R4-2 Flashcards

Question

Cobb, Danver, and Evans each owned a one-third interest in the capital and profits of their calendar-year partnership. On September 18, Year 5, Cobb and Danver sold their partnership interests to Frank and immediately withdrew from all participation in the partnership. On March 15, Year 6, Cobb and Danver received full payment from Frank for the sale of their partnership interests. For tax purposes, the partnership: a. Terminated on September 18, Year 5. b. Did not terminate. c. Terminated on March 15, Year 6. d. Terminated on December 31, Year 5.

Answer 1

Choice "a" is correct. A partnership terminates for tax purposes if within a 12-month period there is a sale or exchange of at least 50% of the total interest in partnership capital and profits. In this case, the partnership terminates September 18, Year 5, the date that 2/3 interest in the partnership is sold to new partner Frank. Choice "d" is incorrect. The partnership terminated on the date that at least 50% of the partnership interest was sold, not the end of the partnership year in which the sale occurred. Choice "c" is incorrect. The partnership terminated on the date that at least 50% of the partnership interest was sold, not the date of full payment between the old and new partners. Choice "b" is incorrect. The partnership terminated on the date that at least 50% of the partnership interest was sold.

Answer 2

Choice "b" is correct. Payments made in liquidation of the interest of a retiring partner are considered a distribution by the partnership. Therefore, a retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions: Berk's partnership basis on 6/30/Yr 8 $ 80,000 $5,000 x 6 months, Year 8 cash distributions nontaxable, basis reduction (30,000) Relief of debt _(30,000)_ Berk's partnership basis on 12/31/Yr 8 20,000 $5,000 x 12 months, Year 9 distributions _(60,000)_ Negative basis (40,000) Capital gain to eliminate negative basis _40,000_ Berk's basis on 12/31/Yr 9, liquidated $ 0 Choices "d", "a", and "c" are incorrect. Payments made in liquidation of the interest of a retiring partner are considered a distribution by the partnership. Therefore, a retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions.

Answer 3

Choice "b" is correct. In a nonliquidating distribution, the partner's basis is reduced first by the amount of cash received and then by the adjusted basis of any property received. Thus, Owen's basis after the distribution is determined as follows: Owen's beginning basis $ 18,000 Cash received (3,000) Basis of property received _(7,000)_ Owen's adjusted basis after the distribution $ 8,000 Choices "d", "a", and "c" are incorrect, per the above explanation.

Answer 4

Choice "a" is correct. A partner's original basis for a partnership interest acquired by a contribution is the amount of cash plus the adjusted basis of any property contributed less the amount of incoming partner's liabilities assumed by the other partners. Bailey's basis is calculated as follows: Adjusted basis of property contributed $ 25,000 Less: The amount of Bailey's debtassumed by the other partners (70% of $10,000) _(7,000)_ Bailey's basis $ 18,000 Choices "c", "b", and "d" are incorrect, per the above explanation.

Answer 5

RULE: The basis in a partnership is increased by investment, pro-rata share of income, and liabilities for which the partner is personally liable. The basis of a partnership is decreased by distributions, pro-rata share of losses, and liabilities for which the partner is personally relieved of. Choice "c" is correct. Per the above rule, each partner's basis in the partnership is $110,000 at the end of the current year, calculated as follows: Contributions$100,000 Pro-rata income allocation 20,000 [$80,000 / 4 partners] Pro-rata income allocation (10,000) Basis at year-end $110,000 Choice "d" is incorrect. The partnership reported income of $80,000, and this amount must be allocated pro-rata to each partner. The mistake made here is that the entire $80,000 was included for each partner as an increase in basis when it should only have been ¼ of that amount (or $20,000). Applying all other facts correctly, this answer was calculated as $100,000 + $80,000 - $10,000 = $170,000. Choice "a" is incorrect. The distribution of $10,000 must be deducted from the basis of each partner. Applying all other facts correctly, this answer was calculated as $100,000 + $20,000 = $120,000. Choice "b" is incorrect. Each partner received a distribution of $10,000. Therefore, the total distributions for the partnership were $40,000. The mistake made here was that the $10,000 distribution was incorrectly assumed to be the total distribution made by the partnership. $10,000 divided by 4 = $2,500. Applying all the other facts correctly, this answer was calculated as $100,000 + $20,000 - $2,500 = $117,500.

Answer 6

RULE: Generally, no gain or loss is recognized on the contribution of property to a partnership in return for a partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor's basis of the contributed property; however, if the fair market value of the property differs from the basis, the amount of the unrealized gain or loss at the date of contribution is specially allocated to the contributing partner upon the sale of that contributed property. Choice "a" is correct. Per the above rule, Marcus' basis in the partnership immediately after formation is $50,000, which is Marcus' basis in the land at the date of contribution. Choice "b" is incorrect. Marcus has a basis in the partnership in the amount of Marcus' basis in the property upon contribution. Choice "d" is incorrect. Per the above rule, Marcus' basis in the partnership immediately after formation is $50,000, which is Marcus' basis in the land at the date of contribution. Choice "c" is incorrect. Per the above rule, Marcus' basis in the partnership immediately after formation is $50,000, which is Marcus' basis in the land at the date of contribution. The basis is not the fair market value at the date of contribution.

Answer 7

Rule: Generally, no gain or loss is recognized on the contribution of property to a partnership in return for partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor's basis of the contributed property; however, if the fair market value of the property differs from the basis, the amount of the unrealized gain or loss at the date of contribution is specially-allocated to the contributing partner upon the sale of that contributed property. Choice "a" is correct. Applying the rule above, Smith's basis in the partnership upon contribution is calculated as follows: Cash contributed $ 3,000 Basis of stock contributed 2,000 Basis of computer contributed _2,500_ Basis in partnership $ 7,500 Choice "d" is incorrect. This answer assumes that the fair market value of the stock ($5,000) is used to calculate the basis of the partnership, but this is an incorrect assumption (the basis of $2,000 is used). Choice "b" is incorrect. This answer neglected to include in the basis of the partnership the $2,000 basis of the stock contributed. Choice "c" is incorrect. This answer neglected to include in the basis of the partnership the property contributed to the partnership and only considered the cash contributed.

Answer 8

Choice "c" is correct. Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest. The partner's original basis for a partnership interest acquired by contribution of property is the adjusted tax basis of the property (unless the property is subject to excess liability, which is not the case in this question). Choice "a" is incorrect. Walker's adjusted tax basis in the property is $20,000. There are no partnership liabilities, and the facts do not indicate that the property was subject to excess liability. The facts in the question do not support a zero basis in the partnership interest. Choice "b" is incorrect. The $50,000 fair market value is not used to determine the initial basis in the partnership interest; however, upon the sale of the property, the fair market value will be used in the calculation of the special allocation to the contributing partner of the built-in gain on the sale. Choice "d" is incorrect. The $75,000 original cost of the property is not used to determine the contributing partner's basis. The amount to use is the adjusted tax basis (cost less depreciation or other basis reduction) upon contribution.

Answer 9

Choice "b" is correct. In a liquidating distribution, the partner's basis for the distributed property is the same as the adjusted basis of his partnership interest (as the partner is simply exchanging his partnership interest for the distributed assets), reduced by any monies received in the same transaction. Olson's basis before distribution $70,000 Less: Cash received _(10,000)_ Remaining basis in partnership 60,000 Less: Allocate basis to land _(60,000)_ Liquidated partnership basis $ 0 Choice "d" is incorrect. This would be the answer if the distribution were a non-liquidating distribution (which would then mean that partner would still have a partnership interest with a basis of $2,000 ($60,000 - $58,000 land basis). Choice "a" is incorrect. The fair market value of the asset is not considered in a liquidation. Choice "c" is incorrect. The allocable basis must first be reduced by the amount of cash received.

Answer 10

Choice "d" is correct. A partner's tax deduction for his or her distributive share of partnership losses is limited to the partner's adjusted basis in the partnership, which is increased by any partnership liabilities that he or she is personally liable for (called the "at-risk" provision). Any unused loss can be carried forward and used in a future year when basis becomes available; therefore, the at-risk limitation does not limit a partner's net operating loss carryover. Choices "a", "b", and "c" are incorrect, based on the above discussion.

Answer 11

Choice "a" is correct. A partner who sells his interest in a partnership has a recognized gain or loss that is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. If there are any partnership liabilities allocated to the interest and transferred to the buyer, they are considered part of the amount realized. Any gain that represents a partner's share of "hot assets" (unrealized receivables of appreciated inventory) is treated as ordinary income if cash is taken. Clark's capital gain on the sale is calculated as follows: Amount realized on the sale: Cash $ 30,000 Liabilities relieved of _25,000_ 55,000 Less: Basis in the partnership (_40,000)_ Capital gain on sale\* $ 15,000 \* Note: The facts tell us that the partnership had no unrealized receivables or substantially appreciated inventory; therefore, there are no "hot assets" to cause Clark to categorize any of the gain as ordinary income. The entire gain is capital gain. Choice "c" is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. Further, as the partnership has no unrealized receivables or appreciated inventory, ordinary income recognition is not applicable. Choice "b" is incorrect. This answer option correctly calculates the gain on the sale as $15,000, but it incorrectly categorizes the gain as ordinary, when there are no unrealized receivables or appreciated inventory items that would cause ordinary income recognition to be applicable. Choice "d" is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. However, the classification of the gain as capital is correct because the partnership has no unrealized receivables or appreciated inventory that would cause ordinary income recognition to be applicable.

Answer 12

Choice "b" is correct. With a liquidating distribution, the partner's basis for the distributed property is the same as the adjusted basis of his partnership interest, first reduced by any monies received. The partner will recognize gain only to the extent that money received exceeds the partner's basis in the partnership. Basis before liquidating distribution $ 60,000 Less: Cash received _(61,000)_ Cash received in excess of basis (1,000) Gain to be recognized _1,000_ Basis after gain recognition $ 0 Note: The basis of the land to Reid is zero, as Reid has no remaining basis in the partnership to allocate to the land (i.e., Reid has exchanged his entire interest in the partnership for the cash and the land). Choice "d" is incorrect. Gain is recognized because the cash received exceeded the basis in the partnership before the liquidation. Choice "a" is incorrect. This answer option incorrectly assumes that the adjusted basis of the land reduced the basis in the partnership before the cash received reduced the basis. As mentioned above, cash received must first reduce the basis before any allocation of basis can be made to the remaining non-cash property [$60,000 - $12,000 = $48,000; $48,000 - $61,000 = ($13,000) in excess of basis]. Choice "c" is incorrect. This answer option incorrectly assumes that the fair market value of the land (fair market value would not be used even if cash were not received, however) reduced the basis in the partnership before the cash received reduced the basis. As mentioned above, cash received must first reduce the basis before any allocation of basis can be made to the remaining non-cash property [$60,000 - $14,000 = $46,000; $46,000 - $61,000 = ($15,000) in excess of basis].

Answer 13

Choice "d" is correct. In a complete liquidation of a partnership, a partner (Baker) recognizes gain only to the extent that the money received (if any) exceeds that partner's adjusted basis in the partnership immediately before the distribution. In this question, there is no money distributed, so there is no gain. The partner recognizes loss if only money, unrealized receivables, or inventory are received and if the basis of the assets received is less than the partner's basis in the partnership. In this question, there is no money, unrealized receivables, or inventory distributed, so there is no loss, regardless of the partner's basis in the partnership. Even though the land has a $40,000 fair market value, Baker's basis in the land is his $60,000 partnership basis, effectively giving him a $20,000 built-in loss that he can recognize by selling the land. Choice "b" is incorrect. The $35,000 is the difference between the $40,000 fair market value of the land and the land's $75,000 adjusted basis (to the partnership). That difference is not reported as a loss by the partner or by the partnership. Choice "a" is incorrect. The $20,000 is the difference between the $40,000 fair market value of the land and the $60,000 partner's adjusted basis in the partnership. That amount is the partner's built-in loss in the land, but the loss is not recognized unless and until the partner sells or disposes of the land in a separate taxable transaction. Choice "c" is incorrect. The $15,000 is the difference between the $60,000 partner's adjusted basis in the partnership and the $75,000 partnership's adjusted basis in the land. That difference is not recognized in any way.

Answer 14

Choice "b" is correct. In this question, Nolan receives an interest in the partnership for services performed. The services are valued at the fair market value of what is received (the partnership interest) of $120,000, regardless of what Nolan's normal billing for these services might have been. Choice "c" is incorrect. Nolan would certainly report some income from the services that she performed when something is received in return for those services. Choice "d" is incorrect. The $40,000 is the difference between the fair market value of the partnership (and of the services performed) and Nolan's billing. That number is meaningless in this question. Choice "a" is incorrect. The $80,000 is Nolan's normal billing for her services. However, her income is the $120,000 fair market value of the services. Perhaps, she should charge more. The difference is not considered a gift.

Answer 15

Choice "c" is correct. In this liquidating distribution of a partnership, three different assets are distributed. The $4,000 cash distributed reduces Chang's (outside) basis in the partnership to $8,000. At that point, Chang's outside basis is less than the total (inside) basis of the remaining property distributed. The inventory gets $4,000 of basis first and Chang's outside basis is reduced to $4,000. The land gets the remaining $4,000 basis (whatever is left over). The sale of the inventory for $5,000 then produces a $1,000 ordinary gain ($5,000 - $4,000), and the sale of the land for $3,000 produces a $1,000 capital loss ($3,000 - $4,000). Choice "a" is incorrect. There is gain or loss on the sale transactions because each of the assets distributed is sold for an amount that is different from its basis. This choice would require that the inventory be given a basis of $5,000 and the land be given a basis of $3,000. Choice "b" is incorrect. A $0 ordinary gain could be recognized if the inventory were given a basis of $5,000, but there is no reason for doing that. The $1,000 capital loss is correct, but the choice is already incorrect. Choice "d" is incorrect. A $0 capital loss could be recognized if the land were given a basis of $3,000. That would require that the land be given a basis of its fair market value on the distribution date. However, it is the bases of the property distributed that are allocated, not the fair market values. The $1,000 ordinary gain is correct, but the choice is already incorrect.

Answer 16

Choice "d" is correct. Most elections that affect the calculation of taxable income of a partnership are made by the partnership itself rather than by an individual partner. For example, the elections as to methods of accounting, methods of depreciation and the Section 179 expensing of a limited amount of depreciable property, the election not to use installment method accounting, and similar elections are made by the partnership and apply to all partners. However, individual partners can make the election to take a deduction or a credit for taxes paid to foreign countries. Choice "c" is incorrect. The election to amortize organizational costs is made at the partnership level, not at the partner level. Choice "a" is incorrect. The election not to recognize involuntary conversion gains is made at the partnership level, not at the partner level. Choice "b" is incorrect. The election to expense Section 179 property is made at the partnership level, not at the partner level.

Answer 17

Choice "a" is correct. Molloy's (adjusted) basis in the RST partnership includes its original cost ($40,000) plus its share of the partnership's taxable income ($60,000 x 1/3 = $20,000). The basis is reduced by cash distributions ($5,000) and increased by its share of the partnership's recourse liabilities (1/3 x $18,000 = $6,000). The total is $61,000. Choice "b" is incorrect. The $55,000 is the $61,000 ignoring Molloy's share of the partnership's liabilities. However, the partnership's recourse liabilities cannot be ignored. Choice "d" is incorrect. The $71,000 is the $61,000 with the $5,000 cash distribution increasing, as opposed to reducing, the basis. However, the distribution reduces the basis. Choice "c" is incorrect. The $101,000 is the $61,000 with the full amount ($60,000), instead of Molloy's share ($20,000), of the partnership's taxable income added. However, only Molloy's share should be added to the basis.

Answer 18

Choice "a" is correct. In a complete liquidation of a partnership, the amount of cash distributed initially reduces the basis of the partner in the partnership (outside basis). In this question, the partner's $60,000 basis in the partnership is reduced to $30,000 by the $30,000 cash distribution. The $30,000 remaining partner basis in the partnership is given to the other property distributed (in this question, the only property distributed was the automobile). Choice "b" is incorrect. The $0 indicates that the automobile was given no basis. That would happen only if the cash distributed exceeded the partner's basis in the partnership before the liquidation and distribution. Choice "c" is incorrect. The $10,000 is the difference between the amount received in cash and the (fair) market value and basis of the automobile to the partnership. That amount does not represent the basis of the automobile after the distribution. Choice "d" is incorrect. The $20,000 is the (fair) market value of the automobile at the date of the liquidation and distribution. That basis does not necessarily carry over to the partner.

Answer 19

Rule: The partner's original basis is increased by the portion of the liabilities assumed by the partner, and this amount is equal to the partner's percentage ownership in the partnership. Choice "a" is correct. A $100,000 increase in partnership liabilities generally increases each partner's basis in proportion to their ownership percentage. [Thus, a 25% partner will generally have a basis increase of $25,000 for an increase in partnership debt of $100,000.] Choice "d" is incorrect. This incorrectly says that each partner will have a basis increase of $100,000 for a total partnership debt increase of $100,000. A partner is only responsible for debt in the proportion of his/her ownership interest. Choice "c" is incorrect. Partnership basis will increase in proportion to the partner's economic loss percentage (risk) if the debt is recourse. Partnership basis may increase if the debt in nonrecourse, but there are limitations (beyond the scope of the exam). Choice "b" is incorrect. A $100,000 increase in partnership liabilities generally increases each partner's basis in proportion to their ownership percentage. Partnership basis will increase in proportion to the partner's economic loss percentage (risk) if the debt is recourse. Partnership basis may increase if the debt in nonrecourse, but there are limitations (beyond the scope of the exam).

Answer 20

Rule: In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received. The partner recognizes gain only to the extent that money received exceeds the partner's basis in the partnership. Choice "d" is correct. Smith's basis in the real estate is calculated as follows: Smith's basis in EVA before liquidation $ 230,000 Cash received _(150,000)_ Smith's basis in the real estate $ 80,000 Choice "b" is incorrect. This answer option incorrectly uses the fair market value of the land ($146,000) at the date of distribution in complete liquidation. In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received. Choice "c" is incorrect. This answer option incorrectly uses the average of the basis and the fair markets value of the real estate at the date of distribution [($120,000 + $146,000)/2 = $133,000]. In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received. Choice "a" is incorrect. This answer option incorrectly uses EVA's basis of the land ($120,000) at the date of distribution in complete liquidation. In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received.

Answer 21

Rule: The partnership basis formula follows: Basis = Capital Account + Partner's Share of Liabilities Choice "b" is correct. Dale's basis at the end of the first year of operations is calculated as follows: Initial contribution at formation $ 10,000 Net taxable income 7,500 [$15,000 × 50%] Tax exempt income 1,000 [$2,000 × 50%] Distributions (3,000) [to each partner] Increase in debt responsible for 5,000 [$10,000 × 50%] Reduction in debt responsible for _(2,000)_ [$4,000 × 50%] Basis at year end $ 18,500 Choice "d" is incorrect. There are a few ways to have miscalculated the basis by $2,000. The proper calculation of the basis at year end is shown above. Choice "c" is incorrect. The most likely error made if this answer option were chosen is that the tax exempt income of $1,000 was omitted from being an increase in the partner's basis in the partnership. All income (including tax free income) increases a partner's basis. Choice "a" is incorrect. The most likely error made if this answer option were chosen is that the distributions of $3,000 were omitted from being a decrease in the partner's basis in the partnership; although, several other miscalculations could have been made. The proper calculation of the basis at year end is shown above.

Answer 22

Choice "a" is correct. $5,000 ordinary income. Rule: If a person receives an interest in the capital of a partnership as a result of prior employment service, the fair market value of the interest acquired represents ordinary income to the recipient and is his basis in the partnership interest acquired. The partnership's net assets had a FMV of $50,000 as of June 1. Therefore, the FMV of the partnerships respective capital accounts was $50,000. Total FMV of partnership capital accounts $ 50,000 Percentage received by Don Kerr _10%_ Ordinary income to be reported $ 5,000

Answer 23

Choice "a" is correct. $0. Rule: There is no gain or loss recognized when a partner contributes property to a partnership in exchange for a partnership interest. Instead, the basis of the property contributed carries over and becomes the partnership's basis in the property. Likewise, the basis of the property contributed net of any related loans assumed by the other partners, becomes the new partner's basis in his partnership interest. FMV of partner's interest received (25% × 600,000) $150,000 Basis in property surrendered (stock acquired in Year 2) _30,000_ Long term capital gain realized $120,000 Long term capital gain recognized $0 When the stock is later sold by the partnership, any gain recognition to the extent of the above unrecognized gain would be specifically allocated to the partner who contributed the property to the partnership.

Answer 24

Choice "d" is correct. Partnership Abel & Benz is considered to be a continuation of partnership Abel, Benz, Clark, and Day as Abel (40%) and Benz (20%) constitute more than 50% of the old partnership. Choice "a" is incorrect. No such penalty surtax exists. Normally, there would be no tax consequence resulting from a distribution from the original partnership unless the amount of cash distributed to the partners exceeded their respective basis in their partnership interest. Choice "c" is incorrect. Separating the two businesses into two entities does not require approval from the IRS. Choice "b" is incorrect. A partnership does not terminate and therefore does not require a formal dissolution with the IRS unless: It stops doing business. 50% or more of the total interest in the partnership capital and profits changes hands by sale of exchange within 12 consecutive months. Only one partner remains which makes it a sole proprietorship.

Answer 25

Choice "d" is correct. The total amount of partnership income taxable to Dale in Year 1 is $50,000, which is his distributive share of partnership income. Rule: A partner must include his allocated share of partnership income, even if not received in cash, in his tax return for his taxable year (usually calendar year) within which the taxable year of the partnership ends. Choices "a", "b", and "c" are incorrect, per the above rule.

Answer 26

Choice "c" is correct. A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months. Choice "b" is incorrect. Generally, partnerships must adopt the same taxable year as the majority of their partners (usually December 31) unless a natural business year exception or the above exception applies. Choice "a" is incorrect. A valid business purpose reason for adoption of a tax year other than the generally required tax year may still apply if approved by IRS. Choice "d" is incorrect. No such form or filing requirement exists.

Answer 27

Choice "d" is correct. Hart's basis for the land is $6,000. Rule: The basis of property received in a distribution, other than in liquidation of a partner's interest, will ordinarily be the same as the basis in the hands of the partnership immediately prior to distribution. However, in no case may the basis of property in the hands of the partner exceed the basis of his partnership interest reduced by the amount of money distributed to him in the same transaction. Partnership interest adjusted prior to distribution $ 30,000 Amount of cash distributed (24,000) Remaining basis after cash distribution 6,000 Distribution of land with basis of $9,000 (6,000) Remaining partnership interest $ 0 The partnership interest may not be reduced below zero. Therefore, the land has a basis of $6,000 in the hands of the partner.

Answer 28

Choice "d" is correct. The basis for Eng's interest in the partnership is $75,000 computed as follows: Cash $ 50,000 Adjusted basis of eqpt. 25,000 Total partnership interest basis $ 75,000 Rule: In general, a partner's basis in his/her partnership interest will be the amount of cash contributed plus the adjusted basis of any property contributed in exchange for the interest. Choices "b", "a", and "c" are incorrect, per the above rule.

Answer 29

Choice "a" is correct. Under the Internal Revenue Code, guaranteed payments are payments to partners for services rendered or the use of capital without regard to partnership income. Choices "c", "d", and "b" are incorrect, per the above definition of a guaranteed payment.

Answer 30

Choice "b" is correct. Adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction. Rule: Upon dissolution, the "basis" of property distributed to a partner will be the partner's "adjusted basis" in the partnership, net of any cash distributions (not FMV of property distributed). Choice "a" is incorrect. In a liquidation, the basis of property received is reduced to the extent of cash received in the liquidating distribution. Choice "c" is incorrect. The basis of property distributed in a complete liquidation is the adjusted basis of the property to the partnership net of any cash distributed. Choice "d" is incorrect, per the above rule.

Answer 31

Choice "b" is correct. Both the "at-risk" limits and the "passive loss" limits will apply in determining a partner's deduction for that partner's share of partnership losses. Partners are subject to the basis limitations on losses, the "at-risk" provisions and the passive loss limitations on the losses passed through from the partnership. Choices "a", "c", and "d" are incorrect, per the above.

Answer 32

Choice "d" is correct. Rule: A partner's basis for his partnership interest consists of the amount of cash paid for the interest, plus the adjusted basis of property transferred for the interest, plus the new partner's share of partnership liabilities. Choices "b", "a", and "c" are incorrect, per the above rule.

Answer 33

Choice "a" is correct. Rule: The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner's holding period of the capital asset began. Choices "d", "c", and "b" are incorrect, per the above rule.

Answer 34

Choice "b" is correct. There would be a $35,000 decrease of Kane's tax basis in his capitalize partnership interest. Rule: Basis in a partnership is increased by debt that a partner is personally liable for and decreased by the amount of liabilities a partner is relieved of. Kane's 25% of debt ($300,000 times 25%) $ 75,000 Kane's 20% of debt ($300,000 times 20%) (60,000) Reduction of basis due to admission of new partner 15,000 Add: Reduction of basis for the $100,000 general partnership liability ($100,000 times 20%) 20,000 Total reduction $ 35,000 Choices "d", "c", and "a" are incorrect, per the above rule and calculation.

Answer 35

Choice "b" is correct. Such a partnership will be terminated for income tax purposes when either fifty percent or more of the total interest in capital and profits is sold within a 12-month period or the partnership's business and financial operations are discontinued.

Answer 36

Choice "b" is correct. Only the filing fees incident to the creation of the partnership are eligible expenditures. Generally speaking, expenditures up to $5,000 can be immediately deducted. Remaining expenses are amortized over 180 months.

Answer 37

Choice "a" is correct. Kelly must include as ordinary income the fair market value of the asset received, a 10% interest in a partnership valued at $100,000, or $10,000. It is ordinary income since Kelly provided services for the partnership interest. Choice "d" is incorrect. Use Kelly's share of the fair market value of the partnership, not its adjusted basis. Choice "c" is incorrect. Use Kelly's share of the fair market value of the partnership, not its adjusted basis. Also, Kelly must include this value as ordinary income since Kelly provided services for the partnership interest. Choice "b" is incorrect. The $10,000 is ordinary income because Kelly provided services for the partnership interest.

Answer 38

Choice "d" is correct. Strom's basis in the land ($16,000) carries over as an element of his basis in Ace. The assumption by Ace of Strom's liabilities on the land ($24,000) is treated as a distribution of money to Strom, which reduces his basis temporarily to negative $8,000. Then, through his status as a partner of Ace, Strom is treated as re-assuming 25% of the liability, or $6,000, and this increases his basis temporarily to negative $2,000. Since it is impossible to have negative basis, Strom realizes a gain (usually capital) of $2,000, the amount necessary to bring his basis up to zero. Choice "c" is incorrect. Strom's basis in Ace is reduced because of the liability assumed by Ace. Choice "a" is incorrect. Strom's basis in the land ($16,000) carries over as an element of Strom's basis in Ace. Choice "b" is incorrect. Strom's basis in the land ($16,000) carries over as an element of Strom's basis in Ace. Then, Strom's basis in Ace is reduced because of the liability assumed by Ace.

Answer 39

Choice "d" is correct. Dean's basis in Target is calculated by starting with his basis at January 1, 20X1 ($20,000) and adding his 25% share of partnership income items for the year. The nontaxable municipal bond income increases his basis as does the ordinary income. Target's income items include the municipal bond income ($12,000) plus the ordinary income ($40,000) for a total of $52,000, of which Dean's 25% share is $13,000. This is added to the beginning basis of $20,000, and the $8,000 cash distribution is deducted leaving a balance at December 31, 20X1, of $25,000. Choice "a" is incorrect. This answer fails to take into account Dean's distributive share of the ordinary income of Target. Choice "c" is incorrect. This answer appears to be a distracter. Choice "b" is incorrect. This answer fails to take into consideration the effect on Dean's basis of both the nonliquidating cash distribution and Dean's distributive share of Target's municipal bond interest income.

Answer 40

Choice "c" is correct. The guaranteed payment increases Peters' ordinary income by $16,000 but does not affect Peters' tax basis because guaranteed payments are not undistributed earnings (they are distributed to the partner). The answer is "II only." Rule: Guaranteed payments are reasonable compensation paid to a partner for services rendered without regard to the partner's ratio of income. They are allowable tax deductions to the partnership and ordinary income to the partner receiving them. Note: A guaranteed payment will not increase a partner's basis in the partnership because the payment has been distributed to the partner. Choices "b", "a", and "d" are incorrect, per the above rule and note.

Answer 41

Choice "b" is correct. Evan's income from Vista is $37,500, calculated as follows: Partnership income before guaranteed payment to Evan $ 80,000 Deductible guaranteed payment to Evan _(20,000)_ Net taxable partnership income 60,000 Evan's share of partnership income _25%_ Evan's amount of partnership income 15,000 Evan's 25% share of Vista's $10,000 capital gain 2,500 Evan's guaranteed payment from Vista _20,000_ 20X1 Vista income reportable on Evan's return $ 37,500 Choice "d" is incorrect. Evan needs to calculate the percentage of partnership income allocable to his share of the partnership. In addition Evan needs to include the guaranteed payment. Choices "c" and "a" are incorrect. Evan needs to report more than the guaranteed payment and share of capital gain on his tax return. Evan needs to calculate the percentage of partnership income allocable to his share of the partnership.

Answer 42

Choice "c" is correct. The $20,000 current distribution of cash is first applied to Jody's $50,000 basis, reducing it to $30,000. The current distribution of property is then applied at its $40,000 basis. Since Jody's remaining basis is $30,000, only $30,000 is applied to the property distribution, resulting in $0 taxable gain to Jody and $0 remaining basis in the partnership. Choice "a" is incorrect. First, the cash distribution is fully applied, then the property distribution is applied at adjusted basis until the partner's basis is zero. No gain is generally recognized by the partner as a result of a current distribution unless the cash distributed is in excess of the partner's basis. In that case, the excess would be a gain to the partner (to avoid a negative basis). Choice "b" is incorrect. The $10,000 gain is not recognized since the property distributed takes on a $30,000 basis to the partner. Choice "d" is incorrect. First, the cash distribution is fully applied, then the property distribution is applied at adjusted basis until the partner's basis is zero. No gain is generally recognized by the partner as a result of a current distribution unless the cash distributed is in excess of the partner's basis. In that case, the excess would be a gain to the partner (to avoid a negative basis).

Answer 43

Choice "c" is correct. Jody's basis in the distributed property is $30,000, Jody's remaining basis in the partnership after the cash distribution: Jody's partnership basis $ 50,000 Cash distribution and Jody's basis in cash (20,000) $ 30,000 Property distribution and Jody's basis in the property (30,000) \* Jody's partnership basis after distributions $ 0 \* If the partner's basis in the partnership ($30,000) is less than the property's basis ($40,000), the partner's basis in the property is limited to her basis in the partnership ($30,000). Choice "b" is incorrect. $0 is Jody's basis in the partnership after the distributions, not her basis in the property. Choice "a" is incorrect. The partner's basis in distributed property is equal to the partnership's basis in the distributed property, not the fair market value. In this instance, because the partnership's basis exceeds the partner's basis in the partnership, the partner's basis is limited. Choice "d" is incorrect. If the partner's basis in the partnership is less than the property's basis, the partner's basis in the property is limited to her basis in the partnership. Remember, the cash distributed must be subtracted from the partner's basis first.

Answer 44

Choice "a" is correct. In a liquidating distribution, the $100,000 cash is applied first to the $180,000 partnership basis, reducing it to $80,000. Even though the partnership's basis in the real estate is only $70,000, Vance's basis in the real estate will be his partnership basis ($80,000) since this is the last asset distributed and it is a liquidating distribution (i.e., Vance's partnership basis must be reduced to zero). Neither Vance nor the partnership recognizes any gain or loss from the distribution. Choice "c" is incorrect. The real estate's fair market value is not used. Choice "b" is incorrect. $83,000 is the average of the $70,000 basis and the $96,000 fair market value. The average of the two amounts is not used. Choice "d" is incorrect. Even though the partnership's basis in the real estate is $70,000, Vance's basis in the real estate will be stepped up to $80,000, Vance's remaining basis in the partnership. Because this is a liquidating distribution, Vance's basis in the partnership must be reduced to zero.

Answer 45

Choice "a" is correct. When a partner sells his partnership interest, capital gain or loss on the sale is recognized. To the extent that there are Sec. 751(a) hot assets (unrealized receivables or substantially appreciated inventory), the partner must recognize ordinary income or loss. In this case, the partnership has no Sec. 751 assets. The amount realized less the partner's basis in the partnership is the capital gain or loss. The amount realized is $55,000 ($30,000 cash received + $25,000 relief of debt). The partner's basis in the partnership is $40,000. Thus, the capital gain is $55,000 − $40,000, or $15,000. Choice "c" is incorrect. Since there are no Sec. 751 assets, the gain or loss must be capital, not ordinary. Choice "b" is incorrect. Since there are no Sec. 751 assets, the gain or loss must be capital, not ordinary. Choice "d" is incorrect. The amount realized must include the $25,000 debt relief.

Answer 46

Choice "c" is correct. A partnership calculates net business income or loss and passes each partner's distributive share through on the Schedule K-1. Guaranteed payments paid to partners for services rendered or for the use of capital, without regard to partnership income or profit and loss sharing ratios, are an allowable tax deduction to the partnership and are separately reported on Schedule K-1 for inclusion on the partner's tax return. Choice "d" is incorrect. Salaries paid to non-partner employees are deducted from revenues to arrive at net business income or loss at the partnership level. Each partner's distributive share of the net income or loss is then reported on the Schedule K-1. Choice "a" is incorrect. Advertising expenditures incurred by the partnership are deducted from revenues to arrive at net business income or loss at the partnership level. Each partner's distributive share of the net income or loss is then reported on the Schedule K-1. Choice "b" is incorrect. Depreciation of assets used in the business is deducted from revenues to arrive at net business income or loss at the partnership level. Each partner's distributive share of the net income or loss is then reported on the Schedule K-1.

Answer 47

Rule: Per IRC Section 706(b), a partnership tax year must have the same taxable year as the common taxable year of the partners that, in the aggregate, have interest greater than 50%, which is determined based on the "testing day," the first day of the partnership's tax year (not considering the majority interest rule). Note: After a change is made to the "majority-interest" tax year end, the partnership does not have to change to another tax year for two years following the year of change. Exceptions to the rule exist. (1) If there is no "majority-interest" tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5% or more of the income or capital of the partnership). (2) If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted. Choice "d" is correct. In the absence of election to adopt an annual accounting period, the required tax year for a partnership is the tax year of one or more partners who, in aggregate, have more than 50% interest in profits and capital, per the majority interest rule. Choice "a" is incorrect. If there is no "majority-interest" tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5% or more of the income or capital of the partnership). If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted. Choice "c" is incorrect. A partnership may be able to avoid the rules above if it has a business purpose for selecting a different tax year and if this can be established with the IRS. In this case, a calendar year (assuming it is not already required because it coincides with the general rule or the exceptions identified above) may be used. Choice "b" is incorrect. If there is no "majority-interest" tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5% or more of the income or capital of the partnership).

Answer 48

Rule: IRC Section 731 controls the taxability of partnership distributions. A partner who receives a distribution from a partnership realizes gain only to the extent that he receives cash in excess of the adjusted basis of his interest in the partnership immediately before the distribution. Choice "c" is correct. This distribution is a current distribution (a distribution other than in liquidation of an entire partnership interest). Brown is a 50% partner and he/she received ½ of the partnership's income in cash. Choice "a" is incorrect. There is nothing in the question that indicates that the distribution is a liquidating distribution, partial or not. Choice "b" is incorrect. There is nothing in the question that indicates that the distribution is a liquidating distribution of any kind. Choice "d" is incorrect. This distribution is not a disproportionate distribution since Brown is a 50% partner and he/she received ½ of the partnership's income.

Answer 49

Explanation ## Footnote Choice "a" is correct. As a general rule, a partner who sells or exchanges his or her partnership interest has a recognized capital gain or loss. The capital gain or loss is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. An exception to the capital gain treatment is on any gain that represents a partner's share of "hot assets". Any gain that represents a partner's share of hot assets is treated as ordinary income. Hot assets are: (1) Unrealized receivables and, (2) Appreciated inventory. Choice "b" is incorrect. Cash is not a hot asset. Choice "c" is incorrect. Section 1231 assets are not hot assets. Choice "d" is incorrect. Capital assets are not hot assets.

Answer 50

Choice "b" is correct. A partner's share of operating losses reduces that partner's basis. Likewise, a reduction in a partner's share of liabilities reduces basis. A partner's basis will increase by that partner's share of income such as dividends and interest. Initial basis in partnership interest $ 32,500 Equal share of interest and dividends 4,000 Equal share of operating loss (15,000) Share of decreased partnership liabilities at year end _(8,000)_ Basis of George's partnership interest at year end $ 13,500 Choice "d" is incorrect. Reducing liabilities decreases basis. Choice "c" is incorrect. Equal partners would divide partnership activity equally. Choice "a" is incorrect. Operating losses are a reduction of basis.

Answer 51

Choice "b" is correct. A partner must include in income their share of partnership income (even if not received) on their tax return in the taxable year within which the taxable year of the partnership ends. This income includes guaranteed payments. Withdrawals/distributions are not a taxable event, yet will decrease the partner's basis. Choice "c" is incorrect. Cash distributions are not included in income. Choice "a" is incorrect. Guaranteed payments are taxable income to the receiving partner. Choice "d" is incorrect. Distributions are not income, since the money was taxed when the partnership earned such money, but would reduce the partner's basis.

Answer 52

Choice "b" is correct. A partner's initial basis in their partnership interest is determined by, among other items, the adjusted basis of appreciated property contributed. Such basis is reduced by liabilities assumed by the other partners. When property that is subject to a liability is contributed to a partnership and the subsequent decrease in the partner's individual liability exceeds partnership basis, the excess amount is treated like taxable boot, which means there is a taxable gain to the partner. Initial Basis: $40,000 (basis in asset contributed to the partnership) Less: liabilities assumed by others: (54,000) ($60,000 in total liabilities less 10% retained) Net Basis: ($14,000) Excess liability, taxable to Campbell Campbell's basis in partnership: $0 Choice "d" is incorrect. Basis determination begins with the contributed asset's basis, not fair market value. Choice "c" is incorrect. The incoming partner is considered as being relieved of 90% of the liability because the partner is purchasing a 10% interest. Therefore, 90% of the liability is the responsibility of the other partners. Choice "a" is incorrect. Basis determination begins with the contributed asset's basis, not fair market value.

Answer 53

Choice "d" is correct. Losses between a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale or exchange of property are not allowed. Thus the disallowance of the $6,000 loss would make the ordinary income $91,000 and 80% of that is $72,800. Choice "c" is incorrect. This results if the loss is subtracted again from the partnership's ordinary income [($85,000 - 6,000) x 80% = $63,200]. Choice "b" is incorrect. This answer did not disallow the loss but merely took 80% of the $85,000. Choice "a" is incorrect. This answer is the total loss of the partnership. It must be multiplied by the partner's ownership interest.

Answer 54

Choice "d" is correct. In a liquidating distribution, a partner's basis in the distributed property is the same as the adjusted basis of his partnership interest reduced for any monies actually received. King's basis in his partnership interest was $32,000 less $2,000 cash received, leaving $30,000 of basis to be allocated to the realty received. Choices "a", "c", and "b" are incorrect, per the above explanation.

Answer 55

Explanation ## Footnote Choice "d" is correct. A partner's basis in his partnership interest is the combination of his capital account and his share of liabilities that he is personally liable for. The beginning basis of $50,000 should be decreased by each partner's share of the $30,000 operating loss, or $15,000, and increased for each partner's share of the liabilities, or $40,000, for current calendar year end basis of $75,000. Choices "b", "a", and "c" are incorrect, per the above explanation.

Answer 56

Choice "a" is correct. Following the basis formula yields: + Cash $ 0 + Adjusted basis of property 100,000 − Liabilities (amount assumed by other partners) 75,000 + FMV of services rendered (if applicable) 0 + Liabilities - other partner's liabilities assumed by the incoming partner 0 = basis $ 25,000 Choices "b", "d", and "c" are incorrect, per the above calculation.

Answer 57

Choice "c" is correct. The deduction of the ordinary loss is limited to Junior's basis and any at risk amounts. Junior's basis is calculated as $40,000 + $12,500 capital gain - $5,000 charitable contributions = $47,500; thus the ordinary loss deducted on his return would be limited to $47,500. Choices "b" and "d" are incorrect. Both of these options incorrectly state the ordinary loss. Choice "b" did not take into account the limitation to basis and choice "d" did not take into account the adjustment of basis by the other income/deduction items for the year. Choice "a" is incorrect. The loss, capital gain, and charitable contributions are all stated separately - income from operations is passed through as a net number to the partners and charitable contributions and capital gain are separately stated items, not netted in that figure.

Answer 58

Choice "c" is correct. Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest (note: when contributed property is subject to a liability, if the decrease in the contributing partner's individual basis exceeds the partner's partnership basis, the excess amount is treated like taxable boot and is a gain to that partner). So, given the facts in this question, Turner and Reed will recognize no income or gain. On the other hand, the value of a partnership acquired for services is ordinary income to the partner rendering those services. So, Summer must recognize $50,000 of ordinary income on account of Summer's rendering to the partnership $50,000 worth of services in exchange for a partnership interest. Choices "d", "b", and "a" are incorrect per the above rules.

Answer 59

Choice "b" is correct. General rules: A nonliquidating distribution to a partner is nontaxable. In nonliquidating distribution to a partner, the basis of property received will be the same as the basis in the hands of the partnership immediately prior to the nonliquidating distribution. Distributions to a partner reduce the partner's basis by the cash the partner receives and by the partnership's adjusted basis in property which the partner receives. Exception to the general rule (the exception does not apply to the facts set forth in the question): Gain is recognized only to the extent that cash (including the partner's share of partnership liabilities are assumed by other partners) distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. In this question, the partner received no cash, and the partner's share of partnership liabilities did not change. So, the partner will recognize no gain with respect to the distribution. Although the partnership's adjusted basis in the distributed property was $20,000, because the partner's basis in the partner's partnership interest was only $10,000, the adjusted basis of the property which the partner received will be limited to $10,000. The new basis in the partnership interest will be reduced from $10,000 to -0-. Choices "a", "c", and "d" are incorrect per the above rules.

Answer 60

Choice "d" is correct. This LLC has elected not to be treated as a corporation. Therefore, the rules for partnerships will apply. The general rule is that the partnership's basis in the contributed property is the carryover basis of the contributor. So the $5,000 basis to Baker becomes the carryover $5,000 basis to Apple. Choices "b", "c", and "a" are incorrect per the above rule and per the above computations.

Answer 61

Choice "a" is correct. In a liquidating distribution, we have to "zero out to get out." Partnership basis starts at $26,000. The cash distribution of $12,000 reduces the partnership basis to $14,000. The land then is distributed with that basis of $14,000, as we zero out to get out. Choice "c" is incorrect. The correct answer is not zero. It is $14,000, as indicated above. Choice "d" is incorrect. The land currently has an adjusted basis of $10,000. However, as indicated above, it becomes $14,000 upon liquidation, as we zero out to get out. Choice "b" is incorrect. The land currently has a FMV of $30,000. However, as indicated above, the basis becomes $14,000 upon liquidation, as we zero out to get out.

Answer 62

Choice "c" is correct. Skinner's basis in partnership interest is calculated as follows: Cash contributed $ 5,000 Basis of land contributed 12,000 Less mortgage on land assumed by other partners (80% of $10,000) (8,000) Recourse liabilities assumed by Skinner (20% of $20,000) 4,000 Skinner's basis $ 13,000 Choices "b", "d", and "a" are incorrect per the above calculation.

Answer 63

Choice "b" is correct. Nonseparately stated income is calculated as follows: Revenues $ 120,000 Salaries (36,000) Guaranteed payments (10,000) Rent expense (21,000) Depreciation expense _(18,000)_ Total nonseparately stated income $ 35,000 Note: All other items listed in the question are separately stated. Choices "d", "a", and "c" are incorrect per the above calculation.

Answer 64

Choice "a" is correct. The difference between the tax basis of $60,000 and FMV of $100,000 on the date the partnership was formed is a built-in gain to partner Acre. Accordingly, the first $40,000 of gain is allocated to Acre and the remaining gain of $60,000 is then shared equally by all of the partners. Choices "d", "c", and "b" are incorrect per the above explanation.

Answer 65

Choice "c" is correct. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. The at-risk amount is also referred to as basis. Note that although we discuss this in the textbook for partnerships, the concept applies to all activities that have flow through income and losses. Choice "a" is incorrect. This is the rule for suspended passive activity losses, not suspended losses due to at-risk limitations. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. Choice "d" is incorrect. Losses in excess of the at-risk amount may not be deducted currently against income from other activities. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. Choice "b" is incorrect. Losses in excess of the at-risk amount are not carried back two years against activities with income and then carried forward for 20 years. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.

Answer 66

Choice "d" is correct. The general rule is that the basis of property received in a nonliquidating distribution is the same as the basis in the hands of the partnership immediately prior to the distribution. However, it is limited to the partner's basis in the partnership. This property has an adjusted basis to the partnership of $12,000. Johnson's basis in the partnership at the beginning of the year is $14,000. This is increased by 50% of the ordinary income of $6,000 and reduced by the cash distribution of $8,000. Basis in the partnership is therefore $9,000 ($14,000 + $3,000 – $8,000) before the property distribution. The basis of the property received is limited to the $9,000 partnership basis. Note: This results in Johnson having a zero basis in the partnership after the property distribution. Choice "a" is incorrect. $6,000 is simply the net income of DEF partnership for the year. Choice "c" is incorrect. $12,000 would be the adjusted basis of the property if it were not limited to Johnson's resulting $9,000 basis in the partnership. Choice "b" is incorrect. $15,000 is the FMV of the property.

Answer 67

Choice "d" is correct. Gain is recognized only to the extent that cash distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. Able's basis in the partnership immediately before the distribution is $30,000. The cash distribution is $25,000. This is not in excess of basis and there is a $5,000 basis remaining. Able's basis in the distributed property is the $5,000 remaining partnership basis. Choices "c", "b", and "a" are incorrect, per the above explanation.

Answer 68

Choice "b" is correct. Forman's basis in the partnership is $2,000 immediately before the liquidating distributions. The assets are divided equally. Forman receives $1,000 of the cash. This reduces the partnership basis to $1,000. Then we "zero out to get out." Forman's share of the property will receive a basis of $1,000. This essentially zeroes out the partnership interest. Choices "a", "d", and "c" are incorrect, per the above explanation.