REG 43 - Partnership Taxation 3 - Distibutions/Sales/Terminations Flashcards
As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland? A. $5,000 B. $25,000 C. $35,000 D. $40,000
C. The partner must report $25,000 of ordinary income and the $10,000 guaranteed payment. The distribution does not generate additional income since the partner has sufficient basis to absorb it.
On June 30, 2014, Berk retired from his partnership.
At that time, his capital account was $50,000 and his share of the partnership’s liabilities was $30,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2014.
Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of 2014 2015 $13,333 $26,667 $20,000 $20,000 $40,000 - - $40,000
2014 - $0
2015 - $40,000
Payments received by a retiring partner from the partnership in exchange for the partner’s interest in the partnership receive similar treatment to the receipt of a liquidating distribution. Thus, the retiring partner recognizes income only to the extent that “money” received exceeds the partner’s basis in the partnership interest. The assumption of a partner’s liabilities is viewed as being a “money” payment.
Immediately before retiring from the partnership, Berk had a balance of $50,000 in his capital account and his share of the liabilities amounted to $30,000, putting his adjusted basis in the partnership interest at $80,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2014. Thus, in 2014, Berk would receive $60,000 in distributions of “money,” $30,000 in liabilities assumed and $30,000 in cash payments ($5,000 per month multiplied by 6 months). The payments made to Berk in 2015 are not recognized in 2014 because Berk had no right to receive the income until paid in 2015.
Since Berk’s basis in the partnership interest, $80,000, is greater than the amount of “money’” received, $60,000, Berk would not recognize any income in 2014. This transaction would reduce Berk’s basis in the partnership interest by the $60,000 of income not recognized, going from $80,000 immediately before Berk retired to $20,000 at the end of 2014. Berk received an additional $60,000 in cash payments ($5,000 per month multiplied by 12 months) in 2015. Of this amount, Berk would recognize $40,000 in 2015, the $60,000 in cash payments less the $20,000 in basis not absorbed at the end of 2014.
Thus, Berk should not report any income from the retirement payments received in 2014, but he should report $40,000 from the payments in 2015.
T/F: A partner cannot recognize a loss on the liquidation of a partnership.
False.
If the distribution is in cash and exceeds the partner’s basis in the partnership, then a loss can be recognized. However, no gain or loss will be recognized if the distribution consists of property.
T/F: For partners to recognize a loss on a liquidating distribution, the distribution must consist of cash, inventory, and unrealized receivables.
True
Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership while Benz, Clark, and Day each owns a 20% interest. All use a calendar year.
At November 1, 2014, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business.
Which one of the following statements is correct for tax purposes?
A. Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day.
B. In forming Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day.
C. Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS.
D. Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form.
A. When a partnership divides into two or more partnerships, the original partnership is continued in each of the new partnerships which contain partners that controlled 50 percent or more of the partnership interest in the original partnership.
Since Abel and Benz own 40 percent and 20 percent interests, respectively, in the capital and profits of Partnership Abel, Benz, Clark and Day, the new Partnership Abel and Benz is considered a continuation of Partnership Abel, Benz, Clark and Day. However, Clark and Day only own a combined 40 percent interest in the capital and profits of Partnership Abel, Benz, Clark and Day.
Hence, the Partnership Clark and Day is not considered a continuation of Partnership Abel, Benz, Clark and Day.
On December 31, 2014, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities.
On that date, the adjusted basis of Clark’s partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory.
What is Clark's gain or loss on the sale of his partnership interest? A. Ordinary loss of $10,000. B. Ordinary gain of $15,000. C. Capital loss of $10,000. D. Capital gain of $15,000.
D. If a partner sells his/her interest in the partnership, the partner recognizes a capital gain equal to the amount that the payment exceeds the partner’s adjusted basis in the partnership.
Clark’s adjusted basis in the partnership is $40,000 immediately before the sale. The assumption of Clark’s share of the partnership’s liabilities is viewed as a distribution to Clark. Thus, Clark’s adjusted basis must be reduced by the assumption of his share of the partnership’s liabilities, putting his adjusted basis at $15,000. The payment of $30,000 received by Clark exceeds his adjusted basis of $15,000 by the amount of $15,000. Hence, Clark must recognize a capital gain of $15,000.
"Hot assets" of a partnership would include which of the following? A. Cash. B. Unrealized receivables. C. Section 1231 assets. D. Capital assets.
B. “Hot assets” for a partnership includes ONLY inventory and unrealized receivables.
T/F: Unrealized receivables will produce ordinary income on the sale of a partnership interest.
True
T/F: Termination of a partnership requires a closing of the partnership tax year.
True
