Chapter 10: Homework

Question 1

Complete the paragraph below regarding how a proportionate current distribution of cash from a partnership to a partner compares with one from a Subchapter C corporation to a shareholder.

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 is less than 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.

Answer 1

• taxable capital gain,
• exceeds,
• is less than,
• no gain or income,
• dividend,
• current or accumulated earnings and profits

The rule that no gain or loss is recognized on a property distribution from a partnership has several exceptions. Because the partner typically does not recognize a gain from a property distribution, the Code provides that the partner’s basis for property received cannot exceed the partner’s basis in the partnership interest immediately before the distribution.

Question 2

Regarding (1) contractual liability claims (i.e. trade accounts payable) and (2) malpractice claims against the entity, select the extent to which personal assets of a general partner, limited partner, or member of an LLC are exposed.

a. General Partner in a General Partnership
Contractual Liability:

Unlimited
Malpractice Liability:

Unlimited
b. General partner in a limited partnership
Contractual Liability:

Unlimited
Malpractice Liability:

Unlimited
c. Limited partner in a limited partnership
Contractual Liability:

Assets of the limited partner are not subject to creditor claims
Malpractice Liability:

Assets of the limited partner are not subject to creditor claims
d. General Partner in an LLP
Contractual Liability:

Unlimited in many states, limited in other states
Malpractice Liability:

In certain cases, satisfied by general partner’s assets
e. Member of a Nonprofessional LLC
Contractual Liability:

Limited
Malpractice Liability:

Cannot be satisfied by member assets

Answer 2

Owners of small businesses often want to combine the limited liability of a corporation with the pass-through provisions of a partnership. The limited liability company is a form of entity that goes further in combining partnership taxation with limited personal liability for all owners of the entity.

Question 3

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.

How much is Franco’s adjusted basis in the LLC interest after the distribution, and what is the amount of his basis in the equipment received?

Franco’s adjusted basis in the LLC interest: $ ____

Franco’s basis in the equipment: $ ____

Answer 3

93,000,
5,000

In general, neither the partner nor the partnership recognizes gain or loss when a proportionate current distribution occurs. The partner usually takes a carryover basis for the assets distributed. The distributee partner’s outside basis is reduced (but not below zero) by the amount of cash and the adjusted basis of property distributed to the partner by the partnership.

Question 4

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.

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

if an amount is zero, enter “0”.
She recognizes a $ ____ gain/loss from this distribution. Her basis is reduced to $ ___

Answer 4

• 3000,
• Gain,
• 0

Question 5

When Bruno’s basis in his LLC interest is $150,000, he receives cash of $55,000, a proportionate share of inventory, and land in a distribution that liquidates both the LLC and his entire LLC interest. The inventory has a basis to the LLC of $45,000 and a fair market value of $48,000. The land’s basis is $70,000, and the fair market value is $60,000. How much gain or loss does Bruno recognize, and what is his basis in the inventory and land received in the distribution?

If an amount is zero, enter “0”.

Bruno recognizes no gain or loss. Bruno’s basis in the inventory is $ ____ and his basis in the land is $ ____

Answer 5

• 45,000,
• 50,000,

Normally, the partnership itself does not recognize either gain or loss on a proportionate liquidating distribution. When a partnership liquidates, the liquidating distributions to a partner usually consist of an interest in several or all of the partnership’s assets. As with a current distribution, gain is recognized if distributed cash exceeds the partner’s basis before the distribution. The ordering rules also parallel those for current distributions, except that the partner’s entire basis in the partnership interest is allocated to the assets received in the liquidating distribution, unless the partner is required to recognize a loss.

Question 6

When Magdalena’s outside basis is $58,000, she receives a liquidating distribution of $15,000 cash and a proportionate share of inventory having a partnership basis of $20,000 and a fair market value of $24,000. The distribution results in a liquidation of both the partnership and her interest.

a. How much is Magdalena’s basis in the inventory received?
$ ____

b. What is the amount of any gain or loss recognized on the liquidation?
She has recognized a capital loss of $ ____ on the liquidation.

Answer 6

• 20,000,
• 23,000,

The distributee partner recognizes a loss on a liquidating distribution if both of the following are true: (1) the partner receives only cash, unrealized receivables, or inventory and (2) the partner’s outside basis in the partnership interest exceeds the partnership’s inside basis for the assets distributed in these categories. This excess is the amount of the loss recognized by the distributee partner.

Question 7

Answer the following questions regarding four liquidating distribution scenarios, the partnership also liquidates.

If there is no gain or loss or if an amount is zero, enter “0”.

Question Content Area
a. For each, determine the amount and character of any gain or loss to be recognized by each partner and the basis of each asset (other than cash) received.

Assume for all scenarios that the distributions of hot assets are proportionate to the partners (or there are no hot assets). You can use the format in Concept Summary 10.3.
(1) Rafael has a partnership basis of $40,000 and receives a distribution of $50,000 in cash.

He will recognize
a capital gain
of $fill in the blank 553d30005077012_2
10,000
.

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When a partnership liquidates, the liquidating distributions to a partner usually consist of an interest in several or all of the partnership assets. The gain recognition and ordering rules parallel those for current distributions, except that the partner’s entire basis in the partnership interest is allocated to the assets received in the liquidating distribution, unless the partner is required to recognize a loss. A loss may be recognized when only cash, unrealized receivables, or inventory is received in the distribution.

Question Content Area
(2) Mark has a partnership basis of $50,000. He receives $20,000 cash and a capital asset with a basis to the partnership of $25,000 and a fair market value of $40,000.

He will recognize
no gain or loss
of $fill in the blank a1a985f76faaf89_2
0
. His basis in the capital asset is $fill in the blank a1a985f76faaf89_3
30,000
.

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(3) Neil has a partnership basis of $100,000. He receives $40,000 cash, inventory with a basis to the partnership of $30,000, and a capital asset with a partnership basis of $20,000. The inventory and capital asset have fair market values of $20,000 and $30,000, respectively.

He will recognize
no gain or loss
of $fill in the blank 035416f69fd502a_2
0
. The capital asset is allocated a basis of $fill in the blank 035416f69fd502a_3
30,000
, and the inventory will have a basis of $fill in the blank 035416f69fd502a_4
30,000
.

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(4) Oscar has a partnership basis of $40,000. He receives a distribution of $10,000 cash and an account receivable with a basis of $0 to the partnership (value is $15,000).

He will recognize
a capital loss
of $fill in the blank 9d230bfc3059fc0_2
30,000
.

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b. In each of the four situations in part (a), are any planning techniques available to the partnership to avoid any “lost basis” results?

For any of the four situations, students might answer “make a § 754 election.” However, because the partnership is liquidating, this
is not
viable.

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c. In the four situations in part (a), would your answers change if the transaction had been a current distribution?

The results for transaction (1)
would not
change since gain recognition rules are
the same
for both current and liquidating distributions.

For transactions (2) and (3), the bases of capital assets
would not
be adjusted in Step 3 of a current distribution.

In situations (2) to (4), there
are no
gains, losses, or basis adjustments in a current distribution, so
no § 754
adjustment is needed.