To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 11 PARTNERSHIPS: DISTRIBUTIONS, TRANSFER OF INTERESTS, AND TERMINATIONS SOLUTIONS TO PROBLEM MATERIALS Question/ Problem 10 11 12 13 14 15 16 17 18 19 20 21 Learning Objective Topic LO Proportionate nonliquidating distributions: treatment to partner LO Proportionate nonliquidating distributions: partner’s basis LO Proportionate nonliquidating distributions: effect on partnership LO Proportionate liquidating distributions: treatment to partner LO Proportionate liquidating distributions: partner’s basis LO Proportionate liquidating distributions: effect on partnership LO 1, Current distributions LO 1, 4, Hot assets definitions LO 1, Conceptual: tax results of distributions LO Distribution of precontribution gain property LO Distribution of precontribution gain property LO Disproportionate distributions LO Section 736 income and property payments LO 6, Ramifications of sale of a partnership interest LO Sale of a partnership interest LO Gift of partnership interest LO Section 754 election LO Partnership terminations LO 1, 2, 3, Comprehensive issues 4, 5, 6, 8, 10, 12 LO 11 Partner/owner liability for obligations of partnership, LLP or LLC LO Nonliquidating distribution; basis of assets distributed (limited); partner’s outside basis Status: Present Edition Q/P in Prior Edition New New New New New New New Unchanged Unchanged New New New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged 12 13 14 18 New Instructor: For difficulty, timing, and assessment information about each item, see p 11-4 11-1 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-2 Question/ Problem 2012 Corporations Volume/Solutions Manual Learning Objective 22 LO *23 LO *24 LO *25 LO 26 LO 27 LO 1, 28 29 30 31 32 33 *34 35 *36 LO 1, 3, LO 1, 3, LO 1, 3, LO 2, 3, 4, 12 LO LO 2, 12 LO LO 2, 12 LO *37 LO 2, 12 38 LO 39 LO Topic Nonliquidating distribution; basis of assets distributed (limited); partner’s outside basis Nonliquidating distributions; amount and nature of gain or loss; basis of assets distributed; partner’s outside basis Continuation of Problem 23; partnership adjustment to basis on distribution of assets Allocation of basis to multiple assets distributed Nonliquidating distribution; basis of assets distributed; partner’s outside basis; communications Effect of change in partner’s share of liabilities; nonliquidating versus liquidating distributions Current distribution concepts Current distribution concepts Current distribution concepts Liquidating distributions Status: Present Edition Q/P in Prior Edition New New New Unchanged 24 Unchanged 25 Unchanged 26 New New New New Results of various liquidating distributions New Proportionate liquidating distributions New Proportionate liquidating distributions New Proportionate liquidating distributions Unchanged Proportionate distribution which liquidates Unchanged partner’s interest; amount and nature of gain or loss; basis of land parcels to partner; effect of liquidating distribution if land parcels were inventory to partnership Same facts as Problem 36, except that cash Unchanged and a desk are distributed; amount and nature of gain or loss; basis to partner of desk Distribution of precontribution gain Modified property; gain or loss to contributing partner; gain or loss to distributee partner; effect on basis of distributed property; effect on basis of contributing partner’s interest in partnership Distribution to partner previously Modified contributing precontribution gain partner; gain or loss to distributee partner; effect on basis of partnership interest; effect on basis of partnership property 34 35 36 37 38 Instructor: For difficulty, timing, and assessment information about each item, see p 11-4 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-3 Status: Present Edition Q/P in Prior Edition Question/ Problem Learning Objective 40 LO 3, 41 LO 5, 12 *42 LO *43 LO *44 LO 6, 45 LO 6, 7, 46 LO 6, 7, 47 48 LO LO 10 Topic Distribution of marketable securities; § 736 Unchanged issues Classification and treatment of § 736 Unchanged payments Sale of partnership interest; amount and Unchanged nature of gain or loss; basis of new partner’s interest; election to adjust basis of partnership property Based on data in Problem 42; proportionate Unchanged distribution which liquidates partner’s entire interest; distribution consists of cash, unrealized receivables, and a § 1231 asset Sale of interest with unrealized receivables New present; amount and nature of gain or loss; subsequent collection of unrealized receivables when election to adjust basis of partnership property was not in effect; optional adjustments to basis of partnership property General partner dies and brother becomes Unchanged successor in interest; amount and nature of gain or loss Same as Problem 45 except that partnership Unchanged had more unrealized receivables present Termination of a partnership New Family partnership where capital is a New material income-producing factor; allocation of partnership profits between parent and child; child under 19 years of age 39 40 41 42 44 45 *The solution to this problem is available on a transparency master Instructor: For difficulty, timing, and assessment information about each item, see p 11-4 Research Problem Topic Section 736 series of payments Allocation of step-up adjustment Partnership agreements Internet activity Internet activity Internet activity Status: Present Edition New Unchanged Unchanged Unchanged New Unchanged Q/P in Prior Edition © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-4 2012 Corporations Volume/Solutions Manual Question/ Problem Est’d completion time Difficulty Easy Easy Easy Easy 5 Easy Easy Medium Easy Easy 10 Easy 11 Easy 12 Easy 13 Medium 10 14 Easy 10 15 Easy 16 Medium 17 Easy 18 Medium 10 19 Medium 20 20 Easy 21 Medium 10 22 Medium 10 23 Medium 10 10 10 5 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting Analytic Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations Question/ Problem Difficulty Est’d completion time 24 Medium 10 25 Medium 10 26 Medium 10 27 Medium 10 28 Medium 15 29 Medium 10 30 Medium 10 31 Medium 10 32 Medium 15 33 Medium 15 34 Medium 10 35 Medium 10 36 Medium 15 37 Medium 15 38 Medium 15 39 Medium 15 40 Medium 15 41 Hard 15 42 Medium 15 43 Medium 10 44 Medium 15 45 Medium 10 46 Medium 10 11-5 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting Analytic | Reflective Thinking Analytic Communication | Analytic Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-6 2012 Corporations Volume/Solutions Manual Question/ Problem Est’d completion time 47 48 Difficulty Easy Medium 10 10 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Reporting FN-Measurement | FNReporting Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-7 CHECK FIGURES 21.a $0 21.b $0 21.c Inventory $160,000; land $80,000; partnership interest $60,000 22.a $0 22.b $0 22.c Account receivable $0; land $90,000; partnership interest $0 23.a $4,000 gain and basis in partnership interest $0; partnership $0 gain 23.b Land $50,000 basis and basis in partnership $10,000; partnership $0 gain 23.c No gain or loss; land basis $10,000; basis in partnership interest $0 23.d $20,000 gain; $0 basis in inventory; $0 basis in partnership interest 24.a $4,000 step up 24.b No § 754 election 24.c $40,000 step up 24.d $70,000 step up 25.a No gain or loss 25.b $6,000 in item and $3,000 in item 26.a $0 26.b $0 gain 26.c $10,000 basis in inventory 26.d $0 27.a Inventory basis $10,000; basis in partnership interest $20,000 27.b Recognized loss $20,000; Inventory basis $10,000 28 Precontribution gain property and disproportionate distribution 29 Disproportionate distribution, precontribution gain, and marketable securities treated as cash 30 Proportionate distribution 31 Design distribution so proportionate, with precontribution gain property returned to contributor; watch marketable securities to minimize gain 32.a $15,000 capital gain 32.b No gain or loss; $50,000 basis 32.c No gain or loss; inventory $20,000; capital asset $50,000 32.d $0 basis in accounts receivable; $40,000 capital loss 33.a None 33.b $20,000 in inventory and $40,000 in land 33.c 33.d 33.e 33.f 34.a 34.b 34.c 34.d 35.a 35.b 35.c 35.d 35.e 36.a 36.b 36.c 37.a 37.b 37.c 38.a 38.b 38.c 38.d 38.e 39.a 39.b 39.c 39.d 39.e 40.a 40.b 40.c 40.d 41.a 41.b 41.c 41.d 42.a 42.b 42.c 42.d 43 44.a $20,000 of § 1231 gain or capital gain No gain or loss No § 754 election No $0 $20,000 inventory; $70,000 land $0 $50,000 land; $20,000 remaining partnership interest basis $14,000 loss $6,000 None Distribute non-inventory/receivable also No loss; Jamie’s basis is $14,000 $0 $22,000 parcel and $36,000 parcel Recognizes $18,000 capital loss; basis in inventory items of $20,000 each $0 $58,000 $0 Use desk in business $9,000 gain; $49,000 basis $25,000 basis $0 gain; $15,000 basis $5,000 gain; equitable Yes No gain to contributing partner $40,000 gain $70,000 basis in interest $30,000 basis in property $60,000 partnership basis in property Yes No gain to contributing partner Property payment under § 736(b) $17,500 cash distribution $12,500 capital gain $17,500 basis in security $40,000 § 736(a), $60,000 § 736(b) $40,000 ordinary income; $10,000 capital gain Partnership deducts $40,000 guaranteed payment Election under § 754 $100,000 realized $30,000 ordinary income $20,000 capital gain $100,000 basis $35,000 ordinary income; $15,000 capital gain $80,000 ordinary income; $80,000 capital gain © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-8 44.b 44.c 2012 Corporations Volume/Solutions Manual $80,000 ordinary income $0 from receivables; $10,000 possible § 1231 gain from land sale 45.a $70,000 gain (capital gain $45,000; ordinary income $25,000) 45.b No gain or loss 46.a $80,000 ordinary income; $10,000 capital loss 46.b Successor treats collection as gross income under § 691 47.a 47.b 47.c 47.d 47.e 47.f 48.a 48.b 48.c No No Yes No Yes No $90,000 $30,000 “Kiddie tax” rules apply © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-9 DISCUSSION QUESTIONS In a proportionate nonliquidating distribution, the property is distributed in the following order: cash, unrealized receivables and inventory, and other assets Gain is generally only recognized by the partner if the cash received exceeds the partner’s basis in the partnership interest (Exceptions might require gain recognition on a distribution of marketable securities or where precontribution gain property is involved.) Loss is not recognized on a proportionate nonliquidating distribution Examples 5, 8, and A partner’s basis in property received from a partnership is generally the same as the basis the partnership held in the property (carryover basis) However, if the partner’s basis in the partnership interest is less than the partnership’s basis in the asset, the lower basis-in-interest is assigned to the property (substituted basis) Each category of assets (in the order inventory, then land) is assigned a basis equal to the lesser of the partnership’s basis in the asset or the partner’s remaining outside basis in the partnership interest Examples and In a proportionate nonliquidating distribution, the partnership recognizes no gain or loss If the partnership has a § 754 election in effect, it will reduce the basis of remaining partnership assets if the partner was required to take a substituted (reduced) basis in assets received Because the partner will not increase the basis of partnership assets in a proportionate nonliquidating distribution, the partnership will not step up the basis of remaining assets p 11-4 As with a nonliquidating distribution, in a proportionate liquidating distribution, the property is distributed in the following order: cash, unrealized receivables and inventory, and other assets Gain is generally only recognized by the partner if the cash received exceeds the partner’s basis in the partnership interest (Exceptions might require gain recognition on a distribution of marketable securities or in situations involving precontribution gain property.) Loss is recognized only if 1) the distribution consists only of items in the first two tiers (cash, then unrealized receivables and inventory), and 2) the partnership’s basis in the distributed assets is less than the partner’s basis in the partnership interest before the distribution Examples 12, 14, and 15 Unlike a proportionate nonliquidating distribution, in a proportionate liquidating distribution, the partner’s entire basis in the partnership interest is generally allocated among all the assets distributed Assets are distributed in three tiers – cash, unrealized receivables and inventory, then land Each tier is assigned a basis equal to the lesser of the partnership’s basis in the asset or the partner’s remaining outside basis in the partnership interest If the partner’s basis is not fully assigned, and if no third tier assets are distributed, the partner can recognize a loss If the partnership’s basis in assets in a given tier exceeds the partner’s remaining basis in the partnership interest, the partner steps down the basis in those assets to absorb the partner’s remaining partnership basis Concept Summary 11.2 In a proportionate liquidating distribution in which the partnership also liquidates, the partnership recognizes no gain or loss This contrasts with the treatment for corporate distributions of appreciated property, where the corporation recognizes (and pays tax on) the built-in gain Concept Summary 11.2 and Chapter © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-10 2012 Corporations Volume/Solutions Manual The following issues must be addressed: • Is this a current or a liquidating distribution? No loss can be recognized on a current distribution In addition, current vs liquidating status may impact Liz’s basis in the assets she receives pp 11-4 to 11-12 • Is the cash distribution greater than Liz’s basis in the partnership interest? If so, Liz will recognize gain on the distribution pp 11-5, 11-9, and 11-10 • Is the distribution disproportionate with respect to the inventory? If so, Liz or the partnership may be required to recognize ordinary income on the distribution pp 11-15 and 11-16 • What is Liz’s basis in the land and inventory she receives in the distribution? If this is a liquidating distribution, the assets are allocated a substituted basis equal to Liz’s basis in her partnership interest If this is a current distribution, the assets are allocated the lesser of (1) a carryover basis or (2) a substituted basis In either case, ordering rules must be followed in determining Liz’s basis pp 11-6 to 11-11 Hot assets are assets owned by the partnership that, if sold or otherwise liquidated, would produce ordinary income at the partnership level There are two main categories of hot assets: unrealized receivables and inventory Classification as a hot asset is relevant at any time a transaction (e.g., sale of a partnership interest or a disproportionate distribution from the partnership to a partner) would alter the partner’s ownership interest in ordinary income-producing assets Each type of transaction (distribution, sale, etc.) is subject to different rules regarding the specific assets that are treated as unrealized receivables or inventory Unrealized receivables include any rights (contractual or otherwise) to receive payments (1) from the sale of partnership property (other than a capital asset) held for sale to customers or (2) from the rendering of services that have not previously been included in income under the partnership’s method of accounting The most common example of an unrealized receivable is a trade account receivable of a cash basis taxpayer Inventory items, as defined in § 751(d)(2), include virtually all partnership property except money, capital assets, and § 1231 property Reg § 1.751-1(d)(2)(B) defines inventory items as any partnership property which, on sale or exchange, would be considered property other than a capital or § 1231 asset Thus, the term includes stock in trade or property held for sale to customers in the ordinary course of business and any other property which is not a capital asset or a § 1231 asset The definition is broad enough to include all items considered to be unrealized receivables For purposes of disproportionate distributions under § 731 or § 736 (payments to retiring partners), “substantially appreciated inventory” is relevant Any asset which meets the definition of “inventory” (as defined above) must be tested to determine whether it is “substantially appreciated.” Inventory is substantially appreciated if the fair market value of all inventory property exceeds 120% of its adjusted basis The selling or retiring partner will recognize ordinary income to the extent of the appreciation inherent in such inventory pp 11-6, 11-15, 11-19, and 11-24 to 11-26 The partnership distribution rules reflect the aggregate theory of taxation With respect to property ownership, the partner can be seen as an extension of the partnership Ownership of property by the partner generally produces the same result as ownership by the partnership © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-12 14 2012 Corporations Volume/Solutions Manual Jody must determine her gain or loss on the sale of the partnership interest If the partnership owns “hot assets,” she must recognize ordinary income or loss to the extent of her proportionate share of the built-in appreciation or depreciation on these assets Her remaining gain or loss is adjusted by the ordinary income or loss recognized If the partnership’s assets are substantially appreciated, Bill may wish to ask the partnership to make a § 754 election so he can be allocated a step-up in basis If the partnership has a substantial built-in loss (assets are depreciated by more than $250,000), the partnership may be required to make a step-down adjustment with respect to Bill’s acquired interest If Jody sells more than a 50% interest in the partnership, or Bill is the sole remaining member of a two-owner partnership, the entity will terminate on the date the purchase is finalized This may result in a loss of a favorable tax year or accounting method by the partnership pp 11-21 to 11-25, 11-29, and 11-30 15 The selling partner’s sales proceeds include cash and the fair market value of any property received from the purchaser, plus the partner’s share of any partnership liabilities assumed by the purchaser Under § 741, a partnership interest is a capital asset, the sale or exchange of which may result in the recognition of capital gain or loss However, if the partnership has § 751 assets at the time of sale or exchange, the resulting gain or loss is allocated between capital gain (or loss) and ordinary income (or deductions) Example 28 16 When a partnership interest is gifted, typically, neither the donor nor donee partner recognizes gain or loss Partnership items for the year are allocated between the donor and the donee, and each reports their respective share of income for the year in which the partnership’s tax year ends The partnership may allocate income using either a daily proration method or the interim closing of the books method In a daily proration, each item of income, gain, loss, deduction, or credit is allocated based on the proportion of days each partner belonged to the partnership Under the interim allocation method, actual partnership income is determined through the date of the gift, and allocated to the respective parties Under this method, certain cash method items, such as interest, taxes, and rent, must be allocated on a daily basis In addition to the Federal income tax consequences, the donor must also consider the gift tax consequences of the transfer pp 11-23 and 11-28 17 The partnership must make the optional adjustment election by attaching a statement to its timely filed tax return for the taxable year in which the step-up transaction occurs A partner cannot make the election, even if the partner is the only taxpayer affected by the election All transactions in that taxable year and all future taxable years are subject to the election The partnership can revoke the election but only with IRS permission pp 11-29 and 11-30 18 A partnership is terminated when no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners This can occur when an existing partnership incorporates; when one party purchases the interest of the other party in a two-party partnership; when one party in a two-party partnership is liquidated from the partnership under § 736; or if the partnership simply liquidates and distributes all its assets to its partners A partnership also terminates if, within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits A “technical” © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-13 termination occurs when the business, financial operation, or venture continues in a new partnership after the old partnership terminates because of the 50%, 12-month rule pp 11-32 and 11-33 19 20 a False In general, capital gain, not ordinary income, is recognized on a proportionate nonliquidating distribution of cash in excess of the partner’s basis in the partnership interest Example b False Loss is not recognized on a current distribution Example c True The cash distribution reduces the partner’s basis in the partnership interest to $0, and the remaining assets will be required to take a $0 basis Example 12 d False If a precontribution gain property is returned to the original contributing partner, no gain or loss is recognized p 11-14 e True A disproportionate distribution changes the partners’ ownership interest in ordinary-income-producing property The ordinary income must be recognized by the partner or partnership whose interest in these assets is reduced pp 11-15 and 11-16 f True A payment for goodwill that is provided for in the partnership agreement is treated as a property payment under § 736(b) whether the partner is a general or limited partner and whether or not capital is a material income-producing factor p 11-18 g True In general, the parties have some discretion in deciding whether an amount is an income or property payment, but specific rules apply to certain types of payments p 11-17 h False The partner will recognize ordinary income to the extent of any ordinary income inherent in the underlying assets of the partnership Example 33 i False The partnership, not the distributee partner, would make an election under § 754 pp 11-29 and 11-30 j True A partnership might make an election under § 754 if a new partner paid more for a partnership interest than the partner’s share of the underlying basis in the partnership assets p 11-29 k True A family member cannot be a partner in a family-owned service-providing partnership unless services are provided to the partnership p 11-34 l False Even though the partner might receive the same amount of cash in a sale or a redemption of the partnership interest, the tax results could differ substantially pp 11-39 and 11-40 The following matrix can be used in answering this question General Partner in a General Partnership Contractual Liability Unlimited—trade creditors can collect amounts from any assets of the general partner Malpractice Liability Unlimited—malpractice claims can be satisfied from any assets of the general partner © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-14 2012 Corporations Volume/Solutions Manual General Partner in a Limited Partnership Contractual Liability Same as general partnership Malpractice Liability Same as general partnership Limited Partner in a Limited Partnership Personal assets of the limited partner are not subject to creditor claims, whether arising from a contractual obligation or a malpractice action General Partner in an LLP (There are no limited partners in an LLP.) Unlimited in many states— trade creditors can collect amounts from any assets of the general partner Some states, however, limit an LLP partner’s contractual liability to amounts owed by the partner to the LLP Malpractice claims can only be satisfied from personal assets of the general partner if that partner or a party the partner supervises committed the malpractice action Member of a nonprofessional LLC Limited to amounts owed by the member to the LLC Malpractice claims against the entity cannot be satisfied by member assets pp 11-35 to 11-37 and Chapter 10 PROBLEMS 21 a The partnership recognizes no gain or loss as a result of the distribution b Because this is a proportionate nonliquidating distribution, Greg would only recognize gain if the cash received exceeded his outside basis He would only recognize loss under limited conditions, and only if his interest in the partnership terminated Therefore, he has no recognized gain or loss c Greg takes a basis in the inventory equal to the partnership’s basis in the inventory, or $160,000 His $360,000 basis in the partnership is reduced first by the $60,000 cash distribution, then by the $160,000 inventory distribution He takes a basis in the land equal to the partnership’s basis in the land, or $80,000 The land distribution reduces his basis in the partnership interest to $60,000 Example 22 a A partnership recognizes no gain or loss on a distribution that does not alter the partner’s proportionate ownership of hot assets b Tiffany recognizes no gain or loss on the distribution Gain is recognized on a nonliquidating distribution if the amount of cash or certain marketable securities received exceeds the partner’s outside basis immediately before the distribution c The cash is deemed distributed first and reduces Tiffany’s outside basis to $90,000 The account receivable is distributed next, and takes a substituted and carryover basis of $0 The land is distributed last and takes a substituted basis of $90,000 The receivable distribution does not change Tiffany’s outside basis The value she received © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-15 was $255,000 (compared to her basis of $120,000), but she recognizes no gain or loss because of the basis allocation and ordering rules Examples and 23 a Brooke recognizes a $4,000 gain on the distribution Her outside basis for her partnership interest is reduced to $0 The partnership does not recognize any gain or loss on the transaction b The $30,000 cash is deemed distributed first and reduces Brianna’s outside basis to $60,000 The land takes a $50,000 carryover basis to Brianna, and her outside basis for her partnership interest is reduced to $10,000 The partnership recognizes no gain or loss on the transaction c Brianna recognizes no gain or loss on the cash distribution, the land takes a substituted basis to Brianna of $10,000, and her outside basis for the partnership interest is reduced to $0 d The cash is deemed distributed first and results in a $20,000 taxable gain to Bonnie because it exceeds her basis in the interest before the distribution The inventory takes a $0 substituted basis Bonnie’s outside basis is reduced to $0 as a result of the cash distribution The inventory distribution does not affect her basis The partnership recognizes no gain or loss on the distribution Examples to 24 In some of these situations, the partnership making the distribution may wish to make an election under § 754 to adjust the basis of partnership assets If a § 754 election is made as a result of a distribution, the basis increase is allocated to partnership assets, and all the partners share in the increase and any resulting deductions a If a § 754 election is made, the partnership would increase its basis in remaining partnership assets by $4,000 ($4,000 gain recognized by Brooke) b A § 754 election would not be made in this case because the land’s basis carried over to Brianna in the distribution c If a § 754 election is made, the partnership would increase its basis in partnership assets by $40,000 (the $40,000 decrease in the land basis) to reflect the reduction of the asset’s basis in the hands of the partner d If a § 754 election is made, the partnership would increase its basis in remaining partnership assets by $70,000 [$20,000 gain recognized by Bonnie plus $50,000 ($50,000 inside basis of inventory – $0 remaining outside basis in interest after cash distribution)] pp 11-29 and 11-30 25 a Mark does not recognize a gain or loss on the distribution, because this is a nonliquidating distribution Gains are only recognized in a nonliquidating distribution if distributed cash exceeds the partner’s basis in the partnership, which did not happen in this case Losses are not recognized in nonliquidating distributions b Mark’s basis in the two inventory items is limited to the basis in his partnership interest, less the amount of cash received, or $9,000 Because the partnership’s basis in © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-16 2012 Corporations Volume/Solutions Manual the two inventory items ($20,000) exceeds the amount Mark can allocate to these assets, his basis in each item is determined in three steps as follows: The inventory items both are initially allocated a basis equal to the partnership’s basis in the assets, or $10,000 each Because the second inventory item is depreciated in value, Mark’s basis is reduced to the amount of its fair market value, or $5,000 The first inventory item is appreciated, so its basis is not further reduced in this step Mark now has inventory with bases totaling $15,000 and a capital account that can absorb $9,000 of basis Therefore, he must reduce the bases in the inventory items an additional $6,000 This reduction is applied proportionately to the two inventory items, based on their respective bases after Step 2: $6,000 × $10,000 $15,000 = $4,000 $5,000 = $2,000 $6,000 × $15,000 The basis in the first inventory item is reduced to $6,000 ($10,000 – $4,000) and the basis in the second inventory item is reduced to $3,000 ($5,000 – $2,000) Example 10 26 Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 January 12, 2012 Ms Heloise Hawkins Hawkins-Henry Partnership 1622 East Henry Street St Paul, MN 55163 Dear Heloise: You have asked our advice regarding the effect of 2011 operating results and distributions from the Hawkins-Henry Partnership on your personal 2011 tax situation Facts: The partnership reported no income or loss for the year You received a distribution in December of $140,000 cash, and inventory which had a basis of $25,000 to the partnership and a fair market value of $20,000 Your basis in the partnership interest on January 1, 2011, was $150,000 Issues: a Does the partnership recognize gain or loss in 2011? b How much gain or loss must you report for the current year? c What is your basis in the inventory received from the partnership? © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations d 11-17 What is your basis in your partnership interest at the end of the year? Conclusion and Analysis: a The partnership will recognize no gain or loss on either the cash or inventory distribution b You will recognize no gain or loss on the cash distribution This distribution did not exceed your $150,000 basis in your partnership interest, so there is no taxable gain c Your basis in the inventory you received is $10,000 The basis in inventory distributed from a partnership is the lesser of the partnership’s basis in the property before the distribution ($25,000) or your basis in the partnership interest after considering the cash distributions ($10,000) d Your basis in the partnership interest is $0 at the end of the year The cash distributions reduced your basis to $10,000 ($150,000 – $140,000) The inventory takes a substituted basis of $10,000 and reduces your basis to $0 If you have any questions, please not hesitate to call us Sincerely, Amy Grey Accountant Examples and 27 a Monica is treated as receiving cash distributions of $70,000 ($20,000 cash plus $50,000 relief of liabilities) The distributions reduce Monica’s basis to $30,000 The inventory takes a carryover basis to Monica of $10,000, and reduces her basis in MIP to $20,000 b If this is a proportionate liquidating distribution, Monica recognizes a loss of $20,000, and her basis in the inventory will be $10,000 The inventory cannot be “stepped up” to absorb the $30,000 of basis remaining after the distribution Because Monica has received only cash and inventory, she may claim the loss Examples 6, 9, and 12 28 Section 751(b) must be considered when there is a disproportionate distribution of “hot assets.” In this case, both Tyler’s and Anita’s share of unrealized receivables is reduced from a value of $50,000 ($200,000 × 25%) before the distribution to $25,000 ($100,000 × 25%) following the distribution This will result in ordinary income recognition to Tyler and Anita In addition, a distribution of precontribution gain property less than seven years after it was contributed can result in a taxable gain to the contributing partner if the distribution is to a partner other than the contributing partner In this case, Vincent would be taxed on built-in gain when the land is distributed to Tyler and Anita Examples 9, 18, and 21 29 The disproportionate distribution of accounts receivable to Anita will result in ordinary income to Tyler and Vincent, as described in Problem 28 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-18 2012 Corporations Volume/Solutions Manual Gain will arise on a current distribution of cash that exceeds the partner’s outside basis However, the distribution of cash does not exceed Vincent’s basis Per the last paragraph, there is a disproportionate distribution of accounts receivable, so Vincent will recognize ordinary income A distribution of marketable securities is treated as a distribution of cash, but the amount of the distribution treated as cash is the fair value of the security reduced by the partner’s share of appreciation which attaches to these securities In this case, the partnership has realized substantial appreciation, so after the reduction, the distribution is not likely to result in an amount in excess of Tyler’s $75,000 basis In addition, some of the securities are deemed a payment in exchange for Vincent’s share of (distributed) unrealized receivables, so the result is ordinary income to Vincent Examples 9, 16, and 21 30 This distribution is proportionate with respect to “hot assets,” so the receivables not trigger ordinary income recognition by any of the partners For Tyler and Anita, the cash is distributed first Because the cash does not exceed their outside basis, no gain is recognized The receivables are distributed second and the partners take a carryover basis of $0 in the receivables For Vincent, the receivables are deemed distributed first and take a carryover basis The land is distributed next Because he is merely receiving a return of precontribution gain property he contributed, he will not recognize any gain or loss Note that there is no requirement for cash and capital gain property distributions to be proportionate for each specific property Examples and 31 If accounts receivable are distributed disproportionately to the partners, the nondistributee partners will be required to recognize ordinary income currently, and the distributee partner will be able to defer the ordinary income until such time as the receivables are collected Because Vincent contributed the appreciated land less than seven years ago, if any of the land is distributed to any of the other partners, Vincent will be required to recognize part or all of the $30,000 precontribution gain The post contribution gain will be deferred until the land is sold If the land is distributed to Vincent, though, he will not be required to recognize gain until he later sells the property The Code does not require the gain to be reported merely because a partner contributes a property and later receives it in a distribution The cash and marketable security distributions may result in capital gains to the partners if the distribution exceeds a partner’s outside basis The potential gain from the securities is deferred to the extent it relates to appreciation earned by the partnership Examples 12, 16, 18, and 21 32 a Brandon recognizes a $15,000 capital gain b No gain or loss is recognized by Barry The $50,000 basis in the partnership interest remaining after the reduction for the $30,000 cash is allocated to the capital asset c Bryan does not recognize any gain or loss as a result of the distribution The inventory has a basis to Bryan of $20,000, and the capital asset is allocated the $50,000 basis of Bryan’s partnership interest remaining after the reduction for the cash and the amount allocated to the inventory © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations d 11-19 Blake recognizes a $40,000 capital loss on the distribution He received only cash and unrealized receivables in the distribution, and his basis in the assets received ($20,000 basis in cash + $0 carryover basis in the account receivable) is less than his $60,000 basis in the partnership interest before the distribution Examples 12 and 14 and Concept Summary 11.2 33 a None Because the $30,000 cash received did not exceed Jesse’s basis in his partnership interest, no gain is recognized After reducing Jesse’s basis in his partnership interest by the cash received, the inventory is distributed next and takes a carryover basis of $20,000 Finally, the land is distributed and absorbs the remaining $40,000 (basis of $90,000 – $30,000 cash – $20,000 inventory) b $20,000 and $40,000 See explanation in a Although the partnership’s basis in the distributed land was $50,000, Jesse cannot assign a basis greater than $40,000 c Jesse will recognize a gain of $20,000 which will be either a capital gain or a § 1231 gain, depending on Jesse’s use of the land d Section 731(b) provides that no gain or loss is recognized to a partnership on a distribution to a partner of property, including money Because Jesse received a pro rata distribution, no gain or loss is recognized by the partnership; however, the land distributed to Jesse had a basis to the partnership of $50,000 and was limited to a basis of $40,000 to Jesse It appears that $10,000 of the land’s original basis has been lost! e Students might answer “make a § 754 election.” However, as the partnership is liquidating, this is not viable The “lost basis” likely arose because at some point in the past, inside and outside bases were not in balance, and the partnership would have had to step down the basis of its assets to achieve balance—which it wisely opted not to By not making the § 754 election previously, the partnership deferred the disappearance of basis to the last possible moment, liquidation of the partnership f No Jesse would have the same $20,000 basis for the inventory, $40,000 basis in the land, and a remaining outside basis of $0 for the partnership interest Example 12 and Concept Summary 11.2 34 a No gain or loss The cash is distributed first, followed by the inventory The land is distributed last and absorbs Jesse’s remaining basis of $70,000 ($120,000 basis – $30,000 cash – $20,000 inventory) b Jesse’s basis in the inventory is a carryover basis of $20,000 His basis in the land is $70,000 (see calculation in a.) c The partnership has no gain or loss d If this had been a nonliquidating distribution, Jesse’s basis in the land would have been limited to the partnership’s $50,000 basis Jesse would have a remaining basis in the partnership interest of $20,000 Example 12 and Concept Summary 11.2 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-20 35 2012 Corporations Volume/Solutions Manual a $14,000 loss Jamie cannot allocate to the inventory more than $6,000 Her remaining basis is $14,000 after the reduction for the $10,000 cash distribution She recognizes a $14,000 capital loss on the liquidation, and the basis of the inventory is $6,000 b $6,000 basis in inventory See explanation in a above c None d A non-inventory, non-unrealized receivable, such as a chair, could be distributed with the other property to absorb the remaining basis and possibly provide an ordinary loss later e Yes No loss would be recognized, and Jamie would have a $14,000 outside basis remaining for the partnership interest § 731(a)(2) and Examples 7, 14, and 15 36 a No gain or loss Instead, the $58,000 basis of Julie’s partnership interest remaining after the reduction for the $50,000 cash received is allocated to the land parcels b Julie’s remaining $58,000 basis in the partnership interest, after the distribution of cash, is allocated to the two land parcels as described in Example 13 The land parcels are both initially allocated a basis equal to the partnership’s basis in the assets, or $20,000 each Because the second land parcel is appreciated in value, Julie’s basis is increased to the amount of its fair market value, $30,000 Julie now has land parcels with bases totaling $50,000 ($30,000 + $20,000) and a capital account that must absorb $58,000 of basis Therefore, she must increase the bases in the parcels an additional $8,000 This increase is applied to the two land parcels in proportion to the fair market values of the respective properties $8,000 × $10,000 $40,000 = $2,000 $8,000 × $30,000 $40,000 = $6,000 The basis in the first property is increased, then, to $22,000 ($20,000 + $2,000) and the basis in the second property is increased to $36,000 ($30,000 + $6,000) c If the land had been held as inventory, Julie could not increase its basis above the partnership’s basis in the assets Therefore, she would have allocated bases of $20,000 to each parcel, and she would have realized and recognized a capital loss of $18,000 Examples 13 and 14 37 a None After reducing the basis of Julie’s partnership interest by the $50,000 cash received, Julie allocates the remaining $58,000 of basis to the desk received in the liquidating distribution Under § 731(a)(2), loss is recognized only if the sum of cash received plus the basis of any unrealized receivables or inventory distributed is less © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-21 than the adjusted basis of the partnership interest prior to the liquidating distribution, and no other property is distributed b $58,000 Example 15 and § 732(b) c If Julie’s child uses the desk for any period of time, it is converted to a personal-use asset None of the loss is recognized as it results from the sale or exchange of a personal-use asset Julie could have preserved the deductible loss in several ways First, Julie could have insisted that the partnership sell the desk and distribute $52,000 cash in liquidation of her interest If this were done, Julie would recognize a capital loss of $56,000 (basis of $108,000 – $52,000 cash) as a result of the liquidation Another alternative would be for Julie to place the desk in use in another trade or business The basis of the desk is $58,000 for depreciation purposes Julie would be converting a $58,000 capital loss into an ordinary deduction Although a depreciable desk with a $58,000 basis probably will arouse the interest of any examining IRS agent, there is no apparent limitation or restriction on such tax planning pp 11-11, 11-12, and Example 15 38 a Under § 704(c)(1)(B), Adrianna recognizes gain on the distribution to Isabel in the amount of the original precontribution gain on the contributed property, $9,000 Her basis in her partnership interest is increased accordingly, to $49,000 b Isabel’s basis in the property received equals the predistribution basis in the property received, $16,000, plus the gain recognized by Adrianna, $9,000, for a total basis in the property of $25,000 c Isabel recognizes no gain or loss on the distribution of the property Her basis in her partnership interest is reduced by her basis in the distributed property of $25,000, to $15,000 d If Isabel sold the land immediately after the distribution, she would recognize a $5,000 gain: $30,000 (fair market value) – $25,000 (basis in property) The overall result is equitable: Isabel pays tax on post contribution gain, and Adrianna pays tax on precontribution gain e If the precontribution gain property had been contributed to the partnership more than seven years prior to the distribution of the property to Isabel, Adrianna would not be required to recognize gain on the distribution, and Isabel’s basis in the property would be $16,000 Example 18 39 a $40,000 Under § 737(a), Derek recognizes gain of the lesser of (1) the excess of the value of the property over his basis in his partnership interest (as of the date of the distribution), or (2) precontribution gain on the property contributed by Derek in 2008 The excess value of the distributed property is $40,000 ($100,000 value – $60,000 basis) The precontribution gain on the property contributed in 2008 was $50,000 Therefore, Derek will recognize gain of the lesser of these amounts, or $40,000 b Derek’s $60,000 basis in his partnership interest is increased by the $40,000 gain recognized His basis is then reduced by the partnership’s $30,000 basis in the distributed property His basis after the distribution, then, is $70,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-22 2012 Corporations Volume/Solutions Manual c Under the nonliquidating distribution rules, Derek will take a carryover basis of $30,000 in the property distributed by the partnership d The partnership increases its basis in the precontribution gain property by the amount of gain Derek recognizes, $40,000 The partnership’s basis, in this situation, is increased to $60,000 This is less than the $70,000 value at the contribution date because $10,000 of precontribution gain still exists e If the precontribution gain property were contributed to the partnership more than seven years before the property was distributed to Derek, § 737 would not apply to the distribution Derek would recognize no gain and would have no increase in his basis in his partnership interest The partnership would have no increase in its basis in precontribution gain property Examples 19 and 20 40 a The security is treated as a property payment under § 736(b) The fact that Fred is a general partner does not matter in this case, because capital is a material incomeproducing factor for the partnership b The normal distribution rules for a § 736(b) payment are used to determine whether the partner must recognize gain or loss and to calculate the partner’s basis in property received in the distribution The security is treated as a $20,000 distribution of cash However, this amount is reduced by Fred’s share of the appreciation in the security prior to the distribution, or $2,500 [25% × $20,000 – $10,000)] The “cash” distribution, then, is $17,500 ($20,000 – $2,500) c The $17,500 cash exceeds Fred’s basis by $12,500, so Fred must report a $12,500 capital gain d Fred’s basis in the security is first determined under the normal distribution rules as a substituted basis of $5,000 (the lesser of Fred’s outside basis or the partnership’s inside basis) The $12,500 capital gain is added to this basis, for a total basis in the security of $17,500 pp 11-12 to 11-14, 11-17 to 11-20, and Examples 16 and 17 41 a The $40,000 payment for Maurice’s share of the unrealized receivables is treated as an income payment under § 736(a), because Maurice is a general partner in a serviceproviding partnership The remaining $60,000 cash payment is treated as a § 736(b) property payment because no portion of the payment represents partnership goodwill b The $40,000 cash payment for Maurice’s share of receivables is taxed to Maurice as ordinary income The remaining $60,000 cash payment is treated as a return of capital and is offset by his $50,000 basis in his interest, for a net $10,000 capital gain c The partnership may deduct the $40,000 cash payment for Maurice’s share of receivables because it is classified as a guaranteed payment (not determined by reference to partnership profits) The partnership cannot deduct the remaining $60,000 cash payment d The partnership may wish to make an election under § 754 to step up the inside basis of its assets to reflect the $10,000 gain recognized by Maurice Examples 22 to 24, 26, and Concept Summary 11.3 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 42 a Cash received Add: Liabilities assumed by Dale Total amount realized b $30,000 (Barry’s one-third share of unrealized accounts receivable.) c $20,000 Total realized Less: Basis of Barry’s interest: Capital Debt share Gain to Barry Less: Ordinary income Capital gain 11-23 $ 90,000 10,000 $100,000 $100,000 $40,000 10,000 (50,000) $ 50,000 (30,000) $ 20,000 Concept Summary 11.4 d Cash paid Add: Liabilities assumed by Dale Dale’s basis in partnership interest acquired $ 90,000 10,000 $100,000 Example 28 43 $50,000 The gain would be treated as $35,000 ordinary income and $15,000 capital gain Cash received Add: Liabilities assumed by remaining partners Total amount realized Less: Basis of Barry’s interest Capital Debt share Total gain recognized $ 90,000 10,000 $100,000 $40,000 10,000 (50,000) $ 50,000 Barry is treated under § 736(a) as having received an income payment of $30,000 for the unrealized receivables, thereby creating ordinary income (The $30,000 amount represents Barry’s 1/3 portion of the partnership’s $90,000 unrealized receivables.) The $5,000 payment for partnership goodwill ($90,000 payment – $85,000 stated value of assets) is not provided for in the partnership agreement Therefore, the partnership may deduct this amount as a § 736(a) payment and Barry will report the amount as additional ordinary income The remaining portion of the liquidating distribution, $65,000 ($100,000 – $30,000 accounts receivable – $5,000 goodwill), is treated under § 736(b) as being in exchange for Barry’s interest in the remaining partnership property The recognized gain on this part of the distribution is $15,000 (i.e., $65,000 – $50,000) and is treated as a capital gain Examples 23, 24, and 26 44 a $80,000 of ordinary income and $80,000 of capital gain Diana’s total gain is $160,000 ($250,000 selling price less her interest basis of $90,000) However, she has a one-third profits interest in the unrealized receivable of $80,000 ($240,000 × 1/3) which must be taxed as ordinary income The remainder of the gain is a capital gain from the sale of a partnership interest Example 33 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-24 2012 Corporations Volume/Solutions Manual b $80,000 ordinary income As a § 754 election was not made or in effect, Kenneth stands in the same position as Diana relative to the partnership and must recognize the full $80,000 of ordinary income when the receivables are collected ($240,000 × 1/3) pp 11-29, 11-30, and Example 37 c $0 from the receivables and $10,000 of possible § 1231 gain from the land sale Because a § 754 election was made, Kenneth is entitled to a special adjustment under § 743(b) of $160,000, based on the difference between his $250,000 interest basis in the partnership and his share of the partnership’s basis in its assets of $90,000 Of this adjustment, $80,000 is allocated to the receivables and $80,000 to the land Reg § 1.755-1(b)(2) and Example 39 45 46 47 a Ben’s total gain is $70,000, consisting of a capital gain of $45,000 and ordinary income of $25,000 In calculating the gain, Ben’s amount realized is $120,000 (the sum of cash received and liabilities transferred) While the overall gain is $70,000 [($80,000 cash + $40,000 debt share) – $50,000 interest basis], $25,000 of this amount relates to a § 751 asset (unrealized receivable) with a zero basis, which generates ordinary income Examples 32 and 33 b The transfer of a partnership interest as a result of death is not considered a sale or exchange Thus, no gain or loss results Ben’s share of the partnership’s taxable income or loss would be allocated between Ben and his successor in interest (his brother) p 11-33 a Ben’s share of unrealized receivables is $80,000 (40% of $200,000) Therefore, the gain on the sale of Ben’s partnership interest is fragmented into $80,000 ordinary income and $10,000 capital loss Example 34 b Even though § 751 assets are present, the death of a partner does not trigger income recognition However, the successor treats the collection of the unrealized receivables as gross income under § 691 p 11-33 a No termination A termination only occurs if Paige sells a 50% or more interest in both the partnership capital and profits b No termination A termination does not occur because of the death of a partner The transfer of the interest to Ryan’s estate is not a sale or exchange within the meaning of the termination provisions c Termination This is a sale of 50% of the interests in partnership capital and profits Also, by buying out Ryan’s interest, Rob now will operate a sole proprietorship d No termination A gift of a partnership interest is not normally considered to be a sale or exchange for purposes of the termination provisions e Termination A technical termination occurs when 50% or more of partnership capital and profits interests are sold within a 12-month period f No termination All the sales are counted for the 50%, 12-month rule However, because the first and last transactions occur more than one year apart, no 12-month period exists during which sales are made of 50% or more of the interests in partnership capital and profits © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Partnerships: Distributions, Transfer of Interests, and Terminations 11-25 pp 11-32 and 11-33 48 a $90,000 ($60,000 as compensation, plus 50% of the remaining partnership income) b $30,000 (50% of the partnership income, after payment to Fred of $60,000 for services performed) Reasonable income is allocated to Fred as compensation first; then, any remaining partnership income is allocated in accordance with the profit and loss sharing agreement c Because the child is under age 19 and has at least one living parent, the “kiddie tax” rules apply The first portion of partnership income is offset by the child’s standard deduction, the next portion is taxed at the child’s marginal rate (which is the lowest rate available), and the remainder is taxed at the parent’s rate §§ 1(g) and 63(c)(5), pp 11-34, 11-35, and Examples 46 and 47 The answers to the Research Problems are incorporated into the Instructor’s Guide with Lecture Notes to accompany the 2012 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION: CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-26 2012 Corporations Volume/Solutions Manual Notes © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-26 2012 Corporations Volume/Solutions Manual Notes © 2012 Cengage Learning All Rights Reserved... or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11-10 2012 Corporations Volume/Solutions Manual The following issues must be addressed:... Instructor’s Guide with Lecture Notes to accompany the 2012 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION: CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS © 2012 Cengage Learning All Rights Reserved May