Module 4: Partnerships: Part 3

Question 1

When do partnerships have the option of making a Section 754 election?

Answer 1

1. When certain distributions of property from the partnership to partner occur, 2. When there is a transfer of partnership interest by sale/exchange
2. Upon the death of a partner

Question 2

What is the Section 743(b) adjustment?

Answer 2

Equals the difference between the value of the outside basis to transferee partner and his share of the partnership’s inside basis of the assets

Question 3

What is the goal of the Section 743(b) adjustment?

Answer 3

To make the transferee have an inside basis in the partnership assets equal to his outside basis

Question 4

When would the IRS mandate a 743(b) adjustment?

Answer 4

When there is a substantial built-in loss at the time of purchase (inside basis exceeds outside basis by $250,000 or more)

Question 5

What are the 3 ways in which a partnership may liquidate a partnership interest?

Answer 5

1. Complete withdrawal
2. Sale of partnership interest
3. Retirement or death

Question 6

COMPLETE WITHDRAWAL

How is the partner’s basis calculated when there is a complete withdrawal?

Answer 6

Beginning capital account
\+ % of income  up to withdrawal
= Partner's capital account
\+ % of liabilities
= Adjusted basis at date of withdrawal

= Remaining basis to be allocated to assets withdrawn

Question 7

COMPLETE WITHDRAWAL

What is the rule in terms of the remaining basis when there is a complete withdrawal?

Answer 7

Zero out to get out

The basis needs to be zeroed out in order for the partner to get out

Question 8

COMPLETE WITHDRAWAL

What is the gain exception to the rule?

Answer 8

If the money taken out was > the basis = GAIN

The partner recognizes gain only to the extent that money received exceed the partner’s basis in the partnership

Question 9

COMPLETE WITHDRAWAL

What is the loss exception to the rule?

Answer 9

Partner recognizes a loss if money, unrealized receivables, or inventory are the only assets received and if the basis of the assets rec’v < partner’s adjusted basis in partnership

Question 10

SALE OF PARTNERSHIP INTEREST (LIQUIDATION)

What is the general rule when a partner transfers a partnership interest?

Answer 10

The partner has a capital gain or loss when transferring a partnership interest b/c it is a capital asset

Question 11

SALE OF PARTNERSHIP INTEREST (LIQUIDATION)

How is the gain or loss determined?

Answer 11

Measured by the difference b/w the amount realized for the sale and the adjusted basis of the partnership interest

Question 12

SALE OF PARTNERSHIP INTEREST (LIQUIDATION)

Capital gain/loss calculation

Answer 12

Beg. capital account
\+ % of income  up to sale
= Capital account at sale date
\+ % of liabilities
= Adjusted basis

= Capital gain or loss

Question 13

SALE OF PARTNERSHIP INTEREST (LIQUIDATION)

What would be included in the “amount received” when calculating the gain or loss?

Answer 13

1. Cash
2. Assumption of liabilities
3. FMV property

Question 14

SALE OF PARTNERSHIP INTEREST (LIQUIDATION)

What is the exception to the general rule of capital gain/loss?

Answer 14

Any gain that represents a partner’s share of “hot assets” is treated as ordinary income

Question 15

SALE OF PARTNERSHIP INTEREST (LIQUIDATION)

What would be considered “hot assets”?

Answer 15

1. Unrealized receivables
2. Appreciated inventory
3. “Recapture income” regarding depreciable assets owned by the partnership

Question 16

RETIREMENT/DEATH OF PARTNER

Result of payments for the interest in partnership assets

Answer 16

Capital gain/loss

Question 17

RETIREMENT/DEATH OF PARTNER

Result of payments that are measured by partnership income

Answer 17

Taxable as ordinary income to retire partner

Question 18

RETIREMENT/DEATH OF PARTNER

Accounting for sale of interest to a new partner in the middle of the tax year

Answer 18

The selling partner’s share of partnership income/loss must be allocated pro rata