CH 11 - Quiz

Question 1

(1) What is the difference between the definition of:

(A) proportionate current distribution?
(B) proportionate liquidating distribution?

(2) What is the significance of the word proportionate?

Answer 1

(1A) A proportionate current distribution is one in which the partnership makes a routine distribution to one or more partners that will remain partners in a continuing partnership.

(1B) A proportionate liquidating distribution is a distribution in which either (1) the partnership itself
liquidates and distributes all of its assets to the partners or (2) a continuing partnership distributes
assets to one or more partners in liquidation of those partnership interests

(2) Proportionate does not refer to a distribution that is proportionate to all partners in the partnership; proportionate refers to a distribution that does not change each partner’s respective ownership of the partnership’s “hot assets”

Question 2

How does a proportionate current distribution of cash from a partnership to a partner compare with one from a C corporation to a shareholder?

Answer 2

A proportionate current distribution of cash from a partnership results in a taxable capital gain to the partner only to the extent the distribution exceeds the partner’s basis in the partnership interest. If the distribution does not exceed the partner’s basis, no gain or income is recognized.

A distribution of cash from a C corporation is treated as a dividend to the extent it is made from the
corporation’s current or accumulated earnings and profits. A dividend is treated as ordinary income to
the shareholder (although a favorable tax rate may be available for “qualified dividends”).

Question 3

What issues arise if a partner contributes appreciated property to a partnership and other property is later distributed to that partner?

Answer 3

If appreciated property is contributed to the partnership and other appreciated property is later distributed to that partner, the distribution of the other property may trigger gain recognition to the contributing partner

Question 4

Describe how a partnership is terminated

Answer 4

A partnership is terminated when no part of any business, financial operation, or venture of
the partnership continues to be carried on by any of its partners.

Question 5

—————————– BACKGROUND————————–
Franco owns a 60% interest in the Dulera LLC.

On December 31 of the current tax
year, his basis in the LLC interest is $128,000.

The fair market value of the interest is
$140,000.

In a proportionate current distribution, the LLC distributes $30,000 cash and equipment with an adjusted basis of $5,000 and a fair market value of $8,000 to him on that date.

—————————– QUESTION————————–

(1) How much is Franco’s adjusted basis in the LLC interest after the distribution
(2) What is the amount of his basis in the equipment received?

Answer 5

(1) $128k - $30k - $5k = $93k

(2) $5k

Question 6

—————————– BACKGROUND————————–
Lola owns a one-half interest in the Lenax LLC.

Her basis in this ownership interest is $22,000 at the end of the year, after accounting for the calendar year LLC’s current operations.

On that date, the LLC distributes $25,000 cash to Lola in a proportionate current distribution.

—————————– QUESTION————————–

(1) What is the amount of any gain or loss Lola recognizes as a result of this distribution?
(2) What is her basis in the LLC interest?

Answer 6

(1) Lola recognizes a $3,000 gain on the distribution ($22,000 basis – $25,000 cash
distribution) .

(2) Her basis is reduced to $0.