37 - Partnership Taxation 2

Question 1

What items DECREASE partnership basis?

Answer 1

Money distributed
Adjusted basis of property distributed
Partners’s share of ordinary losses
Partnership is relieved of a liability (considered a distribution)

Question 2

What INCREASES partnership basis?

Answer 2

Partnership getting a loan
Capital contributions
Ordinary income
Capital gains
Tax-exempt income

Question 3

How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?

Answer 3

If the partnership gets a loan; this INCREASES basis.

If partnership is relieved of a liability; this DECREASES basis.

Question 4

How do guaranteed payments affect partnership basis?

Answer 4

They do not affect basis- they are already included in ordinary income; which affects basis.

Question 5

What is the order in which basis is adjusted in a partnership?

Answer 5

1. Increase basis (all items; including tax-exempt income)
2. Distributions
3. Losses (limited to basis)

Question 6

How is the taxable year of a partnership determined?

Answer 6

It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.

Question 7

How does death of a partner affect the partnership’s taxable year?

Answer 7

The taxable year closes with respect to the decedent partner’s interest ONLY.

Question 8

When CAN’T a partnership use cash basis?

Answer 8

1. They have inventories
2. Partnership is a tax shelter
3. Has a corporate partner
4. Gross receipts are $5 Million or more

Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.

Question 9

When does a partnership terminate?

Answer 9

When there is less than 2 partners (only one partner)

When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.

Question 10

How is gain or loss on sale of a partnership interest calculated?

Answer 10

Gain or Loss = Amount realized on sale - basis in partnership interest

Question 11

What is the new basis of a partnership interest sold?

Answer 11

Basis = Capital account + Liabilities assumed

Question 12

How is the sale of non-capital partnership property treated?

Answer 12

As ordinary gain/loss.

Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.

Question 13

How is a partner’s share of an ordinary gain calculated?

Answer 13

FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner’s % interest
= Partner’s share of gain

Note: No gain or loss will be recognized by a partnership upon distribution of property.

Question 14

What is the order of basis reductions for distributions from a partnership?

Answer 14

1. Money distributed
2. Adjusted basis of unrealized receivables and inventory
3. Adjusted basis of other property

Note: Only MONEY distributions will trigger a gain in a partnership distribution.

Question 15

When can a LOSS occur in a partnership distribution?

Answer 15

Only in a liquidating distribution.

Question 16

What are the requirements for recognizing a gain in a partnership liquidating distribution?

Answer 16

1. Money was distributed
2. Unrealized receivables were distributed
3. Appreciated inventories were distributed

Otherwise; no loss recognized.