Test Questions

Partnerships: Distributions, Transfer of Interests, and Terminations
11-1
CHAPTER 11
PARTNERSHIPS: DISTRIBUTIONS, TRANSFER
OF INTERESTS, AND TERMINATIONS
EXAMINATION QUESTIONS
MULTIPLE CHOICE
1.
Cathy receives a proportionate, nonliquidating distribution from the Player Partnership.

The distribution consists of $19,000 cash and property with an adjusted basis to the
partnership of $20,000 and a fair market value of $55,000. Immediately before the
distribution, Cathy's adjusted basis for her partnership interest is $95,000. Cathys basis
in the noncash property received is:
a.
$19,000.
b.
$20,000.
c.
$55,000.
d.
$56,000.
e.
None of the above.
2.
Raul is a partner in a continuing partnership. At the end of the current year, the
partnership distributed to Raul in a proportionate, nonliquidating distribution cash of
$60,000, inventory with a basis to the partnership of $48,000 and a fair market value of
$60,000, and a parcel of land with a basis to the partnership of $120,000 and a fair market
value of $100,000. Rauls basis in the partnership interest was $240,000 before the
distribution. What basis does Raul take in the inventory and land, and what is his basis in
the partnership interest following the distribution?
a.
$48,000 basis in inventory; $100,000 basis in land; $32,000 basis in partnership.
b.
c.
d.
e.
$60,000 basis in inventory; $120,000 basis in land; $0 basis in partnership.
11-2
3.
David has an outside basis of $180,000 in the XYZ Partnership as of December 31 of the
current year. On that date the partnership liquidates and distributes to David a
proportionate distribution of $150,000 cash and inventory with an inside basis to the
partnership of $20,000 and a fair market value of $30,000. In addition, David receives a
desk which has an inside basis and fair market value of $2,400 and $3,600, respectively.
None of the distribution is for partnership goodwill. How much gain or loss will David
recognize on the distribution, and what basis will he take in the desk?
a.
$7,600 loss; $2,400 basis.
b.
$6,400 loss; $3,600 basis.
c.
$7,600 loss; $3,600 basis.
d.
$0 loss; $10,000 basis.
e.
None of the above.
4.
Salvadore received $20,000 cash and a capital asset with a basis and fair market value of
$15,000 in a proportionate liquidating distribution. His basis in his partnership interest
was $50,000 prior to the distribution. How much gain or loss does Salvadore recognize,
and what is his basis in the capital asset received in the distribution?
a.
$0 gain or loss; $15,000 basis.
b.
$15,000 loss; $15,000 basis.
c.
$15,000 gain; $15,000 basis.
d.
$15,000 gain; $30,000 basis.
e.
5.
Elijah contributed nondepreciable property with a basis of $20,000 and a fair market
value of $36,000 to the XYZ Partnership in 2003 in exchange for a 40% interest in the
partnership. In 2004, 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
$30,000. The basis in his partnership interest at the time of the distribution was $10,000.
How much gain or loss does Elijah recognize on the distribution? (Assume no other
distributions have been made to Elijah, 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.
$16,000 gain.
c.
$20,000 gain.
d.
$21,000 gain.
e.
None of the above.

6.
11-3
Dariels interest in the equal Island Partnership is sold to Shelby for $95,000 cash. On
the date of the sale, the partnership tax balance sheet and the agreed fair market values
were as follows.
Adjusted
Basis
Cash $ 140,000
Inventory
Other assets
$440,000
FMV
$ 140,000
200,000
100,000
$380,000
Dariel, capital
Croix, capital
Nassau, capital
Bermuda, capital
$440,000
$ 110,000
110,000
110,000
110,000
$380,000
120,000
120,000
$ 95,000
95,000
95,000
95,000
Assume Dariels basis for her partnership interest equals her capital account. As a result
of the sale, Dariel recognizes
a.
No gain or loss.
b.
$15,000 capital loss.
c.
$20,000 ordinary loss.
d.
$5,000 capital gain.
e.
$20,000 ordinary loss and $5,000 capital gain.
7.
Partner Adams received a distribution of $90,000 cash from the XYZ Partnership in
complete liquidation of his partnership interest. If Adamss outside basis immediately
before the distribution was $200,000, 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.
Adams will recognize a $110,000 capital loss on the distribution.
b.
The partnership will step-up the basis of its assets by $110,000.
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 $90,000.
e.
None of the above.
11-4
8.
The Capricorn Partnership makes a proportionate distribution of its assets to Tyrone, 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 $100,000 and a fair market value
of $160,000. None of the payment is for partnership goodwill. At the time of the
distribution, Tyrone's partnership basis is $130,000 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 $10,000 and increases the basis of its remaining assets by $10,000.
b.
Capital loss of $10,000 and decreases the basis of its remaining assets by $10,000.
c.
No gain or loss and increases the basis of its remaining assets by $10,000.
d.
No gain or loss and decreases the basis of its remaining assets by $10,000.
e.
None of the above.
9.
On December 31 of last year, Bill gave his son, Jimmy, 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 $145,000. Bill and Jimmy were the
only partners in the current year. There were no guaranteed payments to partners. Bill's
services performed for the partnership were worth a reasonable compensation of $45,000
for the current year. Jimmy has never performed any services for the partnership. What
is Jimmy's distributive share of partnership income for the current year?
a.
$101,500.
b.
$43,500.
c.
$70,000.
d.
$30,000.
e.
None of the above.
10.
On December 31 of last year, Alex gave his son, Paul, a gift of a 30% interest in a
calendar year, the partnership's ordinary income was $145,000. Alex and Paul were the
only partners in the current year. There were no guaranteed payments to partners. Alex 's
services performed for the partnership were worth a reasonable compensation of $45,000
for the current year. Paul has never performed any services for the partnership. What is
Alex 's distributive share of partnership income for the current year?
a.
$115,000.
b.
$43,500.
c.
$70,000.
d.
$30,000.
e.
None of the above.
11-5
SOLUTIONS TO EXAMINATION QUESTIONS

MULTIPLE CHOICE
1.
2.
Cathys basis in the partnership interest is first reduced by the $19,000 cash
distribution to $76,000. Since this is a nonliquidating distribution, the basis in the
noncash property is the lesser of the $76,000 remaining basis in the partnership
interest or the partnerships $20,000 basis in the property. The basis in the
property, then, is $20,000, and Cathys basis in the partnership interest is reduced
to $56,000. Example 4
Basis of Rauls interest

Less: Cash distribution
Basis before property distributions
Less: Inventory distribution
Less: Land distribution
Basis after property distributions
$240,000
(60,000)
$180,000
(48,000)*
(120,000)*
$ 12,000
*Rauls basis in the inventory and land equals the partnerships basis in these
properties. Whether the property is appreciated or depreciated does not matter.
Examples 8 and 9
3.
The cash and inventory are distributed first and take bases of $150,000 and
$20,000, respectively. The partner cannot recognize a loss on the distribution
because the desk is a 1231 asset (depreciable property used in a trade or
business). Only cash, inventory and receivables can be distributed if the partner is
to recognize a loss. Therefore, the desk must take a substituted basis of $10,000
to the partner, which is the amount of the partner's remaining outside basis.
Example 15 and Concept Summary 11-2
4.
Since Salvadore has received property other than cash and unrealized receivables
or inventory, no loss may be recognized on the liquidating distribution. The
capital asset will take a substituted basis of $30,000, which was Salvadores
remaining basis in his partnership interest after the cash distribution is considered.
Example 15
5.
The precontribution gain on the property Elijah originally contributed to the

partnership was $16,000. The excess of the fair market value of the property
distributed over Elijah's basis in his partnership interest (not the partnership's
basis in the asset distributed), was $20,000. The lesser of these two amounts must
be recognized by Elijah since the original property was contributed less than
seven years prior to the distribution date. Examples 19 and 20
11-6
6.
Dariel has an overall loss of $15,000 ($95,000 - $110,000) on the sale. The loss
consists of $20,000 ordinary loss ($30,000 - $50,000) from her share of the
deemed sale of inventory under 751(a). The $5,000 capital gain consists of the
overall $15,000 loss decreased by her $20,000 ordinary loss. Example 33
7.
Section 734(b)(1)(A) provides that the partnership must step-down the basis of
partnership assets by the amount of loss recognized by the distributee partner:
$110,000 ($90,000 distribution - $200,000 basis). Answer a. is correct: Adams
will have a $110,000 capital loss, since the distribution was less than his basis.
Example 39
8.
Under 732(b), Tyrone is limited to a basis of $90,000 in the capital assets

received ($130,000 basis of partnership interest less $40,000 cash received). The
partnership's $100,000 basis in the capital assets exceeds their $90,000 basis to
Tyrone by $10,000. Thus, if a 754 election is made, the partnership is entitled
to increase the basis of its remaining property by $10,000. No gain or loss is
recognized by the partnership, since the liquidating distribution is pro rata.
Example 38
9.
When a family member acquires a capital interest by gift in a family partnership

in which capital is a material income-producing factor, the donor must be
allocated an amount of partnership income that represents reasonable
compensation for services performed for the partnership. The remaining
partnership income generally is divided among the partners according to their
profit or loss sharing agreement. However, the donee's portion may not be greater
than the amount allocated to the donor in proportion to their capital interests.
Jimmy's capital interest is 30%. Of the $145,000 of partnership income, $45,000
is allocated to Bill as compensation for services. The remaining $100,000 is
allocated in the following distributive shares: 70%, or $70,000 to Bill and $30,000
to Jimmy. Example 43
10.

Paul's capital interest is 30%. Of the $145,000 of partnership income, $45,000 is
allocated to Alex as compensation for services. The remaining $100,000 is
allocated in the following distributive shares: 70%, or $70,000 to Alex and
$30,000 to Paul. Example 43
CHAPTER 10
PARTNERSHIPS: FORMATION, OPERATION, AND BASIS
11-7
MULTIPLE CHOICE
1.
Becky contributed property with a $40,000 basis and fair market value of $96,000 to the
NET Partnership in exchange for a 50% interest in partnership capital and profits. During
the first year of partnership operations, NET had net taxable income of $60,000 and taxexempt income of $56,000. The partnership distributed $24,000 cash to Becky. Her
share of partnership recourse liabilities on the last day of the partnership year was
$32,000. Becky's adjusted basis (outside basis) for her partnership interest at year-end is:
a.
$70,000.
b.
$106,000.
c.
$104,000.
d.
$154,000.
e.
Some other amount.
2.
In the current year, Nancy formed an equal partnership with Bette. Nancy contributed
land with an adjusted basis of $75,000 and a fair market value of $125,000. Nancy also
contributed $75,000 cash to the partnership. Bette contributed land with an adjusted
basis of $75,000 and a fair market value of $130,000. The land contributed by Nancy
was encumbered by a $70,000 nonrecourse debt. Assume the partners share debt equally.
Immediately after the formation, the basis of Nancys partnership interest is:
a.
$0.
b.
$75,000.
c.
$115,000.
d.
$135,000.
e.
None of the above.
11-8
3.
Quincy and George formed the CD Partnership four years ago. Because they decided the
company needed some expertise in computer networking, they offered Chelsea 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 Chelsea. How should Chelsea 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.
Abigail and Donald formed a partnership. Abigail received a 50% interest in partnership
capital and profits in exchange for contributing land with a basis of $40,000 and a fair
market value of $200,000. Donald received a 50% interest in partnership capital and
profits in exchange for contributing $200,000 of cash. Three years after the contribution
date, the land contributed by Abigail is sold by the partnership to a third party for
$280,000. How much taxable gain will Abigail recognize from the sale?
a.
$120,000.
b.
$140,000.
c.
$200,000.
d.
$280,000.
e.
None of the above.
5.
Vale contributed $100,000 of cash in exchange for a 50% interest in the Faith partnership
capital and profits. During the first year of partnership operations, Faith had net taxable
income of $60,000. In addition Vale received a $20,000 distribution of cash from the
partnership and he has a 50% share in the $26,000 of partnership recourse liabilities on
the last day of the partnership year. Vales adjusted basis (outside basis) for his
partnership interest at year-end is:
a.
$186,000.
b.
$130,000.
c.
$123,000.
d.
$110,000.
e.
None of the above.
11-9
6.
Nadia is a partner in the Yellow Partnership, which is not publicly traded. Her allocable
share of Yellows passive ordinary losses from a nonrealty activity for the current year is
($250,000). Nadia has a $130,000 adjusted basis (outside basis) for her interest in
Yellow (before deduction of any of the passive losses). Her amount at risk under 465
is $90,000 (before deduction of any of the passive losses). She also has $65,000 of
passive income from other sources. How much of the $250,000 passive loss allocated to
her can Nadia deduct on her current years tax return?
a.
$-0-.
b.
$65,000.
c.
$90,000.
d.
$250,000.
e.
None of the above.
7.
In the current year, Madison formed an equal partnership with Foundation. Madison
contributed land with an adjusted basis of $100,000 and a fair market value of $250,000.
Madison also contributed $100,000 cash to the partnership. Foundation contributed land
with an adjusted basis of $150,000 and a fair market value of $200,000. The land
contributed by Madison was encumbered by a $150,000 nonrecourse debt. Assume the
partners share debt equally. Immediately after the formation, the basis of Madisons
partnership interest is:
a.
$0.
b.
$100,000.
c.
$125,000.
d.
$200,000.
e.
None of the above.
8.
Garbo and Bogart do business as the KA Partnership, sharing profits and losses equally.
Bogart 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,
Bogart's basis in the partnership was $75,000; he made no withdrawals from the
partnership during the year. The partnership sustained an operating loss of $250,000 in
the current year. Bogart's personal income tax return for the current year should include:
a.
An ordinary loss of $125,000.
b.
c.
An ordinary loss of $75,000 and a capital loss of $50,000.
d.
e.
None of the above.
11-10
9.
Monica and Ross formed the MR Partnership. Monica contributed $80,000 of cash in
exchange for her 50% 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 $50,000; Monica received a distribution of $17,000 cash from the partnership;
and she had a 50% share in the $40,000 of partnership recourse liabilities on the last day
of the partnership year. Monicas adjusted basis for her partnership interest at year-end is:
a.
$125,000
b.
$108,000.
c.
$120,000.
d.
$80,000.
e.
None of the above.
10.
Nicole and George formed the NG Partnership. Nicole contributed $100,000 of cash in
exchange for her 50% interest in the partnership capital and profits. George contributed
property with an adjusted basis of $50,000 and a fair market value of $100,000 for his
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
$100,000; Nicole received a distribution of $16,000 cash from the partnership; and she
had a 50% share in the $60,000 of partnership recourse liabilities on the last day of the
partnership year. Nicoles adjusted basis for her partnership interest at year-end is:
a.
$100,000
b.
$164,000.
c.
$180,000.
d.
$210,000.
e.
None of the above.
11-11

1.
Because Becky is a 50% partner, she will share in 50% of the partnership taxable
income and tax-exempt income. In addition, she will share in 50% of the
partnership recourse liabilities. Her beginning basis is $40,000 (her basis in the
property she contributed to the partnership). The correct basis is calculated as
follows: $40,000 beginning basis + $30,000 (50% X $60,000) income + $28,000
(50% X $56,000) exempt income - $24,000 distribution + $32,000 share of
liabilities.
Figure 10-3 and Examples 26 and 27
2.
Nancys basis is determined as follows:

Basis of land
Basis of cash
Deemed cash distribution
Share of debt
Nancys basis
$75,000
75,000
(70,000)
35,000
$115,000
Example 27
3.
A person who receives an unrestricted partnership capital interest for services

rendered has ordinary income when the interest is received. The value of the
interest is its fair market value on the date of receipt. Example 13
4.
Section 704(c)(1)(A) requires that any precontribution gain must be allocated

entirely to Abigail. Therefore, Abigail is allocated the $160,000 precontribution
(built-in) gain and $40,000 of the $80,000 post-contribution gain. Example 25
5.
Because Vale is a 50% partner, his basis will increase by 50% of the partnerships
taxable income and recourse liabilities. The distribution reduces his basis.
Therefore, his basis is $100,000 contribution + $30,000 share of income +
$13,000 share of liabilities - $20,000 distribution. Example 27
6.
The $250,000 passive loss must be limited first by Nadias $130,000 outside basis
for her partnership interest. The at risk rules further limit her deduction to
$90,000, the amount she is at risk in Yellow. She can deduct $65,000 of this
loss because that is the amount she has of passive income from other sources.
Example 34

7.
11-12
Madisons basis is determined as follows:

Basis of land
Cash
Share of debt
Madisons basis
$ 100,000
100,000
(150,000)
75,000
$125,000
Example 27
8.
Section 704(d) limits the deduction of a partner's distributive share of partnership

losses to the adjusted basis of the partner's interest at the end of the partnership
year in which the losses were incurred, before considering any losses. Bogart is
entitled to carry forward and deduct any excess losses against his end-of-the-year
basis occurring in subsequent years, before considering any losses. Since Bogart
is a material participant in the partnership, 469 does not limit the deductibility
of the losses. pp. 10-32 to 10-37
9.
Monicas adjusted basis consists of: $80,000 cash contribution, plus $25,000
share of partnership income, minus the $17,000 cash distribution, plus $20,000
share of partnership liabilities. Example 27
10.
Nicoles adjusted basis consists of: $100,000 cash contributed to the partnership,
plus $50,000 share of partnership income, minus the $16,000 cash distribution,
plus $30,000 share of partnership liabilities. Example 27
CHAPTER 10
PARTNERSHIPS: FORMATION, OPERATION, AND BASIS
MULTIPLE CHOICE
1.
Ruby contributed property with a $50,000 basis and fair market value of $100,000 to the
ABC Partnership in exchange for a 50% interest in partnership capital and profits.
During the first year of partnership operations, ABC had net taxable income of $60,000
and tax-exempt income of $56,000. The partnership distributed $24,000 cash to Ruby.
Her share of partnership recourse liabilities on the last day of the partnership year was
$32,000. Ruby's adjusted basis (outside basis) for her partnership interest at year-end is:
a.
$80,000.

b.
c.
d.
f.
2.
11-13
$116,000.
$114,000.
$166,000.
Some other amount.
In the current year, LaToya formed an equal partnership with Kimberly. LaToya
contributed land with an adjusted basis of $50,000 and a fair market value of $125,000.
LaToya also contributed $75,000 cash to the partnership. Kimberly contributed land with
an adjusted basis of $125,000 and a fair market value of $130,000. The land contributed
by LaToya was encumbered by a $70,000 nonrecourse debt. Assume the partners share
debt equally. Immediately after the formation, the basis of LaToyas partnership interest
is:
a.
$55,000.
b.
$90,000.
c.
$125,000.
d.
$165,000.
e.
None of the above.
11-14
3.
Abraham and Elizia formed the DEF Partnership four years ago. Because they decided
the company needed some expertise in computer networking, they offered Emma 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
$75,000) was transferred to Emma. How should Emma treat the receipt of the
partnership interest in the current year?
a.
Nontaxable.
b.
$75,000 of short-term capital gain.
c.
$75,000 of long-term capital gain.
d.
$75,000 of ordinary income.
e.
None of the above.
4.
Kristian and Richard formed a partnership. Kristian received a 50% interest in

partnership capital and profits in exchange for contributing land with a basis of $140,000
and a fair market value of $300,000. Richard 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 Kristian is sold by the partnership to a third
party for $380,000. How much taxable gain will Kristian recognize from the sale?
a.
$40,000.
b.
$120,000.
c.
$160,000.
d.
$200,000.
e.
None of the above.
5.
Kenneth contributed $50,000 of cash in exchange for a 50% interest in the Glory
partnership capital and profits. During the first year of partnership operations, Glory had
net taxable income of $60,000. In addition Kenneth received a $20,000 distribution of
cash from the partnership and he has a 50% share in the $26,000 of partnership recourse
liabilities on the last day of the partnership year. Kenneths adjusted basis (outside basis)
for his partnership interest at year-end is:
a.
$136,000.
b.
$80,000.
c.
$73,000.
f.
$60,000.
g.
None of the above.
11-15
6.
Shay is a partner in the Raven Partnership, which is not publicly traded. Her allocable
share of Ravens passive ordinary losses from a nonrealty activity for the current year is
($270,000). Shay has a $130,000 adjusted basis (outside basis) for her interest in Raven
(before deduction of any of the passive losses). Her amount at risk under 465 is
$110,000 (before deduction of any of the passive losses). She also has $75,000 of
passive income from other sources. How much of the $270,000 passive loss allocated to
her can Shay deduct on her current years tax return?
a.
$75,000
b.
$110,000.
c.
$130,000.
f.
$270,000.
g.
None of the above.
7.
In the current year, Lilith formed an equal partnership with Liberty. Lilith contributed
land with an adjusted basis of $100,000 and a fair market value of $350,000. Lilith also
contributed $100,000 cash to the partnership. Liberty contributed land with an adjusted
basis of $150,000 and a fair market value of $200,000. The land contributed by Lilith
was encumbered by a $250,000 nonrecourse debt. Assume the partners share debt
equally. Immediately after the formation, the basis of Liliths partnership interest is:
a.
$0.
b.
$75,000.
c.
$200,000.
d.
$325,000.
e.
None of the above.
8.
Anika and Quinn do business as the MN Partnership, sharing profits and losses equally.
Quinn 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,
Quinn's basis in the partnership was $100,000; he made no withdrawals from the
partnership during the year. The partnership sustained an operating loss of $250,000 in
the current year. Quinn's personal income tax return for the current year should include:
a.
b.
c.
d.
e.
None of the above.
11-16
9.
Phyllis and Joey formed the YR Partnership. Phyllis contributed $40,000 of cash in
exchange for her 50% 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 $50,000; Phyllis received a distribution of $17,000 cash from the partnership;
and she had a 50% share in the $40,000 of partnership recourse liabilities on the last day
of the partnership year. Phylliss adjusted basis for her partnership interest at year-end is:
a.
$85,000
b.
$68,000.
c.
$80,000.
d.
$40,000.
e.
None of the above.
10.
Renee and Elizia formed the CT Partnership. Renee contributed $50,000 of cash in
exchange for her 50% interest in the partnership capital and profits. Elizia contributed
property with an adjusted basis of $50,000 and a fair market value of $100,000 for his
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
$100,000; Renee received a distribution of $16,000 cash from the partnership; and she
had a 50% share in the $60,000 of partnership recourse liabilities on the last day of the
partnership year. Renees adjusted basis for her partnership interest at year-end is:
a.
$50,000
b.
$114,000.
c.
$130,000.
d.
$160,000.
e.
None of the above.
11-17

1.
Because Ruby is a 50% partner, she will share in 50% of the partnership taxable
income and tax-exempt income. In addition, she will share in 50% of the
partnership recourse liabilities. Her beginning basis is $50,000 (her basis in the
property she contributed to the partnership). The correct basis is calculated as
follows: $50,000 beginning basis + $30,000 (50% X $60,000) income + $28,000
(50% X $56,000) exempt income - $24,000 distribution + $32,000 share of
liabilities.
Figure 10-3 and Examples 26 and 27
2.
LaToyas basis is determined as follows:

Basis of land
Basis of cash
Share of debt
LaToyas basis
$50,000
75,000
(70,000)
35,000
$90,000
Example 27
3.
A person who receives an unrestricted partnership capital interest for services

rendered has ordinary income when the interest is received. The value of the
interest is its fair market value on the date of receipt. Example 13
4.
Section 704(c)(1)(A) requires that any precontribution gain must be allocated

entirely to Kristian. Therefore, Kristian is allocated the $160,000 precontribution
(built-in) gain and $40,000 of the $80,000 post-contribution gain. Example 25
5.
Because Kenneth is a 50% partner, his basis will increase by 50% of the
partnerships taxable income and recourse liabilities. The distribution reduces his
basis. Therefore, his basis is $50,000 contribution + $30,000 share of income +
$13,000 share of liabilities - $20,000 distribution. Example 27
6.
The $270,000 passive loss must be limited first by Shays $130,000 outside basis
for her partnership interest. The at risk rules further limit her deduction to
$110,000, the amount she is at risk in Raven. She can deduct $75,000 of this
loss because that is the amount she has of passive income from other sources.
Example 34

7.
11-18
Liliths basis is determined as follows:

Basis of land
Cash
Share of debt
Liliths basis
$ 100,000
100,000
(250,000)
125,000
$75,000
Example 27
8.
Section 704(d) limits the deduction of a partner's distributive share of partnership

losses to the adjusted basis of the partner's interest at the end of the partnership
year in which the losses were incurred, before considering any losses. Quinn is
entitled to carry forward and deduct any excess losses against his end-of-the-year
basis occurring in subsequent years, before considering any losses. Since Quinn
is a material participant in the partnership, 469 does not limit the deductibility
of the losses. pp. 10-32 to 10-37
9.
Phylliss adjusted basis consists of: $40,000 cash contribution, plus $25,000 share
of partnership income, minus the $17,000 cash distribution, plus $20,000 share of
partnership liabilities. Example 27
10.
Renees adjusted basis consists of: $50,000 cash contributed to the partnership,
plus $50,000 share of partnership income, minus the $16,000 cash distribution,
plus $30,000 share of partnership liabilities. Example 27
CHAPTER 11
PARTNERSHIPS: DISTRIBUTIONS, TRANSFER
OF INTERESTS, AND TERMINATIONS
MULTIPLE CHOICE
1.
Mildred receives a proportionate, nonliquidating distribution from the Galaxy

Partnership. The distribution consists of $19,000 cash and property with an adjusted
basis to the partnership of $30,000 and a fair market value of $55,000. Immediately
before the distribution, Mildred's adjusted basis for her partnership interest is $85,000.
Mildreds basis in the noncash property received is:
a.
$19,000.
b.
$30,000.
c.
$36,000.
d.
$55,000.
e.
None of the above.

2.
11-19
Johnathan is a partner in a continuing partnership. At the end of the current year, the
partnership distributed to Johnathan in a proportionate, nonliquidating distribution cash
of $60,000, inventory with a basis to the partnership of $38,000 and a fair market value
of $60,000, and a parcel of land with a basis to the partnership of $120,000 and a fair
market value of $80,000. Johnathans basis in the partnership interest was $240,000
before the distribution. What basis does Johnathan take in the inventory and land, and
what is his basis in the partnership interest following the distribution?
a.
b.
c.
d.
e.
$60,000 basis in inventory; $120,000 basis in land; $0 basis in partnership.
11-20
3.
Cole has an outside basis of $170,000 in the ABC Partnership as of December 31 of the
current year. On that date the partnership liquidates and distributes to Cole a
proportionate distribution of $140,000 cash and inventory with an inside basis to the
partnership of $20,000 and a fair market value of $30,000. In addition, Cole receives a
desk which has an inside basis and fair market value of $1,400 and $3,600, respectively.
None of the distribution is for partnership goodwill. How much gain or loss will Cole
recognize on the distribution, and what basis will he take in the desk?
a.
$8,600 loss; $2,400 basis.
b.
$6,400 loss; $3,600 basis.
c.
$7,600 loss; $3,600 basis.
d.
$0 loss; $10,000 basis.
e.
None of the above.
4.
William received $30,000 cash and a capital asset with a basis and fair market value of
$15,000 in a proportionate liquidating distribution. His basis in his partnership interest
was $60,000 prior to the distribution. How much gain or loss does William recognize,
and what is his basis in the capital asset received in the distribution?
a.
b.
$15,000 loss; $15,000 basis.
c.
$15,000 gain; $15,000 basis.
d.
$15,000 gain; $30,000 basis.
e.
5.
Viggo contributed nondepreciable property with a basis of $30,000 and a fair market
value of $46,000 to the ABC Partnership in 2004 in exchange for a 40% interest in the
partnership. In 2005, 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
$40,000. The basis in his partnership interest at the time of the distribution was $20,000.
How much gain or loss does Viggo recognize on the distribution? (Assume no other
distributions have been made to Viggo, 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.
$10,000 gain.
c.
$16,000 gain.
d.
$20,000 gain.
e.
None of the above.

6.
11-21
Kenneths interest in the equal Island Partnership is sold to Kristen 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
Cash $ 180,000
Inventory
Other assets
$440,000
FMV
$ 180,000
160,000
100,000
$380,000
Kenneth, capital
Croix, capital
Nassau, capital
Bermuda, capital
$440,000
$ 110,000
110,000
110,000
110,000
$380,000
80,000
120,000
$ 95,000
95,000
95,000
95,000
Assume Kenneths basis for her partnership interest equals her capital account. As a
result of the sale, Kenneth recognizes
a.
No gain or loss.
b.
$10,000 capital loss.
f.
$20,000 ordinary loss.
g.
$10,000 capital gain.
h.
$20,000 ordinary loss and $10,000 capital gain.
7.
Partner Michael received a distribution of $80,000 cash from the ABC Partnership in
complete liquidation of his partnership interest. If Michaels outside basis immediately
before the distribution was $200,000, 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.
Michael will recognize a $120,000 capital loss on the distribution.
b.
The partnership will step-up the basis of its assets by $120,000.
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 $80,000.
e.
None of the above.
11-22
8.
The Solar Partnership makes a proportionate distribution of its assets to Kobe, in

complete liquidation of his partnership interest. The distribution consists of $50,000 in
cash and capital assets with a basis to the partnership of $100,000 and a fair market value
of $160,000. None of the payment is for partnership goodwill. At the time of the
distribution, Kobe's partnership basis is $140,000 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 $10,000 and increases the basis of its remaining assets by $10,000.
b.
Capital loss of $10,000 and decreases the basis of its remaining assets by $10,000.
c.
No gain or loss and increases the basis of its remaining assets by $10,000.
d.
No gain or loss and decreases the basis of its remaining assets by $10,000.
e.
None of the above.
9.
On December 31 of last year, Tyler gave his son, Anthony, a gift of a 30% interest in a
calendar year, the partnership's ordinary income was $135,000. Tyler and Anthony were
the only partners in the current year. There were no guaranteed payments to partners.
Tyler's services performed for the partnership were worth a reasonable compensation of
$35,000 for the current year. Anthony has never performed any services for the
partnership. What is Anthony's distributive share of partnership income for the current
year?
a.
$94,500.
b.
$40,500.
c.
$70,000.
d.
$30,000.
e.
None of the above.
10.
On December 31 of last year, Zachary gave his son, Jefferson, a gift of a 30% interest in a
calendar year, the partnership's ordinary income was $155,000. Zachary and Jefferson
were the only partners in the current year. There were no guaranteed payments to
partners. Zachary 's services performed for the partnership were worth a reasonable
compensation of $55,000 for the current year. Jefferson has never performed any
services for the partnership. What is Zachary 's distributive share of partnership income
for the current year?
a.
$125,000.
b.
$108,500.
c.
$70,000.
d.
$30,000.
e.
None of the above.
11-23

MULTIPLE CHOICE
1.
2.
Mildreds basis in the partnership interest is first reduced by the $19,000 cash
distribution to $66,000. Since this is a nonliquidating distribution, the basis in the
noncash property is the lesser of the $66,000 remaining basis in the partnership
interest or the partnerships $30,000 basis in the property. The basis in the
property, then, is $30,000, and Mildreds basis in the partnership interest is
reduced to $36,000. Example 4
Basis of Johnathans interest

Less: Cash distribution
Basis before property distributions
Less: Inventory distribution
Less: Land distribution
Basis after property distributions
$240,000
(60,000)
$180,000
(38,000)*
(120,000)*
$ 22,000
*Johnathans basis in the inventory and land equals the partnerships basis in these
properties. Whether the property is appreciated or depreciated does not matter.
Examples 8 and 9
3.
The cash and inventory are distributed first and take bases of $140,000 and
$20,000, respectively. The partner cannot recognize a loss on the distribution
because the desk is a 1231 asset (depreciable property used in a trade or
business). Only cash, inventory and receivables can be distributed if the partner is
to recognize a loss. Therefore, the desk must take a substituted basis of $10,000
to the partner, which is the amount of the partner's remaining outside basis.
Example 15 and Concept Summary 11-2
4.
Since William has received property other than cash and unrealized receivables or
inventory, no loss may be recognized on the liquidating distribution. The capital
asset will take a substituted basis of $30,000, which was Williams remaining
basis in his partnership interest after the cash distribution is considered. Example
15
5.
The precontribution gain on the property Viggo originally contributed to the

partnership was $16,000. The excess of the fair market value of the property
distributed over Viggo's basis in his partnership interest (not the partnership's
basis in the asset distributed), was $20,000. The lesser of these two amounts must
be recognized by Viggo since the original property was contributed less than
seven years prior to the distribution date. Examples 19 and 20
11-24
6.
Kenneth has an overall loss of $10,000 ($100,000 - $110,000) on the sale. The
loss consists of $20,000 ordinary loss ($20,000 - $40,000) from her share of the
deemed sale of inventory under 751(a). The $10,000 capital gain consists of the
overall $10,000 loss decreased by her $20,000 ordinary loss. Example 33
7.
Section 734(b)(1)(A) provides that the partnership must step-down the basis of
partnership assets by the amount of loss recognized by the distributee partner:
$120,000 ($80,000 distribution - $200,000 basis). Answer a. is correct: Michael
will have a $120,000 capital loss, since the distribution was less than his basis.
Example 39
8.
Under 732(b), Kobe is limited to a basis of $90,000 in the capital assets

received ($140,000 basis of partnership interest less $50,000 cash received). The
partnership's $100,000 basis in the capital assets exceeds their $90,000 basis to
Kobe by $10,000. Thus, if a 754 election is made, the partnership is entitled to
increase the basis of its remaining property by $10,000. No gain or loss is
recognized by the partnership, since the liquidating distribution is pro rata.
Example 38
9.

Anthony's capital interest is 30%. Of the $135,000 of partnership income,
$35,000 is allocated to Tyler as compensation for services. The remaining
$100,000 is allocated in the following distributive shares: 70%, or $70,000 to
Tyler and $30,000 to Anthony. Example 43
10.

Jefferson's capital interest is 30%. Of the $155,000 of partnership income,
$55,000 is allocated to Zachary as compensation for services. The remaining
$100,000 is allocated in the following distributive shares: 70%, or $70,000 to
Zachary and $30,000 to Jefferson. Example 43

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Partnerships: Distributions, Transfer of Interests, and Terminations

Cathy receives a proportionate, nonliquidating distribution from the Player Partnership.

Partnerships: Distributions, Transfer of Interests, and Terminations

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SOLUTIONS TO EXAMINATION QUESTIONS

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The precontribution gain on the property Elijah originally contributed to the

Partnerships: Distributions, Transfer of Interests, and Terminations

Under 732(b), Tyrone is limited to a basis of $90,000 in the capital assets

When a family member acquires a capital interest by gift in a family partnership

When a family member acquires a capital interest by gift in a family partnership

Partnerships: Distributions, Transfer of Interests, and Terminations

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Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

SOLUTIONS TO EXAMINATION QUESTIONS

Nancys basis is determined as follows:

A person who receives an unrestricted partnership capital interest for services

Section 704(c)(1)(A) requires that any precontribution gain must be allocated

Partnerships: Distributions, Transfer of Interests, and Terminations

Madisons basis is determined as follows:

Section 704(d) limits the deduction of a partner's distributive share of partnership

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

Kristian and Richard formed a partnership. Kristian received a 50% interest in

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

SOLUTIONS TO EXAMINATION QUESTIONS

LaToyas basis is determined as follows:

A person who receives an unrestricted partnership capital interest for services

Section 704(c)(1)(A) requires that any precontribution gain must be allocated

Partnerships: Distributions, Transfer of Interests, and Terminations

Liliths basis is determined as follows:

Section 704(d) limits the deduction of a partner's distributive share of partnership

Mildred receives a proportionate, nonliquidating distribution from the Galaxy

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

Partnerships: Distributions, Transfer of Interests, and Terminations

The Solar Partnership makes a proportionate distribution of its assets to Kobe, in

Partnerships: Distributions, Transfer of Interests, and Terminations

SOLUTIONS TO EXAMINATION QUESTIONS

Basis of Johnathans interest

The precontribution gain on the property Viggo originally contributed to the

Partnerships: Distributions, Transfer of Interests, and Terminations

Under 732(b), Kobe is limited to a basis of $90,000 in the capital assets

When a family member acquires a capital interest by gift in a family partnership

When a family member acquires a capital interest by gift in a family partnership

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