Tax CHP 10 Answer Key

Chapter 10 - Dispositions of Partnership Interests and Partnership Distributions
Chapter 10
Dispositions of Partnership Interests and Partnership Distributions
SOLUTIONS MANUAL
Discussion Questions
1. [LO 1] Joey is a 25 o!ner of Loopy LLC. "e no #on$er !ants to be in%o#%ed in the
business. &hat options does Joey ha%e to e'it the business(
Answer:
Joeys two most common options are to sell or exchange his interest in the LLC to a
third party or to have the LLC liquidate his interest. Joey may also exchange his
interest for corporate stock give the interest away or transfer the interest upon his
death.
2. [LO 1] Co)pare and *ontrast the a$$re$ate and entity approa*hes for a sa#e of a
partnership interest.
Answer:
!nder the aggregate approach the disposition of a partnership interest represents a
sale of the partners share of each of the partnership assets. "his approach would
require complex tax rules #ecause the partner would need to allocate the sales proceeds
among the different assets and determine the character of the gain or loss from each
asset.
!nder the entity approach the sale of a partnership interest would #e very similar to
the sale of corporate stock. "he partner would recogni$e capital gain or loss on the sale
#ased on the difference #etween the sales price and the partners tax #asis in the
+. [LO 1] &hat restri*tions )i$ht pre%ent a partner fro) se##in$ his partnership interest to
a third party(
Answer:
%artnership agreements may specify whether a partner may voluntarily leave the
partnership. &f the agreement does not allow for a voluntary withdrawal the
partnership may need to #e dissolved to effect the termination.
A partnership agreement may also specify whether a partner may assign his interest
to a third party. "his will determine if the partner is free to sell his interest to
someone other than the existing partners.
10-1
, 201- by .*/ra!-"i## 0du*ation. 1his is proprietary )ateria# so#e#y for authori2ed instru*tor use. 3ot authori2ed for sa#e or distribution in
any )anner. 1his do*u)ent )ay not be *opied4 s*anned4 dup#i*ated4 for!arded4 distributed4 or posted on a !ebsite4 in !ho#e or part.
-. [LO 1] 0'p#ain ho! a partner5s debt re#ief affe*ts his a)ount rea#i2ed in a sa#e of
Answer:
'hen a partner sells his partnership interest often he is relieved of his partnership
de#t o#ligations. As is the case in sales of other assets de#t relief will increase the
amount reali$ed in the sale of a partnership interest. (ecause the partners outside
#asis includes his share of the partnership de#t this negates the effect of de#t on the
gain or loss of the partnership interest sale.
5. [LO 1] 6nder !hat *ir*u)stan*es !i## the $ain or #oss on the sa#e of a partnership
interest be *hara*teri2ed as ordinary rather than *apita#(
Answer:
"o the extent that a gain or loss on the sale of a partnership interest is attri#uta#le to
certain ordinary income assets held #y the partnership the gain or loss is ordinary.
)*+,-a. defines the assets for which the gain or loss will #e treated as ordinary.
7. [LO 1] &hat are 8hot assets9 and !hy are they i)portant in the sa#e of a partnership
interest(
Answer:
/ot assets are assets defined in )*+, that will re0characteri$e the portion of a gain or
loss on the sale of a partnership interest as ordinary. "he two categories of hot assets
under )*+,-a. are unreali$ed receiva#les and inventory items. !nreali$ed receiva#les
include rights to receive payment for goods delivered or to #e delivered rights for
services rendered or to #e rendered and items treated as ordinary income if the
partnership were to sell the item at its fair market value.
!nder )*+,-a. inventory items include property held for sale to customers in the
ordinary course of #usiness and assets that are not capital assets or ),12, assets that
would produce ordinary income if sold #y the partnership. "o the extent that a seller
reali$es any amounts from the sale of his partnership interest that are attri#uta#le to
these unreali$ed receiva#les or inventory items the gain or loss will #e classified as
ordinary.
:. [LO 1] ;or an a**rua#-)ethod partnership4 are a**ounts re*ei%ab#e *onsidered unrea#i2ed
re*ei%ab#es( 0'p#ain.
Answer:
3o. 4or accrual0method taxpayers accounts receiva#le are not considered unreali$ed
receiva#les #ecause these amounts have already #een reali$ed and recogni$ed as
ordinary income.

10-2
<. [LO 1] Can a partnership ha%e unrea#i2ed re*ei%ab#es if it has no a**ounts re*ei%ab#e(
Answer:
"he definition of unreali$ed receiva#les is #road enough to encompass assets other
than accounts receiva#le. )*+,-a. also includes assets that are 35" capital assets or
),12, assets that would produce ordinary income if sold #y the partnership. &tems
such as depreciation recapture are also classified as unreali$ed receiva#les. "hus a
partnership can have unreali$ed receiva#les without having accounts receiva#le.
=. [LO 1] "o! do hot assets affe*t the *hara*ter of $ain or #oss on the sa#e of a partnership
interest(
Answer:
/ot assets cause a portion of the gain or loss on the sale of a partnership interest to #e
classified as ordinary rather than capital.
10. [LO 1] 6nder !hat *ir*u)stan*es *an a partner re*o$ni2e both $ain and #oss on the sa#e
of a partnership interest(
Answer:
A partner may recogni$e #oth gain and loss on the sale of a partnership interest in the
situation where a partners share of the unreali$ed gain in hot assets is greater than
his total gain or loss on the sale of his partnership interest.
11. [LO 1] >bsent any spe*ia# e#e*tions4 !hat effe*t does a sa#e of partnership interest ha%e
on the partnership(
Answer:
'hen one partner sells his partnership interest the sale generally has no effect on the
partnership. /owever if the partnership interest that is sold is large the sale may
terminate the partnership for tax purposes.
12. [LO 1] ?@esear*hA /enera##y4 a se##in$ partner5s *apita# a**ount *arries o%er to the
pur*haser of the partnership interest. 6nder !hat *ir*u)stan*es !i## this not be the *ase(
Answer:
&n the case where the selling partner contri#uted #uilt0in loss property to the
partnership the #uyers capital account will #e reduced #y the amount of the
inherent loss at the partnership interest sale date. "his treatment ensures that only
the partner that contri#uted the #uilt0in loss property to the partnership #enefits
from the inherent loss.
1+. [LO 2] &hat distin$uishes operatin$ fro) #iBuidatin$ distributions(
10-+
Answer:
5perating or current distri#utions are made to partners whose interests in the
partnership continue after the distri#ution. Liquidating distri#utions terminate a
partners interest in the partnership.
1-. [LO +] 6nder !hat *ir*u)stan*es !i## a partner re*o$ni2e a $ain fro) an operatin$
distribution(
Answer:
&n general partners do not recogni$e gain or loss from operating distri#utions.
/owever when the partnership distri#utes money that exceeds a partners #asis in
her partnership interest she will recogni$e a gain equal to the excess. &n this situation
the partner is una#le to ad6ust the #asis in property distri#uted in order to defer the
gain.
15. [LO +] 6nder !hat *ir*u)stan*es !i## a partner re*o$ni2e a #oss fro) an operatin$
distribution(
Answer:
A partner never recogni$es loss from operating distri#utions.
17. [LO +] In $enera#4 !hat effe*t does an operatin$ distribution ha%e on the partnership(
Answer:
"he partnership does not generally recogni$e gain or loss for tax purposes when
making an operating distri#ution. "his contrasts with the tax treatment of corporate
distri#utions in which the corporation recogni$es gain or loss on distri#utions of
property other than cash.
1:. [LO +] If a partner5s outside basis is #ess than the partnership5s inside basis in distributed
assets4 ho! does the partner deter)ine his basis of the distributed assets in an operatin$
distribution(
Answer:
&f only money is distri#uted the partner recogni$es gain equal to the difference
#etween the money distri#uted and the #asis in the partnership interest. &f the
partnership distri#utes money and hot assets only the partner defers gain recognition
#y reducing the #asis of the hot assets distri#uted. "he partner first allocates #asis to
the assets received equal to the partnership #asis -allocating to money first.. "hen the
partner allocates the required decrease -difference #etween the partnerships #asis in
the distri#uted assets and the partners outside #asis. to the assets with unreali$ed
depreciation. 4inally the partner allocates any remaining required decrease to the
distri#uted assets in proportion to their ad6usted #ases.
10--
&f the partnership distri#utes other property in addition to money and hot assets the
partner defers gain #y reducing the #asis in the other property distri#uted. "he
partner first assigns #asis to the distri#uted assets equal to the partnership #asis. "he
partner then allocates the required decrease to property other than money inventory
and unreali$ed receiva#les to the extent of the unreali$ed depreciation in the assets.
4inally the partner allocates any remaining required decrease to the other property
in proportion to the assets ad6usted #ases.
1<. [LO -] 6nder !hat *onditions !i## a partner re*o$ni2e $ain in a #iBuidatin$
distribution(
Answer:
&n the situation in which a partnership distri#utes only money and the amount
exceeds the partners #asis in her partnership interest she will recogni$e a gain equal
to the excess. &n this situation the partner is una#le to ad6ust the #asis in property
distri#uted in order to defer the gain.
1=. [LO -] 6nder !hat *onditions !i## a partner re*o$ni2e #oss in a #iBuidatin$ distribution(
Answer:
'hen a distri#ution includes only cash unreali$ed receiva#les and inventory and the
partners #asis in his partnership interest is greater than the sum of the #ases of the
distri#uted assets the partner will recogni$e a loss on a liquidating distri#ution. "he
partner treats the loss as a capital loss.
20. [LO -] Des*ribe ho! a partner deter)ines his basis in distributed assets in *ases in
!hi*h a partnership distributes on#y )oney4 in%entory4 andCor unrea#i2ed re*ei%ab#es in a
#iBuidatin$ distribution.
Answer:
&f the partners #asis in the partnership interest is greater than the #asis of the
distri#uted assets the partner is una#le to defer loss without changing the character
of the loss. "herefore the partner assigns a #asis to the money inventory and
unreali$ed receiva#les equal to the partnerships #asis in the distri#uted assets. "he
partner recogni$es a capital loss equal to the remaining outside #asis after the
distri#uted assets have #een assigned a carryover #asis.
&f the partners #asis in the partnership interest is less than the #asis of the
distri#uted assets the partner defers gain recognition #y reducing the #asis of the hot
assets distri#uted. "he required decrease is equal to the difference #etween the
partnerships #asis in the distri#uted assets and the partners outside #asis. "he
partner allocates the required decrease to assets with unreali$ed depreciation first to
eliminate existing losses in the distri#uted assets. "hen the partner allocates any
remaining required decrease to the distri#uted assets in proportion to their ad6usted
#ases.
10-5
21. [LO -] "o! does a partner deter)ine his basis in distributed assets !hen the partnership
distributes other property in addition to )oney and hot assets(
Answer:
&f the partners #asis in the partnership interest is greater than the #asis of the
distri#uted assets the partner defers loss recognition #y increasing the #asis of the
other property distri#uted. "he required increase equals the difference #etween the
partners outside #asis and the partnership #ases in the distri#uted assets. "he
partner first assigns a #asis to the distri#uted assets equal to the partnerships #asis.
"he partner then allocates the required increase to the other property with unreali$ed
appreciation. 4inally the partner allocates any remaining required increase to the
other property in proportion to their fair market values.
'hen the partnership distri#utes other property in addition to money inventory and
unreali$ed receiva#les and the partners #asis in the partnership interest is less than
the #asis of the distri#uted assets the partner defers gain #y reducing the #asis in the
other property distri#uted. "he partner first assigns #asis to the distri#uted assets
equal to the partnership #asis. "he partner then allocates the required decrease to
property other than money inventory and unreali$ed receiva#les to the extent of the
unreali$ed depreciation in the assets. 4inally the partner allocates any remaining
required decrease to the other property in proportion to the assets ad6usted #ases.
22. [LO 5] ?P#annin$A DE1 partnership distributes F54000 *ash and a par*e# of #and !ith a
fair )arGet %a#ue of F-04000 and a F254000 basis to the partnership to Da) H+0
partnerI. &hat fa*tors )ust Da) and DE1 *onsider in deter)inin$ the ta' treat)ent of
this distribution(
Answer:
7(" and 7am must determine if the distri#ution is an operating or a liquidating
distri#ution. 7am may not recogni$e a loss if the distri#ution is an operating
distri#ution. 7am must also consider whether the distri#uted cash exceeds her #asis in
7(". &f so she will recogni$e a gain on the distri#ution.
7(" and 7am must also consider whether the distri#ution is a disproportionate
distri#ution. "o the extent that 7(" has any hot assets this distri#ution to 7am will
represent a disproportionate distri#ution that can cause #oth 7am and 7(" to
recogni$e gain or loss on the distri#ution. 4inally 7am must determine her #asis in the
distri#uted land. /er determination of #asis will depend on whether the distri#ution is
an operating or a liquidating distri#ution.
2+. [LO 5] Dis*uss the under#yin$ *on*ern to ta' po#i*y )aGers in distributions in !hi*h a
partner re*ei%es )ore or #ess than his share of the partnership hot assets.
10-7
Answer:
&f a partners share of hot assets is altered from a distri#ution the primary concern is
that the partner will convert capital gain or loss to an ordinary gain or loss. "hus if a
partnership has )*+, property the partnership must determine whether any
distri#ution is proportionate or disproportionate. &f the distri#ution is
disproportionate the tax rules require the application of a complex set of rules to
ensure that the distri#utee partner recogni$es a proportionate amount of ordinary
and capital gain or loss commiserate to his interest in the partnership.
8ost operating distri#utions are proportionate and do not require the application of
these rules. /owever in cases where a partner is reducing his interest in the
partnership -e.g. from 9:; to 1+;. or in liquidating distri#utions the application of
these rules is more commonplace.
2-. [LO 5] In $enera#4 ho! do the disproportionate distribution ru#es ensure that partners
re*o$ni2e their share of partnership ordinary in*o)e(
Answer:
(asically the tax rules require partners to treat disproportionate distri#utions as
though three separate events occur. "o illustrate assume a partners interest in the
partnership hot assets decreases as a result of the distri#ution. 4irst the partner is
treated as though a hypothetical current distri#ution of the hot assets occurs. "he
partner is treated as though she receives the fair market value of the decrease in hot
assets as a current distri#ution.
3ext the rules require the partner to act as though she has sold the hot assets
received in the hypothetical distri#ution to the partnership for an amount equal to the
amount of the cold assets that her interest increases.
4inally the last step is to treat the amount of the distri#ution that is proportionate as
a normal distri#ution.
25. [LO 7] ?P#annin$A &hy !ou#d a ne! partner !ho pays )ore for a partnership interest
than the se##in$ partner5s outside basis !ant the partnership to e#e*t a spe*ia# basis
adJust)ent(
Answer:
An investor who pays more for a partnership interest than the sellers outside #asis
essentially has already paid for his share of any appreciation in the partnerships
assets. /owever a#sent a special #asis ad6ustment the #uyer inherits the sellers
inside #asis which does not reflect the gain reali$ed on the sale of the partnership
interest. As the partnership sells the appreciated assets the partners recogni$e their
share of the gain from the appreciated assets as a part of their annual distri#utive
share of the partnership income.
10-:
"his means that the #uyer pays for the appreciation of the assets as part of the
acquisition price of the partnership interest A3< recogni$es gain again when the
partnership recogni$es income from the sale of the appreciated assets. 5nly upon the
sale of his partnership interest will the over0taxation resolve itself. "he special #asis
ad6ustment under )*+9 eliminates the disparity #etween a new partners inside and
outside #asis.
27. [LO 7] List t!o *o))on situations that !i## *ause a partner5s inside and outside basis to
differ.
Answer:
"he most common situations in which discrepancies #etween inside and outside #ases
occur are following sales of partnership interests and following distri#utions in which
a partner receives more or less than her share of the inside #asis in the partnership
property.
2:. [LO 7] 0'p#ain !hy a partnership )i$ht not !ant to )aGe a K:5- e#e*tion to a##o!
spe*ia# basis adJust)ents.
Answer:
5nce the partnership makes a )*+9 election the election is #inding for all future sales
and distri#utions. "he election may only #e revoked with the consent of the &=7. "he
election may not always #e advantageous and limits the partnerships and partners
a#ility to tax plan. 4or example if partnership assets decrease in value an incoming
partner will have a downward #asis ad6ustment.
2<. [LO 7] &hen )i$ht a ne! partner ha%e an up!ard basis adJust)ent fo##o!in$ the
a*Buisition of a partnership interest(
Answer:
A new partner will have an overall upward #asis ad6ustment when he purchases an
interest in the partnership for an amount greater than his inside #asis immediately
following the acquisition. Although the overall #asis ad6ustment results in an increase
in asset #ases it is possi#le for some individual asset #ases to decrease if the asset has
declined in value while held #y the partnership.
2=. [LO 7] >re spe*ia# basis adJust)ents )andatory( If so4 !hen(
Answer:
"wo cases require a mandatory special #asis ad6ustment. 4irst when a partnership
has a su#stantial #uilt0in loss at the time of a sale of a partnership interest the
ad6ustment is required. A su#stantial #uilt0in loss occurs when the partnerships
ad6usted #asis in its assets exceeds the fair market value of the assets #y more than
>1+::::.
10-<
"he second case where a mandatory special #asis ad6ustment must #e made is for
distri#utions where there is a su#stantial #asis reduction. A su#stantial #asis
reduction exists if the negative ad6ustments from a special #asis ad6ustment exceed
>1+::::. =ecall that negative #asis ad6ustments only occur in liquidating
distri#utions.
Probe!s
+0. [LO 1] Jerry is a +0 partner in the JJ. Partnership !hen he se##s his entire interest to
Lu*ia for F574000 *ash. >t the ti)e of the sa#e4 Jerry5s basis in JJ. is F+24000. JJ.
does not ha%e any debt or hot assets. &hat is Jerry5s $ain or #oss on the sa#e of his
interest(
Answer:
Jerry will determine his gain or loss as the difference #etween the amount reali$ed on
the sale and his #asis in the partnership interest.
Amount reali$ed > +?:::
Less: Ad6usted #asis -21:::.
@ain recogni$ed on the sale >19:::
+1. [LO 1] Joy is a +0 partner in the JO. Partnership !hen she se##s her entire interest to
"ope for F:24000 *ash. >t the ti)e of the sa#e4 Joy5s basis in JO. is F--4000 H!hi*h
in*#udes her F74000 share of JO. #iabi#itiesI. JO. does not ha%e any hot assets. &hat
is Joy5s $ain or #oss on the sa#e of her interest(
Answer:
Joy determines her gain or loss as follows:
Amount reali$ed
Cash >*1:::
<e#t relief ?::: >*A:::
Less: 5utside #asis in J58 -99:::.
@ain recogni$ed on the sale >29:::
+2. [LO 1] >##ison4 Leesha4 and Dte%en ea*h o!n eBua# interests in L>D partnership4 a
*a#endar year-end4 *ash-)ethod entity. On January 1 of the *urrent year4 Dte%en5s basis
in his partnership interest is F2:4000. Durin$ January and ;ebruary4 the partnership
$enerates F+04000 of ordinary in*o)e and F-4500 of ta' e'e)pt in*o)e. On .ar*h 14
Dte%en se##s his partnership interest to Juan for a *ash pay)ent of F-54000. 1he
partnership has the fo##o!in$ assets and no #iabi#ities at the sa#e dateM
10-=
(asis 48B
Cash F +04000 F +04000
Land he#d for in%est)ent +04000 704000
1ota#s F 704000 F =04000
a. >ssu)in$ L>D5s operatin$ a$ree)ent pro%ides for an interi) *#osin$ of the booGs
!hen partners5 interests *han$e durin$ the year4 !hat is Dte%en5s basis in his
partnership interest on .ar*h 1 Just prior to the sa#e(
b. &hat is the a)ount and *hara*ter of Dte%en5s re*o$ni2ed $ain or #oss on the sa#e(
*. &hat is Juan5s basis in the partnership interest(
d. &hat is the partnership5s basis in the assets fo##o!in$ the sa#e(
Answer:
a. 5utside #asis as of January ,: > 1*:::
%lus: distri#utive share of income
5rdinary ,::::
"ax exempt ,+::
5utside #asis as of 8arch ,: > 2A+::
#. Amount reali$ed: > 9+:::
Less: #asis in partnership interest -2A+::.
Capital gain > ?+::
c. Juans #asis in his partnership interest is his cost of >9+:::.
d. "he partnership has a #asis in its assets equal to the assets #efore the sale. "he sale
does not affect the partnerships #asis in its assets.
++. [LO 1] /ra*e4 Ja)es4 "e#en4 and Char#es ea*h o!n eBua# interests in /J"C partnership4
a *a#endar year-end4 *ash-)ethod entity. On January 1 of the *urrent year4 Ja)es5 basis
in his partnership interest is F724000. ;or the ta'ab#e year4 the partnership $enerates
F<04000 of ordinary in*o)e and F+04000 of di%idend in*o)e. ;or the first 5 )onths of
the year4 /J"C $enerates F254000 of ordinary in*o)e and no di%idend in*o)e. On June
14 Ja)es se##s his partnership interest to @obert for a *ash pay)ent of F:04000. 1he
partnership has the fo##o!in$ assets and no #iabi#ities at the sa#e dateM
(asis 48B
Cash F 2:4000 F 2:4000
Land he#d for in%est)ent <04000 1004000
1ota#s F 10:4000 F 12:4000
10-10
a. >ssu)in$ /J"C5s operatin$ a$ree)ent pro%ides that the proration )ethod !i## be
used to a##o*ate in*o)e or #oss !hen partners5 interests *han$e durin$ the year4 !hat
is Ja)es5 basis in his partnership interest on .ar*h 1 Just prior to the sa#e(
b. &hat is the a)ount and *hara*ter of Ja)es5 re*o$ni2ed $ain or #oss on the sa#e(
*. If /J"C uses an interi) *#osin$ of the booGs4 !hat is the a)ount and *hara*ter of
Ja)es5 re*o$ni2ed $ain or #oss on the sa#e(
Answer:
a. 5utside #asis as of January ,: > ?1:::
5rdinary ->A:::: x 1+; x +C,1. A222
<ividend ->2:::: x 1+; x +C,1. 2,1+
5utside #asis as of June ,: > *29+A
#. Amount reali$ed: > *::::
Less: #asis in partnership interest -*29+A.
Capital loss > -29+A.
c. 5utside #asis as of January ,: > ?1:::
5rdinary ->1+::: x 1+;. ?1+:
5utside #asis as of June ,: > ?A1+:
Amount reali$ed: > *::::
Less: #asis in partnership interest -?A1+:.
Capital gain > ,*+:
+-. [LO 1] >t the end of #ast year4 Lisa4 a +5 partner in the fi%e-person L>.0C
partnership4 has an outside basis of F704000 in*#udin$ her F+04000 share of L>.0C
debt. On January 1 of the *urrent year4 Lisa se##s her partnership interest to .aryLynn
for a *ash pay)ent of F-54000 and the assu)ption of her share of L>.0C5s debt.
a. &hat is the a)ount and *hara*ter of Lisa5s re*o$ni2ed $ain or #oss on the sa#e(
b. If L>.0C has F1004000 of unrea#i2ed re*ei%ab#es as of the sa#e date4 !hat is the
a)ount and *hara*ter of Lisa5s re*o$ni2ed $ain or #oss(
*. &hat is .aryLynn5s basis in the partnership interest(
10-11
Answer:
a. Amount reali$ed:
Cash > 9+:::
<e#t relief 2:::: >*+:::
Less: #asis in partnership interest -?::::.
Lisas recogni$ed capital gain > ,+:::
#. Lisas share of unreali$ed receiva#les is >2+::: ->,::::: unreali$ed receiva#les
2+; interest.. Lisa will recogni$e >2+::: of ordinary income and a >1::::
capital loss determined as:
"otal gain > ,+:::
Less: 5rdinary income -2+:::.
Lisas recogni$ed capital loss > -1::::.
c. 8aryLynns #asis in her partnership interest is >*+::: -cash of >9+::: plus her
>2:::: share of LA8DCs de#t..
+5. [LO 1] .ar*o4 Ja*#yn4 and Carrie for)ed Da'in$ partnership Ha *a#endar year-end
entityI by *ontributin$ *ash 10 years a$o. 0a*h partner o!ns an eBua# interest in the
partnership. .ar*o4 Ja*#yn4 and Carrie ea*h ha%e an outside basis in hisCher partnership
interest of F10-4000. On January 1 of the *urrent year4 .ar*o se##s his partnership
interest to @yan for a *ash pay)ent of F1+:4000. 1he partnership has the fo##o!in$
assets and no #iabi#ities as of the sa#e dateM
(asis 4air 8arket Balue
Cash F 1<4000 F 1<4000
>**ounts re*ei%ab#e -0- 124000
In%entory 7=4000 <14000
0Buip)ent 1<04000 2254000
Dto*G in%est)ent -54000 :54000
1ota#s F +124000 F -114000
1he eBuip)ent !as pur*hased for F2-04000 and the partnership has taGen F704000 of
depre*iation. 1he sto*G !as pur*hased : years a$o.
a. &hat are the 8hot assets9 HK:51HaII for this sa#e(
b. &hat is .ar*o5s $ain or #oss on the sa#e of his partnership interest(
*. &hat is the *hara*ter of .ar*o5s $ain or #oss(
10-12
d. &hat is @yan5s inside and outside bases in the partnership on the date of the sa#e(
Answer:
a. "he hot assets include the potential depreciation recapture in the equipment
->9+:::. the accounts receiva#le and the inventory.
#. Amount reali$ed: > ,2*:::
Less: #asis in partnership interest -,:9:::.
8arcos reali$ed and recogni$ed gain > 22:::
c. "o the extent 8arco reali$es any amounts attri#uta#le to hot assets his gain will #e
classified as ordinary. &f <axing sold its assets for their fair market value at the sale
date the ordinary gain would #e as follows:
"ax #asis 48B @ainCLoss 8arks share
Accounts receiva#le > 0:0 > ,1::: > ,1::: >9:::
&nventory ?E::: A,::: ,1::: 9:::
Dquipment ,A:::: 11+::: 9+::: ,+:::
> ?E::: > 12:::
"otal gain > 22:::
Less: ordinary gain -12:::.
Capital gain >,::::
8arco recogni$es >12::: of ordinary income and >,:::: capital gain from the
sale of his interest in <axing.
d. =yan has an outside #asis equal to his cost of the partnership interest: >,2*:::.
/is inside #asis is equal to 8arcos inside #asis #efore the sale: >,:9:::.
3ote: "he partnership in pro#lem 2+ uses the cash method of accounting under =ev %roc
1::,0,: which permits certain small #usinesses to treat inventory items as non0
incidental materials and supplies.
+7. [LO 1] ;ranG#in4 Jefferson4 and &ashin$ton for)ed the Independen*e Partnership Ha
*a#endar-year-endI by *ontributin$ *ash 10 years a$o. 0a*h partner o!ns an eBua#
interest in the partnership. ;ranG#in4 Jefferson4 and &ashin$ton ea*h ha%e an outside
basis in his partnership interest of F10-4000. On January 1 of the *urrent year4 ;ranG#in
se##s his partnership interest to >da)s for a *ash pay)ent of F1224000. 1he partnership
has the fo##o!in$ assets and no #iabi#ities as of the sa#e dateM
10-1+
Cash F 1<4000 F 1<4000
>**ounts re*ei%ab#e -0- 124000
In%entory 7=4000 <14000
0Buip)ent 1<04000 2254000
Dto*G in%est)ent -54000 +04000
1ota#s F +124000 F +774000
1he eBuip)ent !as pur*hased for F2-04000 and the partnership has taGen F704000 of
depre*iation. 1he sto*G !as pur*hased : years a$o.
a. &hat is ;ranG#in5s o%era## $ain or #oss on the sa#e of his partnership interest(
b. &hat is the *hara*ter of ;ranG#in5s $ain or #oss(
Answer:
a. Amount reali$ed: > ,11:::
Less: #asis in partnership interest -,:9:::.
4ranklins reali$ed and recogni$ed gain > ,A:::
#. "o the extent 4ranklin reali$es any amounts attri#uta#le to hot assets his gain will
#e classified as ordinary. &f &ndependence sold its assets for their fair market value
at the sale date the ordinary gain would #e as follows:
"ax #asis 48B @ainCLoss 4ranklins share
Accounts receiva#le > 0:0 > ,1::: > ,1::: >9:::
&nventory ?E::: A,::: ,1::: 9:::
Dquipment ,A:::: 11+::: 9+::: ,+:::
> ?E::: > 12:::
"otal gain > ,A:::
Less: ordinary gain -12:::.
Capital loss >-+:::.
4ranklin recogni$es >12::: of ordinary income and a >+::: capital loss from the
sale of his interest in &ndependence.
3ote: "he partnership in pro#lem 2? uses the cash method of accounting under =ev %roc
1::,0,: which permits certain small #usinesses to treat inventory items as non0
incidental materials and supplies.
10-1-
+:. [LO 1] 1ra%is and >#i' &eber are eBua# partners in the 1ra#i' partnership4 !hi*h does
not ha%e a K:5- e#e*tion in p#a*e. >#i' se##s one-ha#f of her interest H25I to .i*hae#
1o)ei for F+04000 *ash. Just before the sa#e4 >#i'5s basis in her entire partnership
interest is F:54000 in*#udin$ her F+04000 share of the partnership #iabi#ities. 1ra#i'5s
assets on the sa#e date are as fo##o!sM
Cash F -04000 F -04000
In%entory +04000 =04000
Land he#d for in%est)ent <04000 504000
1ota#s F 1504000 F 1<04000
a. &hat is the a)ount and *hara*ter of >#i'5s re*o$ni2ed $ain or #oss on the sa#e(
b. &hat is >#i'5s basis in her re)ainin$ partnership interest(
*. &hat is .i*hae#5s basis in his partnership interest(
d. &hat is the effe*t of the sa#e on the partnership5s basis in the assets(
Answer:
a. Amount reali$ed:
Cash > 2::::
<e#t relief -,C1 of >2::::. ,+::: > 9+:::
Less: #asis in partnership interest -,C1 of >*+:::. -2*+::.
Alixs reali$ed and recogni$ed gain > *+::
"o the extent Alix reali$es any amounts attri#uta#le to hot assets her gain will #e
classified as ordinary. &f "ralix sold its assets for their fair market value at the sale
date the ordinary gain would #e as follows:
"ax #asis 48B @ainCLoss Alixs 1+;
&nventory > 2:::: > E:::: > ?:::: > ,+:::
"otal gain > *+::
Less: ordinary gain -,+:::.
Capital loss >-*+::.
Alix recogni$es >,+::: of ordinary income and a >*+:: capital loss from the sale
of half of her interest in "ralix.
#. Alix has a remaining #asis in "ralix of >2*+::.
10-15
c. 8ichael has an outside #asis in his 1+; interest in "ralix equal to his >2:::: cash
payment plus his share of "ralixFs de#t >,+::: ->2:::: x +:;. for a total #asis of
>9+:::G.
d. "he sale has no effect on "ralixs #asis in its assets.
+<. [LO 1] 3e!ton is a one-third o!ner of Pro@ite Partnership. 3e!ton has de*ided to se##
his interest in the business to Eetty for F504000 *ash p#us the assu)ption of his share of
Pro@ite5s #iabi#ities. >ssu)e 3e!ton5s inside and outside basis in Pro@ite are eBua#.
Pro@ite sho!s the fo##o!in$ ba#an*e sheet as of the sa#e dateM
>ssetsM (asis 48B
Cash F <04000 F <04000
@e*ei%ab#es 254000 254000
In%entory -04000 <54000
Land +04000 204000
1ota#s F 1:54000 F 2104000
Liabi#ities and *apita#M
Liabi#ities F 704000
Capita# N 3e!ton +<4+++
N Earbara +<4++-
N Li2 +<4+++
1ota#s F 1:54000
&hat is the a)ount and *hara*ter of 3e!ton5s re*o$ni2ed $ain or #oss(
Answer:
Amount reali$ed:
Cash > +::::
<e#t relief -,C2 of >?::::. 1:::: > *::::
Less: #asis in partnership interest -including lia#ilities.-+A222.
3ewtons reali$ed and recogni$ed gain >,,??*
"o the extent 3ewton reali$es any amounts attri#uta#le to hot assets his gain will
#e classified as ordinary. &f %ro=ite sold its assets for their fair market value at the
sale date the ordinary gain would #e as follows:
10-17
"ax #asis 48B @ainCLoss 3ewtons ,C2
&nventory > 9:::: > A+::: > 9+::: > ,+:::
"otal gain > ,,??*
Less: ordinary gain -,+:::.
Capital loss >-2222.
3ewton recogni$es >,+::: of ordinary income and a >2222 capital loss from the
sale of his interest in %ro=ite.
+=. [LO +] Coy and .att are eBua# partners in the .at*oy Partnership. 0a*h partner has a
basis in his partnership interest of F2<4000 at the end of the *urrent year4 prior to any
distribution. On De*e)ber +14 they ea*h re*ei%e an operatin$ distribution. Coy re*ei%es
F104000 *ash. .att re*ei%es F+4000 *ash and a par*e# of #and !ith a F:4000 fair )arGet
%a#ue and a F-4000 basis to the partnership. .at*oy has no debt or hot assets.
a. &hat is Coy5s re*o$ni2ed $ain or #oss( &hat is the *hara*ter of any $ain or #oss(
b. &hat is Coy5s endin$ basis in his partnership interest(
c. &hat is .att5s re*o$ni2ed $ain or #oss( &hat is the *hara*ter of any $ain or #oss(
d. &hat is .att5s basis in the distributed property(
e. &hat is .att5s endin$ basis in his partnership interest(
Answer:
a. Coy does not recogni$e any gain or loss on the current distri#ution.
#. Coy reallocates his #asis in 8atcoy to the cash in an amount equal to the
distri#ution >,::::. /is remaining #asis in 8atcoy is >,A::: ->1A::: 0 ,::::..
(asis #efore distri#ution > 1A:::
Less: Amount allocated to cash -,::::.
Dquals: #asis in partnership interest > ,A:::
c. 8att does not recogni$e any gain or loss on the current distri#ution.
d. 8att takes a carryover #asis in the distri#uted property. "he cash has a #asis equal
to >2::: and the land has a #asis equal to >9::: -8atcoys #asis in the land..
10-1:
e. 8att reallocates his #asis in 8atcoy to the cash in an amount equal to the
distri#ution >2:::. 8att takes a carryover #asis in the land and allocates >9::: of
his 8atcoy #asis to the land. /is remaining #asis in 8atcoy is >1,::: ->1A::: 0
2::: H 9:::..
(asis #efore distri#ution > 1A:::
Less: Amount allocated to cash -2:::.
1+:::
Amount allocated to land -9:::.
Dquals: #asis in partnership interest > 1,:::
-0. [LO +] Justin and Lauren are eBua# partners in the PJenn Partnership. 1he partners
for)ed the partnership se%en years a$o by *ontributin$ *ash. Prior to any distributions4
the partners ha%e the fo##o!in$ bases in their partnership interestsM
%artner 5utside (asis
Justin F 224000
Lauren 224000
On De*e)ber +1 of the *urrent year4 the partnership )aGes a pro-rata operatin$
distribution ofM
%artner <istri#ution
Justin Cash F 254000
Lauren Cash 1<4000
Property :4000 H;.OI HF24000 basis to partnershipI
a. &hat is the a)ount and *hara*ter of Justin5s re*o$ni2ed $ain or #oss(
b. &hat is Justin5s re)ainin$ basis in his partnership interest(

*. &hat is the a)ount and *hara*ter of Lauren5s re*o$ni2ed $ain or #oss(
d. &hat is Lauren5s basis in the distributed assets(
e. &hat is Lauren5s re)ainin$ basis in her partnership interest(
10-1<
Answer:
a. (ecause Justin receives only money in the distri#ution and the distri#ution exceeds
his #asis in the partnership he must recogni$e a gain on the current distri#ution.
Justin calculates his gain as the difference #etween his #asis in the partnership and
the distri#ution.
<istri#ution of money > 1+:::
Less: (asis in %Jenn -11:::.
@ain -capital. >2:::
#. Justin allocates his entire outside #asis to the #asis in the money received and
therefore he has a $ero #asis remaining in his partnership interest.
c. Lauren does not recogni$e any gain or loss on the current distri#ution.
d. Lauren takes a carryover #asis in the assets distri#uted. 7he receives >,A::: cash
so she reduces her #asis in %Jenn #y this amount. "his leaves an outside #asis of
>9::: ->11::: H ,A:::.. Lauren assigns a #asis of >1::: to the property
distri#uted as this is %Jenns #asis.
e. Laurens #asis in %Jenn following the distri#ution is >1::: determined as follows:
(asis in %Jenn >11:::
Less: Cash distri#ution -,A:::.
%roperty -1:::.
=emaining #asis in %Jenn >1:::
-1. [LO +] >da) and >#yssa are eBua# partners in the PartiPi#o Partnership. 1he partners
for)ed the partnership three years a$o by *ontributin$ *ash. Prior to any distributions4
the partners ha%e the fo##o!in$ bases in their partnership interestsM
%artner 5utside (asis
>da) F 124000
>#yssa 124000
On De*e)ber +1 of the *urrent year4 the partnership )aGes a pro-rata operatin$
distribution ofM
%artner <istri#ution
>da) Cash F 174000
>#yssa Cash <4000
Property <4000 H;.OI HF74000 basis to partnershipI
a. &hat is the a)ount and *hara*ter of >da)5s re*o$ni2ed $ain or #oss(
10-1=
b. &hat is >da)5s re)ainin$ basis in his partnership interest(
*. &hat is the a)ount and *hara*ter of >#yssa5s re*o$ni2ed $ain or #oss(
d. &hat is >#yssa5s basis in the distributed assets(
e. &hat is >#yssa5s re)ainin$ basis in her partnership interest(
Answer:
a. (ecause Adam receives only money in the distri#ution and the distri#ution exceeds
his #asis in %arti%ilo he must recogni$e a gain on the current distri#ution. Adam
calculates his gain as the difference #etween his #asis in the partnership and the
distri#ution.
<istri#ution of money > ,?:::
Less: (asis in %artipilo -,1:::.
@ain -capital. >9:::
#. Adam allocates his entire outside #asis to the #asis in the money received and
therefore he has a $ero #asis remaining in his partnership interest.
c. Alyssa does not recogni$e any gain or loss on the current distri#ution.
d. Alyssa reduces her #asis in %arti%ilo #y >A::: for the cash distri#ution which
leaves her with a #asis of >9:::. Alyssa assigns a >9::: #asis to the property -a
reduction of >1:::..
e. Alyssa reduces her #asis in %artipilo to >0:0 after the distri#ution.
(asis in %arti%ilo >,1:::
Less: Cash distri#ution -A:::.
%roperty -9:::.
=emaining #asis in %arti%ilo >0:0
-2. [LO +] Laren has a F7<4000 basis in her 50 partnership interest in the LD Partnership
before re*ei%in$ a *urrent distribution of F74000 *ash and #and !ith a fair )arGet %a#ue
of F+54000 and a basis to the partnership of F1<4000.
a. &hat is the a)ount and *hara*ter of Laren5s re*o$ni2ed $ain or #oss(
b. &hat is Laren5s basis in the #and(
10-20
*. &hat is Laren5s re)ainin$ basis in her partnership interest(
Answer:
a. Iaren does not recogni$e any gain or loss on the current distri#ution.
#. Iaren takes a carryover #asis in the land equal to >,A:::.
c. Iarens outside #asis in the partnership after the distri#ution is as follows:
(asis in I< >?A:::
Less: <istri#utions
Cash -?:::.
Land -,A:::. -19:::.
=emaining #asis in I< >99:::

-+. [LO +] Pa) has a F2:4000 basis Hin*#udin$ her share of debtI in her 50 partnership
interest in the .eddo* partnership before re*ei%in$ any distributions. 1his year .eddo*
)aGes a *urrent distribution to Pa) of a par*e# of #and !ith a F-04000 fair )arGet %a#ue
and a F+24000 basis to the partnership. 1he #and is en*u)bered !ith a F154000 )ort$a$e
Hthe partnership5s on#y #iabi#ityI.
a. &hat is the a)ount and *hara*ter of Pa)5s re*o$ni2ed $ain or #oss(
b. &hat is Pa)5s basis in the #and(
*. &hat is Pa)5s re)ainin$ basis in her partnership interest(
Answer:
a. %am must consider the effects of de#t changes #efore determining the effects of the
distri#ution. %am is treated as making a net contri#ution of cash to the partnership
of >*+:: the difference #etween the full mortgage of >,+::: and her allocated
share of the de#t of >*+::. "his deemed contri#ution increases %ams #asis in
8eddoc from >1*::: to >29+::. %am does not recogni$e any gain or loss on the
current distri#ution.
#. %am takes a carryover #asis in the land equal to >21:::.
c. %ams outside #asis in the partnership after the distri#ution is as follows:
(asis in 8eddoc >1*:::
%lus: <eemed contri#ution *+::
Less: Land -21:::.
=emaining #asis in 8eddoc >1+::
10-21
--. [LO +] ?@esear*hA 1!o years a$o4 Li)ber#y be*a)e a +0 partner in the LD1
Partnership !ith a *ontribution of in%est)ent #and !ith a F104000 basis and F174000 fair
)arGet %a#ue. On January 2 of this year4 Li)ber#y has a F154000 basis in her
partnership interest and none of her pre-*ontribution $ain has been re*o$ni2ed. On
January 24 Li)ber#y re*ei%es an operatin$ distribution of a tra*t of #and Hnot the
*ontributed #andI !ith a F124000 basis and an F1<4000 fair )arGet %a#ue.
a. &hat is the a)ount and *hara*ter of Li)ber#y5s re*o$ni2ed $ain or #oss on the
distribution(
b. &hat is Li)ber#y5s re)ainin$ basis in LD1 after the distribution(
*. &hat is LD15s basis in the #and Li)ber#y *ontributed after Li)ber#y re*ei%es this
distribution(
Answer:
a. Iim#erly recogni$es >2::: capital gain as a result of the distri#ution. !nder )*2*
Iim#erly must recogni$e her pre0contri#ution gain to the extent that the fair
market value of the distri#uted property exceeds her partnership interest #efore
the distri#ution -#ut after reduction for any money distri#utions.. Iim#erly
recogni$es the lesser of her unrecogni$ed pre0contri#ution gain ->?:::. or the
excess of the fair market value of the distri#uted land over her pre0distri#ution
outside #asis ->2:::J >,A::: 48B H ,+::: outside #asis..
#. &f a partner recogni$es a pre0contri#ution gain under )*2* the recogni$ed gain
increases the partners outside #asis. Iim#erlys outside #asis in the partnership
after the distri#ution is as follows:
(asis in I7" >,+:::
%lus: )*2* gain 2:::
Less: Carryover #asis in land -,1:::.
=emaining #asis in I7" >?:::
c. I7"s #asis in the land that Iim#erly originally contri#uted is >,2::: determined
as follows:
I7" #asis upon contri#ution > ,::::
%lus: Iim#erlys )*2* gain 2:::
I7"s #asis in land >,2:::
Iim#erlys recogni$ed gain under )*2* increases the partnerships #asis in the
property that originated the pre0contri#ution gain.
10-22
-5. [LO -] @ufus is a one-Buarter partner in the >d%enture partnership. On January 1 of the
*urrent year4 >d%enture distributes F1+4000 *ash to @ufus in *o)p#ete #iBuidation of his
interest. >d%enture has on#y *apita# assets and no #iabi#ities at the date of the
distribution. @ufus5 basis in his partnership interest is F1<4500.
a. &hat is the a)ount and *hara*ter of @ufus5 re*o$ni2ed $ain or #oss(
b. &hat is the a)ount and *hara*ter of >d%enture5s re*o$ni2ed $ain or #oss(
*. If @ufus5 basis is F104000 at the distribution date rather than F1<45004 !hat is the
a)ount and *hara*ter of @ufus5 re*o$ni2ed $ain or #oss(
Answer:
a. =ufus recogni$es a capital loss on the distri#ution of >++:: representing the
difference #etween his #asis in Adventure of >,A+:: and the cash distri#ution of
>,2:::. /e must recogni$e a loss #ecause he receives only cash in the distri#ution
and the cash is less than his #asis in his partnership interest.
#. Adventure does not recogni$e any gain or loss on the distri#ution.
c. &f =ufus outside #asis is >,:::: prior to the distri#ution he must recogni$e a
capital gain of >2::: on the distri#ution as follows:
Cash distri#ution >,2:::
Less: (asis in Adventure -,::::.
Dquals: @ain -capital. >2:::
-7. [LO -] 1he 1aurin Partnership H*a#endar-year-endI has the fo##o!in$ assets as of
De*e)ber +1 of the *urrent yearM
(asis 48B
Cash F -54000 F -54000
>**ounts re*ei%ab#e 154000 +04000
In%entory <14000 1204000
1ota#s F 1-14000 F 1=54000
On De*e)ber +14 1aurin distributes F154000 of *ash4 F104000 H;.OI of a**ounts
re*ei%ab#e4 and F-04000 H;.OI of in%entory to 0))a Ha 1C+ partnerI in ter)ination of
her partnership interest. 0))a5s basis in her partnership interest i))ediate#y prior to
the distribution is F-04000.
a. &hat is the a)ount and *hara*ter of 0))a5s re*o$ni2ed $ain or #oss on the
distribution(
10-2+
b. &hat is 0))a5s basis in the distributed assets(
*. If 0))a5s basis before the distribution !as F554000 rather than F-040004 !hat is
0))a5s re*o$ni2ed $ain or #oss and !hat is her basis in the distributed assets(
Answer:
a. Dmma does not recogni$e any gain or loss on the distri#ution.
#. (ecause "aurin distri#utes only cash accounts receiva#le and inventory and the
ad6usted #ases of the property distri#uted is greater than her #asis in the
partnership Dmma will simply reduce the #ases of the hot assets. Dmma uses a
three step process to allocate her #asis to the distri#uted property.
,. Dmma assigns a #asis of >,+::: -,C2 of >9+:::. to the cash >+::: to the
accounts receiva#le -,C2 of ,+:::. and >1*::: -,C2 of >A,:::. to the inventory.
7ince the sum ->9*:::. exceeds her #asis in "aurin she has a required decrease
of >*::: ->9*::: H 9::::..
1. Dmma allocates the required decrease to the assets with unreali$ed
depreciation. 7ince there are no distri#uted assets with unreali$ed depreciation
Dmma skips this step.
2. Dmma decreases the #asis of the assets in proportion to their relative ad6usted
#ases.
Accounts receiva#le: (asis allocation K >*::: ->+:::C>21:::. K >,:E9
&nventory: (asis allocation K >*::: ->1*:::C>21:::. K >+E:?
After completing the allocation Dmmas #asis in the distri#uted assets are:
Cash >,+:::
Accounts receiva#le ->+::: 0 >,:E9. 2E:?
&nventory ->1*::: 0 >+E:?. 1,:E9
c. &f Dmmas #asis in "aurin were >++::: rather than >9:::: she recogni$es a
capital loss on the distri#ution. Dmma calculates her loss of >A::: as the difference
#etween her #asis in her partnership interest ->++:::. and the sum of the ad6usted
#ases of the distri#uted assets ->9*:::..
/er #asis in the distri#uted assets is equal to the partnerships #asis in the assets.
Cash >,+:::
Accounts receiva#le +:::
&nventory 1*:::
"he carryover #ases allow Dmma to retain the character of the inherent gains in
the accounts receiva#le and inventory she receives in the liquidating distri#ution.
10-2-
-:. [LO -] .e#issa4 3i*o#e4 and Een are eBua# partners in the Opto partnership H*a#endar
year-endI. .e#issa de*ides she !ants to e'it the partnership and re*ei%es a proportionate
distribution to #iBuidate her partnership interest on January 1. 1he partnership has no
#iabi#ities and ho#ds the fo##o!in$ assets as of January 1M
(asis 48B
Cash F 1<4000 F 1<4000
>**ounts re*ei%ab#e -0- 2-4000
Dto*G in%est)ent :4500 124000
Land +04000 +74000
1ota#s F 554500 F =04000
.e#issa re*ei%es one-third of ea*h of the partnership assets. Dhe has a basis in her
partnership interest of F254000.
a. &hat is the a)ount and *hara*ter of any re*o$ni2ed $ain or #oss to .e#issa(
b. &hat is .e#issa5s basis in the distributed assets(
*. &hat are the ta' i)p#i*ations Ha)ount and *hara*ter of $ain or #oss and basis of
assetsI to .e#issa if her outside basis is F114000 rather than F254000(
d. &hat is the a)ount and *hara*ter of any re*o$ni2ed $ain or #oss fro) the distribution
to Opto(
Answer:
a. 8elissa does not recogni$e any gain or loss on the distri#ution. =ather she will
ad6ust the #asis of the distri#uted assets.
#. 8elissa uses a three step process to determine her #asis in the distri#uted property.
,. 8elissa assigns a #asis of >?::: -,C2 of >,A:::. to the cash >0:0 to the accounts
receiva#le >1+:: -,C2 of >*+::. to the stock investment and >,:::: -,C2 of
>2::::. to the land. "he sum ->,A+::. of the inside #asis is less than her
outside #asis so she will need to allocate the excess #asis to the #asis in the
distri#uted assets other than )*+,-a. property. 8elissa has a remaining #asis of
>?+:: to allocate ->1+::: 0 >,A+::. among the distri#uted capital assets.
1. 8elissa allocates the required increase to the capital assets with unreali$ed
appreciation to the extent of the appreciation. 8elissa allocates >,+:: ->9:::
L,C2 x >,1:::M 0 >1+:: L,C2 x >*+::M. to the stock investment and >1:::
->,1::: L,C2 x >2?:::M 0 >,:::: L,C2 x >,::::M. to the land to #ring the #ases
of these assets to their fair market value. "his leaves >2::: remaining to #e
allocated.
10-25
2. 8elissa increases the #asis of the capital assets in proportion to their relative
fair market values.
7tock investment: (asis allocation K >2::: ->9:::C>,?:::. K >*+:
Land: (asis allocation K >2::: ->,1:::C>,?:::. K >11+:
After completing the allocation 8elissas #asis in the distri#uted assets are:
Cash >?:::
Accounts receiva#le 0:0
7tock investment ->1+:: N >,+:: N >*+:. 9*+:
Land ->,:::: N >1::: N >11+:. ,91+:
c. &f 8elissas #asis in 5pto were >,,::: rather than >1+::: she will need to
decrease the #asis in the stock investment and land she receives in liquidation of
her partnership interest. 7he will calculate her #asis in the distri#uted assets as
follows:
,. 4irst she assigns a carryover #asis to the distri#uted assets.
Cash >?:::
7tock investment 1+::
Land ,::::
7ince the sum of the ad6usted #ases of the distri#uted assets ->,A+::. is greater
than her #asis in 5pto ->,,:::. she has a required decrease of >*+::.
1. 8elissa allocates her required decrease to the other property with unreali$ed
depreciation. 7ince none of the distri#uted assets have any unreali$ed
depreciation 8elissa skips this step.
2. &n the final step 8elissa allocates the required decrease to the capital assets in
proportion to their ad6usted #ases.
7tock investment: (asis allocation K >*+:: ->1+::C>,1+::. K >,+::
Land: (asis allocation K >*+:: ->,::::C>,1+::. K >?:::
After completing the allocation 8elissas #asis in the distri#uted assets are:
Cash >?:::
7tock investment ->1+:: 0 >,+::. ,:::
Land ->,:::: 0 >?:::. 9:::
d. 5pto does not recogni$e any gain or loss on the liquidating distri#ution.
10-27
-<. [LO -] ?P#annin$A Lonnie Da%is has been a $enera# partner in the "i$h#and
Partnership for )any years and is a#so a so#e proprietor in a separate business. 1o spend
)ore ti)e fo*usin$ on his so#e proprietorship4 he p#ans to #ea%e "i$h#and and !i##
re*ei%e a #iBuidatin$ distribution of F504000 in *ash and #and !ith a fair )arGet %a#ue of
F1004000 Hta' basis of F1204000I. I))ediate#y before the distribution4 Lonnie5s basis in
his partnership interest is F+504000 !hi*h in*#udes his F504000 share of partnership
debt. 1he "i$h#and Partnership does not ho#d any hot assets.
a. &hat is the a)ount and *hara*ter of any $ain or #oss to Lonnie(
b. &hat is Lonnie5s basis in the #and(
*. &hat is the a)ount and *hara*ter of Lonnie5s $ain or #oss if he ho#ds the #and for
thirteen )onths as in%est)ent property and then se##s it for F1004000(
d. &hat is the a)ount and *hara*ter of Lonnie5s $ain or #oss if he p#a*es the #and into
ser%i*e in his so#e proprietorship and then se##s it thirteen )onths #ater for F1004000(
e. Do your ans!ers to parts *. and d. abo%e su$$est a *ourse of a*tion that !ou#d he#p
Lonnie to a*hie%e a )ore fa%orab#e ta' out*o)e(
Answer:
a. Lonnie does not recogni$e a gain #ecause the >+:::: of actual cash he receives and
de#t relief of >+:::: are not greater than the tax #asis in his interest of >2+::::.
4urther Lonnie does not recogni$e a loss on the liquidating distri#ution #ecause he
receives assets other than cash andCor hot assets in the distri#ution -i.e. the land..
#. Lonnies #asis in the land is equal to his #asis in his partnership interest of
>2+:::: reduced #y the actual cash distri#ution of >+:::: and the deemed cash
distri#ution of >+:::: from de#t relief leaving a #asis of >1+:::: in the land.
c. Lonnie will recogni$e a long0term capital loss of >,+:::: or >,::::: less his
>1+:::: su#stituted #asis in the land. "he loss is a long0term capital loss #ecause
Lonnie held the land as a capital asset for more than one year.
d. Lonnie will recogni$e a 7ection ,12, loss of >,+:::: ->,::::: less his >1+::::
su#stituted #asis in the land.. "he loss is a 7ection ,12, loss #ecause Lonnie held
the land as a trade or #usiness asset for more than one year making the land
7ection ,12, property. Losses from the sale or exchange of 7ection ,12, property
are treated as ordinary assuming there are no gains from the sale of other 7ection
,12, in the same tax year.
10-2:
e. @iven the choice Lonnie should consider holding the land as a trade or #usiness
asset rather than as a capital asset. &n doing so he will convert what would have
otherwise #een a capital loss into an ordinary loss if he also avoids selling other
trade or #usiness property at a gain in the same tax year. 3ote that if Lonnie had
simply received an all cash liquidating distri#ution he would also have recogni$ed
a >,+:::: capital loss at the time of the distri#ution.
-=. [LO -] >J is a +0 partner in the 1rane partnership4 a *a#endar year end entity. On
January 14 >J has an outside basis in his interest in 1rane of F:+40004 !hi*h in*#udes his
share of the F504000 of partnership #iabi#ities. 1rane $enerates F-24000 of in*o)e durin$
the year and does not )aGe any *han$es to its #iabi#ities. On De*e)ber +14 1rane )aGes
a proportionate distribution of the fo##o!in$ assets to >J to ter)inate his partnership
interestM
(asis 48B
In%entory F 554000 F 754000
Land +04000 254000
1ota#s F <54000 F=04000
a. &hat are the ta' *onseBuen*es H$ain or #oss4 basis adJust)entsI of the distribution to
1rane(
b. &hat is the a)ount and *hara*ter of any re*o$ni2ed $ain or #oss to >J(
*. &hat is >J5s basis in the distributed assets(
d. If >J se##s the in%entory four years after the distribution for F:040004 !hat is the
a)ount and *hara*ter of his re*o$ni2ed $ain or #oss(
Answer:
a. "rane does not recogni$e any gain or loss on the distri#ution. "he liquidation is of a
2:; partner and as such does not trigger a technical termination of the
partnership. "ranes #asis in its remaining property is unaffected #y the
distri#ution since there is no )*+9 election in effect.
#. 4irst AJ must determine his #asis in "rane as of the distri#ution. At the #eginning
of the year his #asis is >*2:::. "rane earns >91::: during the period of which
2:; is alloca#le to AJ. /e increases his #asis #y his >,1?:: ->91::: 2:;. share
of "ranes income. "hus as of the distri#ution AJs #asis in "rane is >A+?::
->*2::: N >,1?::.. 3ext AJ accounts for the deemed cash distri#ution relating to
his reduction of "rane de#t. /is 2:; share of "ranes >+:::: de#t is >,+:::. AJ
reduces his outside #asis #y the >,+::: leaving a #asis of >*:?:: to allocate to the
distri#uted assets. /e does not recogni$e any gain or loss on the distri#ution
#ecause the deemed cash distri#ution does not exceed his #asis in "rane.
10-2<
c. AJ calculates his #asis in the distri#uted assets as follows:
,. 4irst he assigns a carryover #asis to the distri#uted assets.
&nventory >++:::
Land 2::::
7ince the sum of the ad6usted #ases of the distri#uted assets ->A+:::. is greater
than his #asis in "rane after the deemed cash distri#ution ->*:?::. he has a
required decrease of >,99::.
1. AJ allocates his required decrease to the other property with unreali$ed
depreciation. 7ince the distri#uted land has an inherent loss of >+::: AJ
allocates this amount of the required decrease to the land. "hus at the end of
this step the #asis in the land is >1+:::.
2. &n the final step AJ allocates the remaining required decrease >E9:: ->,99:: 0
>+:::. to the land. After completing the allocation his #asis in the distri#uted
assets are:
&nventory >++:::
Land ->1+::: in step 1 0 >E9::. ,+?::
d. AJ calculates the gain or loss on the su#sequent sale of inventory as
Amount reali$ed >*::::
Less: Ad6usted #asis -++:::.
Dquals: @ain on sale of inventory >,+:::
"he gain is an ordinary gain under )*2+-a.-1. #ecause AJ sells the inventory within
five years of the distri#ution.
50. [LO -] Da%id5s basis in the Ji)soo Partnership is F5+4000. In a proportionate #iBuidatin$
distribution4 Da%id re*ei%es *ash of F:4000 and t!o *apita# assetsM #and one !ith a fair
)arGet %a#ue of F204000 and a basis to Ji)soo of F174000 and #and t!o !ith a fair
)arGet %a#ue of F104000 and a basis to Ji)soo of F174000. Ji)soo has no #iabi#ities.
a. "o! )u*h $ain or #oss !i## Da%id re*o$ni2e on the distribution( &hat is the *hara*ter
of any re*o$ni2ed $ain or #oss(
b. &hat is Da%id5s basis in the distributed assets(
*. If the t!o par*e#s of #and had been in%entory to Ji)soo4 !hat are the ta' *onseBuen*es
to Da%id Ha)ount and *hara*ter of $ain or #oss and basis in distributed assetsI(
10-2=
Answer:
a. <avid does not recogni$e any gain or loss on the distri#ution.
#. 7ince Jimsoos #asis of the distri#uted assets is less than <avids outside #asis and
<avid receives other property in the distri#ution <avid must ad6ust the #asis of the
land in order to defer his loss. /e follows a three step process to ad6ust the #ases:
,. <avid assigns a #asis of >*::: to the cash >,?::: to the first parcel of land
and >,?::: to the second parcel of land. "he sum ->2E:::. of the #ases is less
than <avids #asis in Jimsoo so he will need to allocate the excess outside #asis
to the #asis in the distri#uted assets. <avid has a remaining outside #asis of
>,9::: -required increase. to allocate ->+2::: 0 >2E:::. among the two
parcels of land.
1. <avid allocates the required increase to the land with unreali$ed appreciation to
the extent of the appreciation. <avid therefore increases the #asis of the first
parcel land #y >9::: to >1::::. "his leaves >,:::: remaining to #e allocated.
2. <avid increases the #asis of the two parcels of land in proportion to their
relative fair market values.
Land ,: (asis allocation K >,:::: ->1::::C>2::::. K >???*
Land 1: (asis allocation K >,:::: ->,::::C>2::::. K >2222
After completing the allocation <avids #ases in the distri#uted assets are:
Cash >*:::
Land , ->,?::: N >9::: N >???*. 1???*
Land 1 ->,?::: N >2222. ,E222
c. &f the land were inventory to Jimsoo <avid would not #e allowed to increase the
#asis of the distri#uted land. &nstead <avid would recogni$e a capital loss of
>,9::: on the distri#ution. <avid would have a #asis of >,?::: in each parcel of
land -carryover #asis..
51. [LO -] .e$an and .atthe! are eBua# partners in the J P J partnership H*a#endar-year-
end entityI. On January 1 of the *urrent year4 they de*ide to #iBuidate the partnership.
.e$an5s basis in her partnership interest is F1004000 and .atthe!5s is F+54000. 1he t!o
partners re*ei%e identi*a# distributions !ith ea*h re*ei%in$ the fo##o!in$ assetsM
(asis 48B
Cash F +04000 F +04000
In%entory 54000 74000
Land 500 14000
1ota#s F +54500 F+:4000
a. &hat is the a)ount and *hara*ter of .e$an5s re*o$ni2ed $ain or #oss(
10-+0
b. &hat is .e$an5s basis in the distributed assets(
*. &hat is the a)ount and *hara*ter of .atthe!5s re*o$ni2ed $ain or #oss(
d. &hat is .atthe!5s basis in the distributed assets(
Answer:
a. 8egan does not recogni$e any gain or loss on the distri#ution although she reali$es
a loss on the distri#ution.
#. 8egan uses a three step process to determine her #asis in the distri#uted property.
,. 8egan assigns a carryover #asis of >2:::: to the cash >+::: to the inventory
and >+:: to the land. "he sum ->2++::. of the #asis is less than her #asis in J O
J so she will need to allocate the excess #asis to the #asis in the distri#uted assets
other than )*+,-a. property -i.e. the land.. 8egan has a remaining #asis of
>?9+:: to allocate ->,::::: 0 >2++::. among the cold assets.
1. 8egan allocates the required increase to the cold assets with unreali$ed
appreciation to the extent of the appreciation. "herefore 8egan increases the
#asis of the land #y >+:: to>,:::. "his leaves >?9::: remaining to #e
allocated.
2. 7ince 8egan only receives one cold asset in the distri#ution all of the required
increase must increase the #asis of the land. 8egan increases the #asis of the
land #y the remaining >?9::: required increase.
After completing the allocation 8egans #ases in the distri#uted assets are:
Cash >2::::
&nventory +:::
Land ?+:::
"he application of these rules demonstrates the sometimes strange results from
the allocation process. &n this case 8egan now has a parcel of land with a #asis
of >?+::: even though its fair market value is only >,:::. 'hen she sells the
land she will recogni$e a capital loss equal to the difference #etween the sale
price and her extremely large #asis.
c. 8atthew does not recogni$e any gain or loss on the distri#ution although he
reali$es a gain on the distri#ution.
d. 8atthew defers his gain through a #asis decrease to the land he receives in
liquidation of his partnership interest. /e calculates his #asis in the distri#uted
assets as follows:
10-+1
Cash >2::::
&nventory +:::
Land +::
7ince the sum of the ad6usted #ases of the distri#uted assets ->2++::. is greater
than his #asis in J O J ->2+:::. 8atthew has a required decrease of >+::.
1. 8atthew allocates his required decrease to the cold assets property with
unreali$ed depreciation. 7ince none of the distri#uted assets have unreali$ed
depreciation 8atthew skips this step.
2. &n the final step 8atthew allocates the entire >+:: required decrease to the
land.
After completing the allocation 8atthews #ases in the distri#uted assets are:
Cash >2::::
&nventory +:::
Land 0:0
52. [LO -] Ery*e5s basis in the .arGit Partnership is F5<4000. In a proportionate #iBuidatin$
distribution4 Ery*e re*ei%es the fo##o!in$ assetsM
Easis ;.O
Cash F<4000 F<4000
Land > 204000 -54000
Land E 204000 254000
a. "o! )u*h $ain or #oss !i## Ery*e re*o$ni2e on the distribution( &hat is the *hara*ter
of any re*o$ni2ed $ain or #oss(
b. &hat is Ery*e5s basis in the distributed assets(
Answer:
a. (ryce does not recogni$e any gain or loss on the distri#ution.
#. 7ince 8arkits #asis of the distri#uted assets is less than (ryces outside #asis and
(ryce receives other property in the distri#ution (ryce must ad6ust the #asis of the
land in order to defer his loss. /e follows a three step process to ad6ust the #ases.
10-+2
,. (ryce assigns a #asis of >A::: to the cash >1:::: to land A and >1:::: to
land (. "he sum ->9A:::. of the #ases is less than (ryces #asis in 8arkit so he
will need to allocate the excess outside #asis to the #asis in the distri#uted
assets. (ryce has a remaining outside #asis of >,:::: -required increase. to
allocate ->+A::: 0 >9A:::. among the two parcels of land.
1. (ryce allocates the required increase to the land with unreali$ed appreciation to
the extent of the appreciation. "he com#ined appreciation in the two parcels of
land is >2:::: ->1+::: for land A and >+::: for land (.. "his exceeds (ryces
required increase ->,::::.. "herefore in this step (ryce must allocate the
required increase to the two parcels of land #ased on their relative appreciation.
Land A: (asis allocation K >,:::: ->1+:::C>2::::. K > A222
Land (: (asis allocation K >,:::: ->+:::C>2::::. K > ,??*
2. All of (ryces outside #asis has #een allocated in 7tep 1 so he does not need to
use 7tep 2 of the allocation process. After completing the allocation (ryces
#ases in the distri#uted assets are:
Land A ->1:::: N A222. > 1A222
Land ( ->1:::: N ,??*. > 1,??*
5+. [LO -] ?P#annin$A Danner In*. has a F+=54000 *apita# #oss *arryo%er that !i## e'pire at
the end of the *urrent ta' year if it is not used. >#so4 Danner In*. has been a $enera#
partner in the 1a#is)an Partnership for three years and p#ans to end its in%o#%e)ent !ith
the partnership by re*ei%in$ a #iBuidatin$ distribution. Initia##y4 a## parties a$reed that
Danner In*.5s #iBuidatin$ distribution !ou#d in*#ude F504000 in *ash and #and !ith a fair
)arGet %a#ue of F-004000 Hta' basis of F1204000I. I))ediate#y before the distribution4
Danner5s basis in its partnership interest is F1504000 !hi*h in*#udes its F1004000 share
of partnership debt. 1he 1a#is)an Partnership does not ho#d any hot assets.
a. &hat is the a)ount and *hara*ter of any $ain or #oss to Danner In*.(
b. &hat is Danner In*.5s basis in the #and(
*. Can you su$$est a *ourse of a*tion that !ou#d he#p Danner In*. to a%oid the
e'piration of its *apita# #oss *arryo%er(
10-++
Answer:
a. (ecause <anner &nc.s actual cash distri#ution of >+:::: and deemed cash
distri#ution of >,::::: from the relief of de#t do not exceed <anner &nc.s tax
#asis of >,+:::: prior to the distri#ution it does not recogni$e any gain. 4urther
it does not recogni$e any loss #ecause it received property other than cash andCor
hot assets in the distri#ution.
#. <anner &nc.s #asis in the land is $ero #ecause the >+:::: of actual cash and
>,::::: deemed cash distri#uted reduce its tax #asis in "alisman from >,+:::: to
$ero.
c. <anner &nc. could ensure that it fully utili$es its capital loss carryover prior to
expiration #y selling the land it receives in the distri#ution for >9::::: and
recogni$ing a capital gain of >9::::: ->9::::: selling price for the land less the
$ero #asis in land.. &f <anner &nc. needs land for its #usiness operations it could
take the proceeds from the land sale and purchase a different piece of land suita#le
for its needs. Alternatively <anner &nc. could suggest that the partnership
distri#ute >9::::: of additional cash in lieu of the land if the partnership has the
cash availa#le. !nder this scenario <anner &nc.s actual cash proceeds of >9+::::
and deemed cash proceeds of >,::::: would again trigger a capital gain of
>9::::: since the actual and deemed cash distri#uted would exceed <anner &nc.s
>,+:::: #asis in "alisman #y >9:::::.
5-. [LO 14 5] ?P#annin$A Ee##a Partnership is an eBua# partnership in !hi*h ea*h of the
partners has a basis in his partnership interest of F104000. Ee##a reports the fo##o!in$
ba#an*e sheetM
>ssetsM (asis 48B
In%entory F 204000 F +04000
Land 104000 154000
1ota#s F +04000 F -54000
Capita# N 1oby 104000
N Lae#in 104000
N >ndre! 104000
1ota#s F +04000
a. Identify the 8hot assets9 if 1oby de*ides to se## his partnership interest. >re these
assets 8hot9 for purposes of distributions(
10-+-
b. If Ee##a distributes the #and to 1oby in *o)p#ete #iBuidation of his partnership interest4
!hat ta' issues shou#d be *onsidered(
Answer:
a. /ot assets under )*+,-a. for purposes of sales or exchanges of partnership interests
include unreali$ed receiva#les and inventory items. (ellas hot assets include the
inventory with a #asis of >1:::: and fair market value of >2::::. 4or purposes of
distri#utions )*+,-#. defines hot assets as su#stantially appreciated inventory and
unreali$ed receiva#les. &nventory is considered su#stantially appreciated if its fair
market value exceeds its #asis #y more than ,1:;. "he value of (ellas inventory
does exceed its #asis #y more than ,1:; -,:: >2::::C>1:::: K ,+:;. and is
thus considered hot asset for purposes of distri#utions.
#. &f (ella distri#utes the land to "o#y in complete liquidation of his partnership
interest the distri#ution would #e a disproportionate distri#ution #ecause "o#y
receives more than his share of the cold assets. &n this case "o#y would #e treated
as having sold his share of hot assets to (ella in exchange for cold assets. "he
deemed sale would generate ordinary income to "o#y.
55. [LO 14 7] .i*he##e pays F1204000 *ash for Erittany5s one-third interest in the &est#aGe
Partnership. Just prior to the sa#e4 Erittany5s basis in &est#aGe is F=74000. &est#aGe
reports the fo##o!in$ ba#an*e sheetM
>ssetsM (asis 48B
Cash F =74000 F =74000
Land 1=24000 27-4000
1ota#s F 2<<4000 F +704000
Capita# N >)y =74000
N Erittany =74000
N Een =74000
1ota#s F 2<<4000
a. &hat is the a)ount and *hara*ter of Erittany5s re*o$ni2ed $ain or #oss on the sa#e(
b. &hat is .i*he##e5s basis in her partnership interest( &hat is .i*he##e5s inside basis(
*. If &est#aGe !ere to se## the #and for F27-4000 short#y after the sa#e of Erittany5s
partnership interest4 ho! )u*h $ain or #oss !ou#d the partnership re*o$ni2e(
d. "o! )u*h $ain or #oss !ou#d .i*he##e re*o$ni2e(
10-+5
e. Duppose &est#aGe has a K:5- e#e*tion in p#a*e. &hat is .i*he##e5s spe*ia# basis
adJust)ent( "o! )u*h $ain or #oss !ou#d .i*he##e re*o$ni2e on a subseBuent sa#e
of the #and in this situation(
Answer:
a. Amount reali$ed:
Cash > ,1::::
Less: #asis in partnership interest -E?:::.
(rittanys reali$ed and recogni$ed gain > 19:::
(rittanys gain will #e capital #ecause 'estlake has no hot assets.
#. 8ichelle has an outside #asis in her interest in 'estlake equal to her >,1:::: cash
payment. 8ichelle steps into (rittanys shoes and takes an inside #asis of >E?:::.
c. 'estlake would reali$e and recogni$e the following on the sale of the land:
Amount reali$ed > 1?9:::
Less: ad6usted #asis in land -,E1:::.
'estlakes reali$ed and recogni$ed gain > *1:::
d. 8ichelle would recogni$e a one0third share of the partnership gain on the sale of
the land: ,C2 >*1::: K >19:::. (ecause a )*+9 election was not in effect
8ichelle must recogni$e her full share of the gain on the sale of the land despite
having paid fair value for her interest in the partnership. /er #asis will increase
when she recogni$es the gain and only when she sells her 'estlake interest will she
recogni$e an offsetting loss.
e 8ichelles special #asis ad6ustment is the difference #etween her outside #asis and
inside #asis in 'estlake and is calculated as follows:
&nitial interest in 'estlake > ,1::::
8inus: 8ichelles inside #asis E?:::
7pecial #asis ad6ustment > 19:::
"he entire special #asis ad6ustment relates to the appreciated land. 8ichelle would
not recogni$e any gain on the su#sequent sale of the land if 'estlake has a )*+9
election in effect when she purchased her interest.
10-+7
57. [LO -4 7] C#iff5s basis in his >ero partnership interest is F114000. C#iff re*ei%es a
distribution of F224000 *ash fro) >ero in *o)p#ete #iBuidation of his interest. >ero is an
eBua# partnership !ith the fo##o!in$ ba#an*e sheetM
>ssetsM (asis 48B
Cash F 224000 F 224000
In%est)ent <4<00 <4<00
Land 24200 +54200
1ota#s F ++4000 F 774000
Capita# N Chris 114000
N C#iff 114000
N Cooper 114000
1ota#s F ++4000
a. &hat is the a)ount and *hara*ter of C#iff5s re*o$ni2ed $ain or #oss( &hat is the effe*t
on the partnership assets(
b. If >ero has a K:5- e#e*tion in p#a*e4 !hat is the a)ount of the spe*ia# basis
adJust)ent(
Answer:
a. Cliff receives only money in the distri#ution and the amount exceeds his outside
#asis so Cliff will recogni$e a capital gain on the liquidation of >,,:::. Aero does
not recogni$e any gain or loss and the distri#ution does not affect Aeros #asis in its
assets.
#. &f Aero has a )*+9 election in effect at the time of the distri#ution Aero will have a
special #asis ad6ustment. "he ad6ustment will #e >,,::: #asis increase since Cliff
recogni$ed a gain on the liquidating distri#ution.
5:. [LO -4 7] 0rin5s basis in her Liybron partnership interest is F+4+00. 0rin re*ei%es a
distribution of F24200 *ash fro) Liybron in *o)p#ete #iBuidation of her interest.
Liybron is an eBua# partnership !ith the fo##o!in$ ba#an*e sheetM
>ssetsM (asis 48B
Cash F 24200 F 24200
Dto*G Hin%est)entI 14100 24200
Land 74700 24200
1ota#s F =4=00 F 74700
10-+:
Capita# N 0rin +4+00
N Car# +4+00
N /ra*e +4+00
1ota#s F =4=00
a. &hat is the a)ount and *hara*ter of 0rin5s re*o$ni2ed $ain or #oss( &hat is the effe*t
on the partnership assets(
b. If Liybron has a K:5- e#e*tion in p#a*e4 !hat is the a)ount of the spe*ia# basis
adJust)ent(
Answer:
a. Drin receives only money in the distri#ution and the amount is less than her outside
#asis so Drin will recogni$e a capital loss on the liquidation of >,,::. Iiy#ron
does not recogni$e any gain or loss and the distri#ution does not affect Iiy#rons
#asis in its assets.
#. &f Iiy#ron has a )*+9 election in effect at the time of the distri#ution Iiy#ron will
have a special #asis ad6ustment. "he ad6ustment will #e >,,:: and will #e a #asis
decrease #ecause Drin recogni$ed a loss on the liquidating distri#ution.
5<. [LO -4 7] "e#en5s basis in "ay!ood partnership is F2:04000. "ay!ood distributes a##
the #and to "e#en in *o)p#ete #iBuidation of her partnership interest. 1he partnership
reports the fo##o!in$ ba#an*e sheet Just before the distributionM
>ssetsM (asis 48B
Cash F 2204000 F 2204000
Dto*G Hin%est)entI -<04000 2204000
Land 1104000 2204000
1ota#s F <104000 F 7704000
Capita# N Char#es F 2:04000
N 0sther 2:04000
N "e#en 2:04000
1ota#s F <104000
a. &hat is the a)ount and *hara*ter of "e#en5s re*o$ni2ed $ain or #oss( &hat is the
effe*t on the partnership assets(
b. If "ay!ood has a K:5- e#e*tion in p#a*e4 !hat is the a)ount of the spe*ia# basis
adJust)ent(
10-+<
Answer:
a. /elen does not recogni$e any gain or loss on the distri#ution. &nstead she will
simply ad6ust the #asis in the distri#uted property to defer recognition of any gain
or loss. /elen increases the #asis in the land to >1*::::. /aywood does not
recogni$e any gain or loss and the distri#ution does not affect /aywoods #asis in
its assets.
#. &f /aywood has a )*+9 election in effect at the time of the distri#ution /aywood
will have a special #asis ad6ustment. "he ad6ustment will equal >,?:::: ->1*::::
0 >,,::::. and will #e a #asis decrease #ecause the #asis of the property
distri#uted to /elen was increased.
Co!prehensi"e Probe!s
5=. [LO 24 +4 -] Di)on is a +0 partner in the DED partnership4 a *a#endar-year-end entity.
>s of the end of this year4 Di)on has an outside basis in his interest in DED of F1<<40004
!hi*h in*#udes his share of the F704000 of partnership #iabi#ities. On De*e)ber +14
DED )aGes a proportionate distribution of the fo##o!in$ assets to Di)onM
(asis 48B
Cash F -04000 F-04000
In%entory 554000 754000
Land +04000 -54000
1ota#s F 1254000 F1504000
a. &hat are the ta' *onseBuen*es Ha)ount and *hara*ter of re*o$ni2ed $ain or #oss4 basis
in distributed assetsI of the distribution to Di)on if the distribution is an operatin$
distribution(
b. &hat are the ta' *onseBuen*es Ha)ount and *hara*ter of re*o$ni2ed $ain or #oss4 basis
in distributed assetsI of the distribution to Di)on if the distribution is a #iBuidatin$
distribution(
*. Co)pare and *ontrast the resu#ts fro) parts a. and b.
Answer:
a. "his distri#ution falls in the category of operating distri#utions that include
property other than money. As such 7imon must allocate his outside #asis to the
distri#uted assets. 4irst 7imon assigns #asis ->9::::. to the money distri#uted.
3ext he assigns #asis equal to the inside #asis ->++:::. of the inventory -hot asset..
4inally 7imon assigns #asis to the distri#uted land equal to the inside #asis
->2::::.. 7imon does not recogni$e any gain or loss on the distri#ution #ecause
the cash distri#ution does not exceed his #asis in 7(<. /is remaining outside #asis
is:
10-+=
%re0distri#ution outside #asis > ,AA:::
Less: <istri#utions
Cash > -9::::.
&nventory -++:::.
Land -2::::. -,1+:::.
%ost0distri#ution outside #asis > ?2:::
#. 7imon does not recogni$e a gain or loss if the distri#ution is a liquidating
distri#ution. "o determine the asset #ases 7imon must first determine his alloca#le
#asis #y considering the deemed cash distri#ution from the reduction of his de#t:
%re0distri#ution #asis > ,AA:::
<e#t relief ->?:::: x 2:;. -,A:::.
Alloca#le #asis > ,*::::
7imon calculates his #asis in the distri#uted assets as follows:
Cash >9::::
&nventory >++:::
Land 2::::
7ince the sum of the ad6usted #ases of the distri#uted assets ->,1+:::. is less
than his #asis in 7(< after the deemed cash distri#ution ->,*::::. he has a
required increase of >9+:::.
1. 7imon allocates his required increase to the other property with unreali$ed
appreciation. 7ince the distri#uted land has unreali$ed appreciation of >,+:::
7imon allocates this amount of the required increase to the land. "hus at the
end of this step the #asis in the land is >9+:::.
2. &n the final step 7imon allocates the remaining required increase >2::::
->9+::: 0 >,+:::. to the land. After completing the allocation 7imons #ases in
the distri#uted assets are:
Cash >9::::
&nventory ++:::
Land ->2:::: N >,+::: N >2::::. *+:::
c. 7imilar to the operating distri#ution result 7imon does not recogni$e a gain or loss
if the distri#ution is a liquidating distri#ution. "he determination of the #ases of
the distri#uted assets differs however #etween the operating and liquidating
distri#utions:
10--0
5perating <istri#ution Liquidating <istri#ution
&nventory > ++::: > ++:::
Land 2:::: *+:::
7imons #asis in the inventory remains the same for #oth types of distri#utions
#ecause the tax rules prohi#it any increases to hot assets in order to prevent the
conversion of ordinary gain to capital gain. /owever in the liquidating
distri#ution 7imon must allocate his entire outside #asis to the distri#uted assets
resulting in a su#stantial increase to the #asis of the other assets -land..
71. Carrie D5LaGe4 @eed >. /reen4 and Dou$ >. Di%ot share a passion for $o#f and de*ide to
$o into the $o#f *#ub )anufa*turin$ business to$ether. On January 24 201+4 D5LaGe4
/reen4 and Di%ot for) the D#i*enhooG Partnership4 a $enera# partnership. D#i*enhooG5s
)ain produ*t !i## be a peri)eter-!ei$hted titaniu) dri%er !ith a patented $raphite shaft.
>## three partners p#an to a*ti%e#y parti*ipate in the business. 1he partners *ontribute the
fo##o!in$ property to for) D#i*enhooGM
Partner Contribution
Carrie D5LaGe Land4 ;.O F-704000
Easis F-7040004 .ort$a$e F704000
@eed >. /reen F-004000
Dou$ >. Di%ot F-004000
Carrie had re*ent#y a*Buired the #and !ith the idea that she !ou#d *ontribute it to the
ne!#y for)ed partnership. 1he partners a$ree to share in profits and #osses eBua##y.
D#i*enhooG e#e*ts a *a#endar year end and the a**rua# )ethod of a**ountin$.
In addition4 D#i*enhooG borro!s F145004000 fro) Ei$EanG at the ti)e the *ontributions
!ere )ade. D#i*enhooG uses the pro*eeds fro) the #oan and the *ash *ontributions to
bui#d a state-of-the-art )anufa*turin$ fa*i#ity HF142004000I4 pur*hase eBuip)ent
HF7004000I4 and produ*e in%entory HF-004000I. &ith the re)ainin$ *ash4 D#i*enhooG
in%ests F-54000 in the sto*G of a pri%ate#y o!ned $raphite resear*h *o)pany and retains
F554000 as !orGin$ *ash.
D#i*enhooG operates on a Just-in-ti)e in%entory syste) so it se##s a## in%entory and
*o##e*ts a## sa#es i))ediate#y. 1hat )eans that at the end of the year4 D#i*enhooG does
not *arry any in%entory or a**ounts re*ei%ab#e ba#an*es. Durin$ 201+4 D#i*enhooG has
the fo##o!in$ operatin$ resu#tsM
Da#es F 141274000
Cost of $oods so#d -004000
Interest in*o)e fro) ta'-e'e)pt bonds =00
Qua#ified di%idend in*o)e fro) sto*G 14500
Operatin$ e'penses 1274000
10--1
Depre*iation Hta'I
K1:= on eBuip)ent F+=4000
0Buip)ent <14000
Eui#din$ 2-4000 1--4000
Interest e'pense on debt 1204000
1he partnership is %ery su**essfu# in its first year. 1he su**ess a##o!s D#i*enhooG to use
e'*ess *ash fro) operations to pur*hase F154000 of ta'-e'e)pt bonds Hyou *an see the
interest in*o)e a#ready ref#e*ted in the operatin$ resu#tsI. 1he partnership a#so )aGes a
prin*ipa# pay)ent on its #oan in the a)ount of F+004000 and a distribution of F1004000
to ea*h of the partners on De*e)ber +14 201+.
10--2
1he partnership *ontinues its su**ess in 201- !ith the fo##o!in$ operatin$ resu#tsM
Da#es F 142004000
Cost of $oods so#d -204000
Interest in*o)e fro) ta'-e'e)pt bonds =00
Qua#ified di%idend in*o)e fro) sto*G 14500
Operatin$ e'penses 1+24000
Depre*iation Hta'I
0Buip)ent 1-:4000
Eui#din$ +04000 1::4000
Interest e'pense on debt =74000
1he operatin$ e'penses in*#ude a F14<00 tru*Gin$ fine that one of their dri%ers in*urred
for re*G#ess dri%in$ and speedin$ and )ea#s and entertain)ent e'pense of F74000.
Ey the end of 201-4 @eed has had a fa##in$ out !ith Carrie and Dou$ and has de*ided to
#ea%e the partnership. "e has #o*ated a potentia# buyer for his partnership interest4 Indie
@uff. Indie has a$reed to pur*hase @eed5s interest in D#i*enhooG for F:+04000 in *ash
and the assu)ption of @eed5s share of D#i*enhooG5s debt. Carrie and Dou$4 ho!e%er4
are not *ertain that ad)ittin$ Indie to the partnership is su*h a $ood idea. 1hey !ant at
#east to *onsider ha%in$ D#i*enhooG #iBuidate @eed5s interest on January 14 2015. >s of
January 14 20154 D#i*enhooG has the fo##o!in$ assetsM
1a' Easis ;.O
Cash F <:74<00 F <:74<00
In%est)ent - 1a' 0'e)pts 154000 1<4000
In%est)ent Dto*G -54000 -54000
0Buip)ent - net of dep. +++4000 7004000
Eui#din$ - net of dep. 141-74000 14--04000
Land -704000 5104000
1ota# F 24<:54<00 F +4-<=4<00
Carrie and Dou$ propose that D#i*enhooG distribute the fo##o!in$ to @eed in *o)p#ete
#iBuidation of his partnership interestM
1a' Easis ;.O
Cash F -<54000 F -<54000
In%est)ent Dto*G -54000 -54000
0Buip)ent - net of dep. 1114000 2004000
1ota# F 7-14000 F :+04000
D#i*enhooG has not pur*hased or so#d any eBuip)ent sin*e its ori$ina# pur*hase Just after
for)ation.
10--+
a. Deter)ine ea*h partner5s re*o$ni2ed $ain or #oss upon for)ation of D#i*enhooG.
b. &hat is ea*h partner5s initia# ta' basis in D#i*enhooG on January 24 201+(
*. Prepare D#i*enhooG5s openin$ ta' basis ba#an*e sheet as of January 24 201+.
d. 6sin$ the operatin$ resu#ts4 !hat are D#i*enhooG5s ordinary in*o)e and separate#y
stated ite)s for 201+ and 201-( &hat a)ount of D#i*enhooG5s in*o)e for ea*h
period !ou#d ea*h of the partner5s re*ei%e(
e. 6sin$ the infor)ation pro%ided4 prepare D#i*enhooG5s pa$e 1 and D*hedu#e L to be
in*#uded !ith its ;or) 1075 for 201+. >#so4 prepare a D*hedu#e L-1 for Carrie.
f. &hat are Carrie5s4 @eed5s4 and Dou$5s bases in their partnership interest at the end of
201+ and 201-(
$. If @eed se##s his interest in D#i*enhooG to Indie @uff4 !hat is the a)ount and
*hara*ter of his re*o$ni2ed $ain or #oss( &hat is Indie5s basis in the partnership
interest(
h. &hat is Indie5s inside basis in D#i*enhooG( &hat effe*t !ou#d a K:5- e#e*tion ha%e
on Indie5s inside basis(
i. If D#i*enhooG distributes the assets proposed by Carrie and Dou$ in *o)p#ete
#iBuidation of @eed5s partnership interest4 !hat is the a)ount and *hara*ter of @eed5s
re*o$ni2ed $ain or #oss( &hat is @eed5s basis in the distributed assets(
J. Co)pare and *ontrast @eed5s options for ter)inatin$ his partnership interest.
>ssu)e that @eed5s )ar$ina# ta' rate is +5 per*ent4 and his *apita# $ains rate is 15
per*ent.
10---
Answer:
a.
<FLake @reen <ivot
=ecogni$ed gain or loss on
formation of 7licenhook
> 0:0 > 0:0 > 0:0
#.
<FLake @reen <ivot
Cash contri#uted 0 >9::::: >9:::::
(asis in contri#uted land >9?::::
7hare of <e#t L,C2 x ->?::::
mtg N >,+::::: loan.M +1:::: +1:::: +1::::
<e#t relief -?::::.
&nitial tax #asis in 7licenhook E1:::: E1:::: E1::::
c.
7licenhook (alance sheet
At 4ormation -January 1 1:,2.
"ax (asis
Cash > 12:::::
Land 9?::::
"otal > 1*?::::
Lia#ilities > ,+?::::
"ax Capital:
Carrie <FLake 9:::::
=eed A. @reen 9:::::
<oug A. <ivot 9:::::
"otal > 1*?::::
d.
7licenhook "otal Dach %artnerFs share
5rdinary &ncome: 1:,2 1:,9 1:,2 1:,9
7ales ,,1?::: ,1::::: 2*+222 9:::::
Cost of goods sold -9:::::. -91::::. -,22222. -,9::::.
5perating expenses -,1?:::. -,191::. -91:::. -9,9::.
<epreciation -,:+:::. -,**:::. -2+:::. -+E:::.
&nterest expense -,1::::. -E?:::. -9::::. -21:::.
"otal ordinary income 2*+::: 2A1A:: ,1+::: ,1*?::
7eparately 7tated &tems:
Pualified dividends ,+:: ,+:: +:: +::
10--5
"ax0exempt interest E:: E:: 2:: 2::
),*E expense -2E:::. 0 -,2:::. 0
4ines and penalties 0 -,A::. 0 -?::.
Meals and entertainment
Deductible
Non-deductible
-
(3,000)
(3,000)
-
(1,000)
(1,000)
e. 7licenhook %artnerships page , and 7chedule I to #e included with 4orm ,:?+ and
Carries 7chedule I0, are shown #elow:
10--7
10--:
10--<
10--=
f.
5utside (asis <FLake @reen <ivot
&nitial tax #asis -inc. de#t. > E1:::: > E1:::: > E1::::
5rdinary income ,1+::: ,1+::: ,1+:::
<ividends +:: +:: +::
"ax0exempt interest 2:: 2:: 2::
),*E expense -,2:::. -,2:::. -,2:::.
<e#t changes -,:::::. -,:::::. -,:::::.
Cash distri#utions -,:::::. -,:::::. -,:::::.
(asis at ,1C2,C,2 > A21A:: > A21A:: > A21A::
5rdinary income ,1*?:: ,1*?:: ,1*?::
<ividends +:: +:: +::
"ax0exempt interest 2:: 2:: 2::
4ines and penalties -?::. -?::. -?::.
8OD -1:::. -1:::. -1:::.
(asis at ,1C2,C,9 E+A?:: E+A?:: E+A?::
g. Amount reali$ed:
Cash > *2::::
<e#t relief ->+1:::: 0 >,:::::. 91:::: > ,,+::::
Less: #asis in partnership interest -E+A?::.
=eeds reali$ed and recogni$ed gain > ,E,9::
"o the extent =eed reali$es any amounts attri#uta#le to hot assets his gain will #e
classified as ordinary. &f 7licenhook sold its assets for their fair market value at the
sale date the ordinary gain from depreciation recapture would #e as follows:
"ax #asis 48B @ainCLoss =eeds share
Dquipment > 222::: > ?::::: > 1?*::: > AE:::
"otal gain > ,E,9::
Less: ordinary gain -AE:::.
Capital gain > ,:19::
=eed recogni$es >AE::: of ordinary income from depreciation recapture on the
equipment and >,:19:: capital gain from the sale of his interest in 7licenhook.
&ndie will take an outside #asis in his 7licenhook interest equal to his cash payment
of >*2:::: plus his ,C2 share of 7licenhooks lia#ilities of >91:::: for a total of
>,,+::::.
h. &ndies inside #asis is equal to =eeds inside #asis #efore the sale: >E+A?:: or one
third of the total tax #asis in all the partnership assets. &ndies special #asis
ad6ustment would #e the difference #etween his outside #asis and inside #asis
-#oth net of lia#ilities. in 7licenhook and is calculated as follows:
10-50
&nitial #asis in 7licenhook > ,,+::::
8inus: &ndies inside #asis E+A?::
7pecial #asis ad6ustment > ,E,9::
"he special #asis ad6ustment relates to the investment in tax exempt securities
equipment #uilding and land. &f 7licenhook were to make a )*+9 election &ndie
would #e allocated additional depreciation #ecause of the increased #asis in the
equipment and #uilding. &n addition if 7licenhook were to sell the land &ndie would
report less gain if 7licenhook had a )*+9 election in effect when he purchased his
interest.
i. =eed does not recogni$e any gain or loss on the distri#ution. =ather he ad6usts the
#asis in the distri#uted assets.
=eeds outside #asis in 7licenhook at the distri#ution is >E+A?:: including his
>91:::: share of partnership lia#ilities. =eed will need to allocate this #asis to the
distri#uted assets. =eed first reduces his #asis for the deemed cash distri#ution
relating to his reduction in 7licenhook de#t ->91::::. leaving an outside #asis of
>+2A?:: ->E+A?:: 0 >91::::. to allocate to the distri#uted assets. /e determines
his #asis in the distri#uted assets as follows:
Cash > 9A+:::
%otential =ecapture :
&nvestment 9+:::
Dquipment ,,,:::
7ince the sum of the ad6usted #ases of the distri#uted assets ->?9,:::. is
greater than his alloca#le #asis in 7licenhook ->+2A?::. =eed has a required
decrease of >,:19::.
,

1. "he recapture potential inherent in the equipment should #e assigned a #asis of
$ero and treated as a hot asset. =eed reduces the #asis in the cold assets
-investment and equipment. distri#uted. "he required decrease is allocated
#etween the investment and equipment according to their relative tax #asis
amounts. Accordingly the #asis of investment should #e reduced #y >1E+2A
->,:19:: Q >9+:::C>,+?:::. and the #asis of equipment should #e reduced
#y >*1A?1 ->,:19:: Q >,,,:::C>,+?:::..
After completing the allocation =eeds #ases in the distri#uted assets are:
Cash >9A+:::
%otential =ecapture :
&nvestment in stock ->9+::: 0 >1E+2A.,+9?1
Dquipment ->,,,::: 0 >*1A?1. 2A,2A
1
Din*e the basis redu*tion is not at #east F25040004 the distribution does not )eet the definition of a 8substantia#
basis redu*tion94 !hi*h !ou#d reBuire a )andatory spe*ia# basis adJust)ent.
10-51
6. &f =eed sells his interest to &ndie =eed must immediately recogni$e a gain of
>,E,9::: >AE::: is ordinary income and >,:19:: is capital gain. /e has no future
tax lia#ility related to the transaction. "he capital gain will #e taxed at a maximum
of ,+;. @iven =eeds assumed ordinary marginal tax rate of 2+; he would have
cash after tax of >?A29E: R>*2:::: H -,+; >,:19::. H -2+; >AE:::.S to
invest in other pro6ects as he wishes.
!nder his other alternative in which 7licenhook distri#utes cash stock and
equipment =eed is a#le to defer any gain on the liquidation until the distri#uted
assets are sold. /owever as he sells the assets he will recogni$e gain or loss. &f =eed
were to immediately sell the distri#uted assets he would recogni$e a >1E+2A capital
gain on the investments ->9+::: 48B H >,+9?1 #asis.J and on the sale of the
equipment he would recogni$e a gain of >,?,A?1 ->1::::: 48B H >2A,2A #asis.
of which >AE::: will #e ordinary income due to depreciation recapture and
>*1A?1 would #e ),12, gain. "his option would leave =eed with >?*91*? after tax
cash as follows:
"ax #asis 48B @ainCLoss After0tax Cash
Cash >9A+::: >9A+::: 0:0 >9A+:::
&nvestment in stock ,+9?1 9+::: 1E+2A 9:+*:
Dquipment 2A,2A 1::::: ,?,A?1 >,+*E1: T
> ,E,9:: > ?A29E:
TAfter0tax cash from the sale of investments is >9:+*: R>9+::: H -,+;
U >1E+2A.S. After0tax cash from the sale of the equipment is >,+*E1:
R>1::::: H -,+; U >*1A?1. H -2+; U >AE:::.S assuming the ),12,
gain is taxed at capital gains rates.

3ote that under the second alternative =eeds after tax cash is the same
as under the sale option. /owever =eed may incur additional costs to
sell these assets which would reduce his after0tax cash.
&n addition under the sale option Carrie and <oug would have a new partner in
their #usiness. "his might work out well if &ndie agrees with the existing partners
a#out how the #usiness should run. 5therwise this might generate some conflict
#etween the partners. "he partnership would retain all of its assets under this
option so it would not incur any additional cost to replace the equipment that
would #e distri#uted to =eed under the distri#ution option. !nder the distri#ution
option not only might 7licenhook need to replace the distri#uted equipment #ut it
would #e left with only >2E,A:: of cash ->A*?A:: pre0distri#ution Rgiven in
pro#lemS 0 >9A+::: distri#ution..
10-52

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Chapter 10 - Dispositions of Partnership Interests and Partnership Distributions

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