Chapter 21 Dispositions of Partnership Interests and Partnership Distributions

1. [LO 4] Rufus is a one-quarter partner in the Adventure partnership. On January 1 of the current year, Adventure distributes $13,000 cash to Rufus in complete liquidation of his interest. Adventure has only capital assets and no liabilities at the date of the distribution. Rufus’ basis in his partnership interest is $18,500.

a. What is the amount and character of Rufus’ recognized gain or loss?

b. What is the amount and character of Adventure’s recognized gain or loss?

c. If Rufus’ basis is $10,000 at the distribution date rather than $18,500, what is the amount and character of Rufus’ recognized gain or loss?

1. [LO 4] The Taurin Partnership (calendar-year-end) has the following assets as of December 31 of the current year:

Tax Basis FMV

Cash $ 45,000 $ 45,000

Accounts receivable 15,000 30,000

Inventory 81,000 120,000

Totals $ 141,000 $ 195,000

On December 31, Taurin distributes $15,000 of cash, $10,000 (FMV) of accounts receivable, and $40,000 (FMV) of inventory to Emma (a 1/3 partner) in termination of her partnership interest. Emma’s basis in her partnership interest immediately prior to the distribution is $40,000.

a. What is the amount and character of Emma’s recognized gain or loss on the distribution?

b. What is Emma’s basis in the distributed assets?

c. If Emma’s basis before the distribution was $55,000 rather than $40,000, what is Emma’s recognized gain or loss and what is her basis in the distributed assets?

1. [LO 4] Melissa, Nicole, and Ben are equal partners in the Opto partnership (calendar year-end). Melissa decides she wants to exit the partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The partnership has no liabilities and holds the following assets as of January 1:

Tax Basis FMV

Cash $ 18,000 $ 18,000

Accounts receivable -0- 24,000

Stock investment 7,500 12,000

Land 30,000 36,000

Totals $ 55,500 $ 90,000

Melissa receives one-third of each of the partnership assets. She has a basis in her partnership interest of $25,000.

a. What is the amount and character of any recognized gain or loss to Melissa?

b. What is Melissa’s basis in the distributed assets?

c. What are the tax implications (amount and character of gain or loss and basis of assets) to Melissa if her outside basis is $11,000 rather than $25,000?

d. What is the amount and character of any recognized gain or loss from the distribution to Opto?

48. [LO 4] {Planning} Lonnie Davis has been a general partner in the Highland Partnership for many years and is also a sole proprietor in a separate business. To spend more time focusing on his sole proprietorship, he plans to leave Highland and will receive a liquidating distribution of $50,000 in cash and land with a fair market value of $100,000 (tax basis of $120,000). Immediately before the distribution, Lonnie’s basis in his partnership interest is $350,000 which includes his $50,000 share of partnership debt. The Highland Partnership does not hold any hot assets.

a. What is the amount and character of any gain or loss to Lonnie?

b. What is Lonnie’s basis in the land?

c. What is the amount and character of Lonnie’s gain or loss if he holds the land for thirteen months as investment property and then sells it for $100,000?

d. What is the amount and character of Lonnie’s gain or loss if he places the land into service in his sole proprietorship and then sells it thirteen months later for $100,000?

e. Do your answers to parts c. and d. above suggest a course of action that would help Lonnie to achieve a more favorable tax outcome?

49. [LO 4] AJ is a 30% partner in the Trane partnership, a calendar year end entity. On January 1, AJ has an outside basis in his interest in Trane of $73,000, which includes his share of the $50,000 of partnership liabilities. Trane generates $42,000 of income during the year and does not make any changes to its liabilities. On December 31, Trane makes a proportionate distribution of the following assets to AJ to terminate his partnership interest:

Tax Basis FMV

Inventory $ 55,000 $ 65,000

Land 30,000 25,000

Totals $ 85,000 $90,000

a. What are the tax consequences (gain or loss, basis adjustments) of the distribution to Trane?

b. What is the amount and character of any recognized gain or loss to AJ?

c. What is AJ’s basis in the distributed assets?

d. If AJ sells the inventory four years after the distribution for $70,000, what is the amount and character of his recognized gain or loss?

50. [LO 4] David’s basis in the Jimsoo Partnership is $53,000. In a proportionate liquidating distribution, David receives cash of $7,000 and two capital assets: land one with a fair market value of $20,000 and a basis to Jimsoo of $16,000 and land two with a fair market value of $10,000 and a basis to Jimsoo of $16,000. Jimsoo has no liabilities.

a. How much gain or loss will David recognize on the distribution? What is the character of any recognized gain or loss?

b. What is David’s basis in the distributed assets?

c. If the two parcels of land had been inventory to Jimsoo, what are the tax consequences to David (amount and character of gain or loss and basis in distributed assets)?

51. [LO 4] Megan and Matthew are equal partners in the J & J partnership (calendar-year-end entity). On January 1 of the current year, they decide to liquidate the partnership. Megan’s basis in her partnership interest is $100,000 and Matthew’s is $35,000. The two partners receive identical distributions with each receiving the following assets:

Tax Basis FMV

Cash $ 30,000 $ 30,000

Inventory 5,000 6,000

Land 500 1,000

Totals $ 35,500 $37,000

a. What is the amount and character of Megan’s recognized gain or loss?

b. What is Megan’s basis in the distributed assets?

c. What is the amount and character of Matthew’s recognized gain or loss?

d. What is Matthew’s basis in the distributed assets?

52. [LO 4] Bryce’s basis in the Markit Partnership is $58,000. In a proportionate liquidating distribution, Bryce receives the following assets:

Tax Basis FMV

Cash $8,000 $8,000

Land A 20,000 45,000

Land B 20,000 25,000

a. How much gain or loss will Bryce recognize on the distribution? What is the character of any recognized gain or loss?

b. What is Bryce’s basis in the distributed assets?

53. [LO 4] {Planning} Danner Inc. has a $395,000 capital loss carryover that will expire at the end of the current tax year if it is not used. Also, Danner Inc. has been a general partner in the Talisman Partnership for three years and plans to end its involvement with the partnership by receiving a liquidating distribution. Initially, all parties agreed that Danner Inc.’s liquidating distribution would include $50,000 in cash and land with a fair market value of $400,000 (tax basis of $120,000). Immediately before the distribution, Danner’s basis in its partnership interest is $150,000 which includes its $100,000 share of partnership debt. The Talisman Partnership does not hold any hot assets.

a. What is the amount and character of any gain or loss to Danner Inc.?

b. What is Danner Inc.’s basis in the land?

c. Can you suggest a course of action that would help Danner Inc. to avoid the expiration of its capital loss carryover?

54. [LO 1, 5] {Planning} Bella Partnership is an equal partnership in which each of the partners has a basis in his partnership interest of $10,000. Bella reports the following balance sheet:

Assets: Tax Basis FMV

Inventory $ 20,000 $ 30,000

Land 10,000 15,000

Totals $ 30,000 $ 45,000

Liabilities and capital:

Capital – Toby 10,000

– Kaelin 10,000

– Andrew 10,000

Totals $ 30,000

a. Identify the “hot assets” if Toby decides to sell his partnership interest. Are these assets “hot” for purposes of distributions?

b. If Bella distributes the land to Toby in complete liquidation of his partnership interest, what tax issues should be considered?

55. [LO 1, 6] Michelle pays $120,000 cash for Brittany’s one-third interest in the Westlake Partnership. Just prior to the sale, Brittany’s basis in Westlake is $96,000. Westlake reports the following balance sheet:

Assets: Tax Basis FMV

Cash $ 96,000 $ 96,000

Land 192,000 264,000

Totals $ 288,000 $ 360,000

Liabilities and capital:

Capital – Amy 96,000

– Brittany 96,000

– Ben 96,000

Totals $ 288,000

a. What is the amount and character of Brittany’s recognized gain or loss on the sale?

b. What is Michelle’s basis in her partnership interest? What is Michelle’s inside basis?

c. If Westlake were to sell the land for $264,000 shortly after the sale of Brittany’s partnership interest, how much gain or loss would the partnership recognize?

d. How much gain or loss would Michelle recognize?

e. Suppose Westlake has a §754 election in place. What is Michelle’s special basis adjustment? How much gain or loss would Michelle recognize on a subsequent sale of the land in this situation?

56. [LO 4, 6] Cliff’s basis in his Aero partnership interest is $11,000. Cliff receives a distribution of $22,000 cash from Aero in complete liquidation of his interest. Aero is an equal partnership with the following balance sheet:

Assets: Tax Basis FMV

Cash $ 22,000 $ 22,000

Investment 8,800 8,800

Land 2,200 35,200

Totals $ 33,000 $ 66,000

Liabilities and capital:

Capital – Chris 11,000

– Cliff 11,000

– Cooper 11,000

Totals $ 33,000

a. What is the amount and character of Cliff’s recognized gain or loss? What is the effect on the partnership assets?

b. If Aero has a §754 election in place, what is the amount of the special basis adjustment?

57. [LO 4, 6] Erin’s basis in her Kiybron partnership interest is $3,300. Erin receives a distribution of $2,200 cash from Kiybron in complete liquidation of her interest. Kiybron is an equal partnership with the following balance sheet:

Assets: Tax Basis FMV

Cash $ 2,200 $ 2,200

Stock (investment) 1,100 2,200

Land 6,600 2,200

Totals $ 9,900 $ 6,600

Liabilities and capital:

Capital – Erin 3,300

– Carl 3,300

– Grace 3,300

Totals $ 9,900

a. What is the amount and character of Erin’s recognized gain or loss? What is the effect on the partnership assets?

b. If Kiybron has a §754 election in place, what is the amount of the special basis adjustment?

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58. [LO 4, 6] Helen’s basis in Haywood partnership is $270,000. Haywood distributes all the land to Helen in complete liquidation of her partnership interest. The partnership reports the following balance sheet just before the distribution:

Assets: Tax Basis FMV

Cash $ 220,000 $ 220,000

Stock (investment) 480,000 220,000

Land 110,000 220,000

Totals $ 810,000 $ 660,000

Liabilities and capital:

Capital – Charles $ 270,000

– Esther 270,000

– Helen 270,000

Totals $ 810,000

a. What is the amount and character of Helen’s recognized gain or loss? What is the effect on the partnership assets?

b. If Haywood has a §754 election in place, what is the amount of the special basis adjustment?