limiting the taxable years a partnership may use?

Julie owns property that is treated as a capital asset in her hands.She contributed a parcel of land (basis $60,000;fair market value $58,000)to a real estate partnership,which will hold it as inventory.After three years,the partnership sells the land for $56,000.The partnership will recognize a $4,000 ordinary loss on sale of the property.

Beth's basis in her BBDE LLC interest is $40,000 at the beginning of the tax year.Her allocable share of LLC items are as follows: $30,000 of ordinary income,$5,000 tax-exempt interest income,and a $12,000 long-term capital gain.In addition,the LLC distributed $20,000 of cash to Beth during the year.Assuming the LLC had no liabilities at the beginning or the end of the year,Beth's ending basis in her LLC interest is $67,000.

Catherine's basis was $50,000 in the CAR Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $40,000,fair market value of $60,000) and inventory (basis of $40,000,fair market value of $40,000) .After the distribution,Catherine's bases in the land and inventory are,respectively:

In a proportionate nonliquidating distribution of a capital asset,the partner recognizes gain to the extent the fair market value of the asset exceeds the partnership's basis in the asset.

During the current tax year,Marci and Rachel each contributed $25,000 to form the M&R LLC.Each member has a 50% interest in LLC capital,profits,and losses,except that depreciation expense is allocated 25% to Marci and 75% to Rachel.During the first year,the LLC reported income (before depreciation expense) of $10,000 and had depreciation expense of $4,000.The LLC incurred recourse debt of $40,000.Under the constructive liquidation scenario,how is the recourse debt allocated to Marci and Rachel?

At the beginning of the year,Elsie's basis in the E&G Partnership interest is $60,000.She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash,unrealized accounts receivable (basis of $0,fair market value $30,000) ,and inventory (basis of $10,000,fair market value of $20,000) .After the distribution,Elsie's bases in the accounts receivable,inventory,and partnership interest are:

An examination of the RB Partnership's tax books provides the following information for the current year: Barry is a 30% partner in partnership capital,profits,and losses.Assume the adjusted basis of his partnership interest is $50,000 at the beginning of the year,and he shares in 30% of the partnership liabilities for basis purposes.

Terri's basis in her partnership interest was $120,000,including her $40,000 share of partnership liabilities.The partnership decides to liquidate,and after repaying all liabilities,distributes all remaining assets proportionately to the partners.Terri receives $30,000 cash and accounts receivable with a $20,000 basis and a $22,000 fair market value to the partnership.What gain or loss does Terri recognize,and what is her basis in the accounts receivable?