Question & Answer

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

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

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

c. What are the amount and character of Lonnie’s gain or loss if he holds the land for 13 months as investment property and then sells it for $100,000?

d. What are the amount and character of Lonnie’s gain or loss if he places the land into service in his sole proprietorship and then sells it 13 months later for $100,000?

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

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

Tax BasisFMV

Cash $ 18,000 $ 18,000

Accounts receivable -0- 24,000

Stock investment 7,500 12,000

Land 30,000 36,000

   Totals $ 55,500 $ 90,000

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

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

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

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

d. What are the amount and character of any recognized gain or loss from the distribution 

The Taurin Partnership (calendar-year-end entity) has the following assets as of December 31 of the current year:

Tax Basis FMV

Cash $ 45,000 $ 45,000

Accounts receivable 15,000 30,000

Inventory 81,000 120,000

   Totals $ 141,000 $ 195,000

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

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

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

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

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

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

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

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

Two years ago, Kimberly became a 30 percent partner in the KST Partnership with a contribution of investment land with a $10,000 basis and $16,000 fair market value. On January 2 of this year, Kimberly has a $15,000 basis in her partnership interest, and none of her pre-contribution gain has been recognized. On January 2 Kimberly receives an operating distribution of a tract of land (not the contributed land) with a $12,000 basis and an $18,000 fair market value.

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

b. What is Kimberly’s remaining basis in KST after the distribution?

c. What is KST’s basis in the land Kimberly contributed after Kimberly receives this distribution?

Pam has a $27,000 basis (including her share of debt) in her 50 percent partnership interest in the Meddoc Partnership before receiving any distributions. This year Meddoc makes a current distribution to Pam of a parcel of land with a $40,000 fair market value and a $32,000 basis to the partnership. The land is encumbered with a $15,000 mortgage (the partnership’s only liability).

a. What are the amount and character of Pam’s recognized gain or loss?

b. What is Pam’s basis in the land?

c. What is Pam’s remaining basis in her partnership interest?

Rania has a $68,000 basis in her 50 percent partnership interest in the KD Partnership before receiving a current distribution of $6,000 cash and land with a fair market value of $35,000 and a basis to the partnership of $18,000.

a. What are the amount and character of Rania’s recognized gain or loss?

b. What is Rania’s basis in the land?

c. What is Rania’s remaining basis in her partnership interest?

Adam and Alyssa are equal partners in the PartiPilo Partnership. The partners formed the partnership three years ago by contributing cash. Prior to any distributions, the partners have the following bases in their partnership interests:

Partner Outside Basis

Adam $ 12,000

Alyssa 12,000

On December 31 of the current year, the partnership makes a pro rata operating distribution of:

Partner Distribution

Adam Cash     $ 16,000

Alyssa Cash          8,000

Property    8,000 (FMV) 

($6,000 basis to partnership)

a. What are the amount and character of Adam’s recognized gain or loss?

b. What is Adam’s remaining basis in his partnership interest?

c. What are the amount and character of Alyssa’s recognized gain or loss?

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

e. What is Alyssa’s remaining basis in her partnership interest?

] Santiago and Lauren are equal partners in the PJenn Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners have the following bases in their partnership interests:

Partner Outside Basis

Santiago $ 22,000

Lauren 22,000

On December 31 of the current year, the partnership makes a pro rata operating distribution of:

Partner Distribution

Santiago Cash $ 25,000

Lauren Cash 18,000

Property    7,000 (FMV)

($2,000 basis to partnership)

a. What are the amount and character of Santiago’s recognized gain or loss?

b. What is Santiago’s remaining basis in his partnership interest?

c. What are the amount and character of Lauren’s recognized gain or loss?

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

e. What is Lauren’s remaining basis in her partnership interest?

Coy and Matt are equal partners in the Matcoy Partnership. Each partner has a basis in his partnership interest of $28,000 at the end of the current year, prior to any distribution. On December 31, each receives an operating distribution. Coy receives $10,000 cash. Matt receives $3,000 cash and a parcel of land with a $7,000 fair market value and a $4,000 basis to the partnership. Matcoy has no debt or hot assets.

a. What is Coy’s recognized gain or loss? What is the character of any gain or loss?

b. What is Coy’s ending basis in his partnership interest?

c. What is Matt’s recognized gain or loss? What is the character of any gain or loss?

d. What is Matt’s basis in the distributed property?

e. What is Matt’s ending basis in his partnership interest?

Newton is a one-third owner of ProRite Partnership. Newton has decided to sell his interest in the business to Dunja for $50,000 cash plus the assumption of his share of ProRite’s liabilities. Assume Newton’s inside and outside basis in ProRite are equal. ProRite shows the following balance sheet as of the sale date:

Assets: Tax Basis FMV

Cash $ 80,000 $ 80,000

Receivables 25,000 25,000

Inventory 40,000 85,000

Land 30,000 20,000

   Totals $ 175,000 $ 210,000

Liabilities and capital:

Liabilities $ 60,000

Capital- Newton 38,333

- Barbara 38,334

- Liz 38,333

   Totals $ 175,000

What are the amount and character of Newton’s recognized gain or loss?

Travis and Alix Weber are equal partners in the Tralix Partnership, which does not have a §754 election in place. Alix sells one-half of her interest (25 percent) to Michael Tomei for $30,000 cash. Just before the sale, Alix’s basis in her entire partnership interest is $75,000, including her $30,000 share of the partnership liabilities. Tralix’s assets on the sale date are as follows:

Basis Fair Market Value

Cash $ 40,000 $ 40,000

Inventory 30,000 90,000

Land held for investment 80,000 50,000

   Totals $ 150,000 $ 180,000

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

b. What is Alix’s basis in her remaining partnership interest?

c. What is Michael’s basis in his partnership interest?

d. What is the effect of the sale on the partnership’s basis in the assets?

Franklin, Jefferson, and Washington formed the Independence Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in their partnership interest of $104,000. On January 1 of the current year, Franklin sells their partnership interest to Adams for a cash payment of $122,000. The partnership has the following assets and no liabilities as of the sale date:

Tax Basis Fair Market Value

Cash $ 18,000 $ 18,000

Accounts receivable -0- 12,000

Inventory 69,000 81,000

Equipment 180,000 225,000

Stock investment 45,000 30,000

   Totals $ 312,000 $ 366,000

The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago.

a. What is Franklin’s overall gain or loss on the sale of their partnership interest?

b. What is the character of Franklin’s gain or loss?

] Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in their partnership interest of $104,000. On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000. The partnership has the following assets and no liabilities as of the sale date:

Tax Basis Fair Market Value

Cash $ 18,000 $ 18,000

Accounts receivable -0- 12,000

Inventory 69,000 81,000

Equipment 180,000 225,000

Stock investment 45,000 75,000

   Totals $ 312,000 $ 411,000

The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago.

a. What are the hot assets [§751(a)] for this sale?

b. What is Marco’s gain or loss on the sale of his partnership interest?

c. What is the character of Marco’s gain or loss?

d. What are Ryan’s inside and outside bases in the partnership on the date of the sale?

At the end of last year, Milena, a 35 percent partner in the five-person LAMEC Partnership, has an outside basis of $60,000, including her $30,000 share of LAMEC debt. On January 1 of the current year, Milena sells her partnership interest to MaryLynn for a cash payment of $45,000 and the assumption of her share of LAMEC’s debt.

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

b. If LAMEC has $100,000 of unrealized receivables as of the sale date, what are the amount and character of Milena’s recognized gain or loss?

c. What is MaryLynn’s initial basis in the partnership interest?

Gamila, James, Helen, and Carlos each own an equal interest in GJHC Partnership, a calendar-year-end, cash-method entity. On January 1 of the current year, James’ basis in his partnership interest is $62,000. For the taxable year, the partnership generates $80,000 of ordinary income and $30,000 of dividend income. For the first 5 months of the year, GJHC generates $25,000 of ordinary income and no dividend income. On June 1, James sells his partnership interest to Robert for a cash payment of $70,000. The partnership has the following assets and no liabilities at the sale date:

Tax Basis FMV

Cash $ 27,000 $ 27,000

Land held for investment 80,000 100,000

   Totals $ 107,000 $ 127,000

a. Assuming GJHC’s operating agreement provides that the proration method will be used to allocate income or loss when partners’ interests change during the year, what is James’ basis in his partnership interest on June 1 just prior to the sale?

b. What are the amount and character of James’s recognized gain or loss on the sale?

c. If GJHC uses an interim closing of the books, what are the amount and character of James’s recognized gain or loss on the sale?

Allison, Keesha, and Steven each own an equal interest in KAS Partnership, a calendar-year-end, cash-method entity. On January 1 of the current year, Steven’s basis in his partnership interest is $27,000. During January and February, the partnership generates $30,000 of ordinary income and $4,500 of tax-exempt income. On March 1, Steven sells his partnership interest to Juan for a cash payment of $45,000. The partnership has the following assets and no liabilities at the sale date:

Tax Basis FMV

Cash $ 30,000 $ 30,000

Land held for investment 30,000 60,000

  Totals $ 60,000 $ 90,000

a. Assuming KAS’s operating agreement provides for an interim closing of the books when partners’ interests change during the year, what is Steven’s basis in his partnership interest on March 1 just prior to the sale?

b. What are the amount and character of Steven’s recognized gain or loss on the sale?

c. What is Juan’s initial basis in the partnership interest?

d. What is the partnership’s basis in the assets following the sale?

Amina is a 30 percent partner in the AOM Partnership when she sells her entire interest to Hope for $72,000 cash. At the time of the sale, Amina’s basis in AOM is $44,000 (which includes her $6,000 share of AOM liabilities). AOM does not have any hot assets. What is Amina’s gain or loss on the sale of her interest?

Jerry is a 30 percent partner in the JJM Partnership when he sells his entire interest to Lucia for $56,000 cash. At the time of the sale, Jerry’s basis in JJM is $32,000. JJM does not have any debt or hot assets. What is Jerry’s gain or loss on the sale of his interest?

When are partnerships mandated to adjust the basis of their assets (inside basis) when a partner sells a partnership interest or receives a partnership distribution?

When might a new partner have an upward basis adjustment following the acquisition of a partnership interest?

Explain why a partnership might not want to make a §754 election to allow special basis adjustments.

List two common situations that will cause a partner’s inside and outside basis to differ.

Why would a new partner who pays more for a partnership interest than the selling partner’s outside basis want the partnership to elect a special basis adjustment?

In general, how do the disproportionate distribution rules ensure that partners recognize their share of partnership ordinary income?