Problem 1 - Debt-Recourse

The equal DEF partnership has the following balance sheet:

Cash and other assets $400,000

Recourse liabilities $100,000

Capital - D $100,000

Capital - E $100,000

Capital - F $100,000

The profits and losses are allocated 40% to D, and 30% each to E and F. Under the partnership agreement there is a capital account deficit restoration provision.

a. How should the liability be allocated?

b. What would your answer be if E had guaranteed the lender that if F did not pay, E would pay F's share?

Problem 2 - Debt- Non-recourse

Note: This problem has two different fact patterns

Partners X and Y own the XY partnership. XY owns a building with a book value/tax basis of $800,000 and an associated nonrecourse debt of $900,000. All of the depreciation on the building has been allocated to Y, and the original cost of the building was $1,100,000. X is allocated 65% of the partnership gains and losses, and Y gets the other 35%.

a. How much of the nonrecourse debt is allocated to each partner?

[New fact pattern] Partners G and H form the GH partnership, with G contributing $200,000 cash and H contributing some land with a basis of $600,000 and a FMV of $900,000, subject to a nonrecourse liability of $700,000. They agree to share profits and losses 60% to G and 40% to H.

b. What is H's share of the liability?

Problem 3 - Sale

Note: This problem has two different fact patterns

Burlington Enterprises LLC is treated as a partnership for purposes of the federal income tax. It has the following assets and liabilities:

	Basis	FMV
Cash	$39,000	$39,000
Land	50,000	200,000
Other capital assets	100,000	190,000
Totals	$189,000	$429,000
Recourse liabilities	$84,000	$84,000
Capital, B	35,000	115,000
Capital, L	35,000	115,000
Capital, T	35,000	115,000
Totals	$189,000	$429,000

The three partners share equally in profits, losses and capital. T is considering the sale of her one-third interest in the partnership for $115,000 cash. The buyer is unrelated to either T or the partnership.

a. What will be the amount realized (i.e., selling price) by T on the sale to the unrelated buyer?

b. What is T's basis in the partnership interest at the date of sale?

c. How much gain or loss will T recognize on the sale?

d. What will be the buyer's tax basis in the newly acquired interest in Burlington Enterprises?

[New fact pattern]

Wolcox Partners has the following balance sheets:

		Basis	FMV
Cash		$15,000	$15,000
Investment Securities		30,000	36,000
Depreciable Equipment (original cost $58,000)		22,000	40,000
Land	38,000	95,000
		$105,000	$186,000
Capital, D		$35,000	$62,000
Capital, E		35,000	62,000
Capital, F		35,000	62,000
		$105,000	$186,000

e. What are the partnership's total "hot assets" for purposes of 751(a)?

f. Assume that D sells her interest in the partnership for $62,000. How much gain will she recognize on the sale?

g. What will be the character of D's gain?

Problem 4- Distribution

Partner N of the calendar-year LMN partnership has a basis in her partnership interest of $50,000 at the beginning of the year.She is distributed cash of $40,000 on Feb. 1 and property with a FMV of $30,000 and a basis of $30,000 on Nov. 1.

a. What is her gain, if any, her remaining basis in her partnership interest after each distribution, and her basis in the property?

b. What would your answer be if the dates of the two distributions were switched?

Problem 5- 751(b)

The DEF partnership has the following balance sheet:

		Basis	FMV
Cash		$48,000	$48,000
Inventory		24,000	60,000
	$72,000	$108,000
Capital, D		$24,000	$36,000
Capital, E		24,000	36,000
Capital, F		24,000	36,000
		$72,000	$108,000

a. If partner D gets a cash distribution in liquidation of $36,000, what will be the tax effects to D and the partnership?

Problem 6- 743(b)

The equal XYZ Partnership has the following balance sheets:

		Basis	FMV
Cash		$54,000	$54,000
Land		$15,000	$42,000
Unrealized Receivables	$0	$15,000
Collectibles	$3,000	$9,000
		$72,000	$120,000
Liabilities		$30,000	$30,000
Capital, X		$14,000	$30,000
Capital, Y		$14,000	$30,000
Capital, Z		$14,000	$30,000
		$72,000	$120,000

a. XYZ has a Code Section 754 election in effect, and X sells her interest to W for $30,000 cash. How much is the Code Sec. 743(b) adjustment?

Problem 7 - Retirement

The XYZ partnership had the following balance sheet:

		Basis	FMV
Cash		$30,000	$30,000
Accounts Receivable	0	48,000
Land	36,000	93,000
Goodwill	0	15,000
		$66,000	$186,000
Capital, X		$22,000	$62,000
Capital, Y		22,000	62,000
Capital, Z		22,000	62,000
		$66,000	$186,000

a. X receives a payment of $62,000 cash upon his retirement from the partnership. X was a general partner, capital was not a material income-producing factor for the partnership, and the partnership agreement said nothing about making payments to a retiring partner for their share of goodwill. How would the retirement payment be treated by X and the partnership?

b. Suppose the payments above were to be made $31,000 each year. How would the payments be taxed?

Problem 8 - Varying Partnership Interests

ABCD is an equal four person partnership that has a fiscal year ending on June 30. For its fiscal year ending on June 30, 2020, ABCD has $732,000 in bottom-line income, $200,000 of which was earned prior to December 1, 2019. In addition, ABCD has a capital gain of $80,000 from the sale of stock on May 1, 2020. Note that 2020 is a leapyear.

On December 7, 2019, A sells her 25% partnership interest to P. Both A and P are calendar year taxpayers.

a. How will the partnership's taxable income for its FYE June 30, 2020 allocable to the 25% interest that was sold by A be divided between A and P if the partnership uses (i) the interim closing method and the semi-monthly convention, or (ii) the prorationmethod?

b. In what calendar year must A report her share of thatincome?

c. Would your answer in part (b) be different if A sold one half of her interest toP, and retained the other half?

Explain the answer you provided for both the True/False and the multiple-choice questions:

1. Alyce owns a 30% interest in a continuing partnership. The partnership distributes a $35,000 year-end cash payment to Alyce. In a proportionate current (nonliquidating) distribution, the partnership also distributed property (basis of $20,000, fair market value of $30,000) to Alyce. Immediately before the distributions of cash and property, Alyce's basis in the partnership interest was $60,000. As a result of the distribution, Alyce recognizes:

a. No gainor loss.

b. Ordinarylossof$5,000.

c. Capitallossof$5,000.

d. Ordinarygainof$5,000.

2. Anthony's basis in the WAM Partnership interest was $200,000 just before he received a proportionate liquidating distribution consisting of investment land (basis of $90,000, fair market value of $100,000) and inventory (basis of $30,000, fair market value of $70,000). After the distribution, Anthony's recognized gain or loss and his basis in the land and inventory are:

a. $80,000 loss; $90,000 (land); $30,000 (inventory).

b. $70,000 loss; $100,000 (land); $30,000 (inventory).

c. $30,000 loss; $100,000 (land); $70,000 (inventory).

d. $0 gain or loss; $170,000 (land); $30,000 (inventory).

3. At the beginning of the year, Elsie's basis in the E&G Partnership interest is $90,000. She receives a proportionate current (nonliquidating) distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $30,000, fair market value of $50,000). After the distribution, Elsie's bases in the accounts receivable, land, and partnership interest are:

a. $0$30,000and$50,000.

b.$0$50,000and$30,000.

c. $40,000 $30,000 and $10,000.

d. $40,000 $40,000 and $0.

4. Beth sold her 25% partnership interest to Katie for $50,000 cash on July 1 (the halfway point)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 monthly proration method to allocate its income among the partners. Beth recognizes a gain of $12,500 on the sale? True or false?

5. Bob received a proportionate current (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? True or false?

6. Brittany, Jennifer, and Daniel are equal partners in the BJD Partnership. The partnership balance sheet reads as follows on December 31.

Adjusted

Basis FMV

Cash $ 75,000 $ 75,000

Unrealized receivables -0- 51,000

Land 45,000 63,000

Total $120,000 $189,000

Brittany, capital $ 40,000 $ 63,000

Jennifer, capital 40,000 63,000

Daniel, capital 40,000 63,000

Total $120,000 $189,000

Partner Daniel has an adjusted basis of $40,000 for his partnership interest. If he sells his entire partnership interest to new partner Amber for $73,000 cash, by how much can the partnership step up the basis of Amber's share of partnership assets under 754 and 743(b)?

a. $6,000

b.$17,000

c.$23,000

d.$33,000

7. 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 $7,000 to the inventory and recognizes no gain or loss? True or false?

8. Carl's basis in his LLC interest is $10,000. In a proportionate current (nonliquidating) distribution, Carl receives land (basis = $10,000; fair market value = $12,000) and inventory (basis = $6,000; fair market value = $8,000). Carl takes a $10,000 basis in the land and a $0 basis in the inventory and has a $0 basis in the LLC interest? True of false?

9. In a proportionate liquidating distribution, Ashleigh receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $40,000, fair market value of $50,000). In addition, the partnership repays all liabilities of which Ashleigh's share was $70,000. Ashleigh's basis in the entity immediately before the distribution was $60,000. As a result of the distribution, what is Ashleigh's basis in the accounts receivable and land, and how much gain or loss does she recognize?

a.$0 basis in accounts receivable; $30,000 basis in land; $20,000 gain.

b. $0 basis in accounts receivable; $0 basis in land; $40,000 gain.

c. $0 basis in accounts receivable; $40,000 basis in land; $0 gain or loss.

d.$40,000 basis in accounts receivable; $20,000 basis in land; $20,000 gain.

10. James received a distribution of $110,000 cash in liquidation of his 25% managing (general partner) interest in the JKL LLP. JKL is a service-oriented entity. Before the distribution, the LLP's assets consisted of $200,000 cash, land (basis of $40,000, value of $100,000), unrealized receivables (basis of $0, value of $100,000), and goodwill (basis of $0, value of $40,000). $10,000 of the total payment is for James' share of partnership goodwill, which is not provided for in the partnership agreement. James will recognize $35,000 of ordinary income from his 736(a) payment; the remaining $75,000 distribution is treated as a 736(b) property payment for his partnership interest? True or false?

11. Jeremiah received a proportionate nonliquidating distribution of land from the JZ Partnership. The land had a fair market value of $65,000 and a basis to the partnership of $50,000. The land was held for investment purposes by the partnership. Jeremiah's basis in his partnership interest immediately before the distribution was $40,000. The partnership's only remaining assets were cash, another parcel of land, and a building on that land. If the partnership has a 754 election in effect, it will record a $10,000 basis step-up; a portion of the step-up will be allocated to the building and will be depreciated; and the step-up and any related depreciation expense will be allocated among all the partners in the partnership.? True or false?

12. Marcella is a 40% nonmanaging member (treated as a limited partner) in the MNO LLC in which capital is a material income-producing factor. MNO has inventory with a basis of $200,000 and a value of $250,000 but no other hot assets. Marcella's basis in the LLC interest is $80,000.Total value of partnership assets recorded on the books is $450,000. If she receives a distribution of $180,000 cash in liquidation of her interest in the LLC, which one of the following statements is not true?

a.Because this is a capital-intensive business, the entire payment is a 736(b) payment.

b.Because Marcella is treated as a limited partner, the entire payment is a 736(b) payment.

c.MNO can deduct the $20,000 paid for Marcella's share of ordinary income related to the inventory.

d.None of the $180,000 payment to Marcella is for partnership goodwill.