Quiz Chapter 15
*The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date...* A) The partner is admitted to the partnership. B) The partner transfers the asset to the partnership. C) The partner's holding period of the capital asset began. D) The partner is first credited with the proportionate share of partnership capital.
C) The partner's holding period of the capital asset began. The holding period of the partner's interest includes the holding period of contributed capital and Sec. 1231 assets. The holding period on an interest acquired in exchange for money, ordinary income property, or services begins the day after the exchange. [1]
*Nolan designed Timber Partnership's new building. Nolan received an interest in the partnership for the services. Nolan's normal billing for these services would be $80,000, and the fair market value of the partnership interest Nolan received is $120,000. What amount of income should Nolan report?* A) $0 B) $40,000 C) $80,000 D) $120,000
D) $120,000 A partner who receives a partnership capital interest in exchange for services recognizes compensation income equal to the FMV of the partnership capital interest. Gross income must be reported when an interest received is subject to neither substantial risk of forfeiture nor restrictions on transfer. The income reported is ordinary. [2]
*Lee inherited a partnership interest from Dale. The adjusted basis of Dale's partnership interest was $50,000, and its fair market value on the date of Dale's death (the estate valuation date) was $70,000. What was Lee's original basis for the partnership interest?* A) $70,000 B) $50,000 C) $20,000 D) $0
A) $70,000 The original basis in a partnership interest of a person who acquired it by inheritance is the fair market value of the interest on the date of death (if the estate does not elect the alternate valuation date). [1]
*Which of the following statements is true?* A) For property that was an unrealized receivable in the hands of the contributing partner, any gain or loss on a disposition by the partnership is ordinary income or loss. B) An individual cannot acquire an interest in partnership capital as compensation for services performed or to be performed. C) A partner recognizes a gain or loss when the partner contributes to the partnership in exchange for a partnership interest. D) If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, and gain or loss for the property is the fair market value at the time of the contribution.
A) For property that was an unrealized receivable in the hands of the contributing partner, any gain or loss on a disposition by the partnership is ordinary income or loss. The term "unrealized receivable" includes any rights to income that have not been included in gross income under the method of accounting employed. Under Sec. 724, unrealized receivables and inventory items contributed by the partner to the partnership retain their ordinary income character in the hands of the partnership. Unrealized receivables remain ordinary income property up to the time of disposal by the partnership, and inventory items remain ordinary income property for the 5-year period beginning on the date of contribution (Sec. 735). [1] [2]
Which of the following items included in ordinary income must be stated separately for each partner? A) Guaranteed payments to partners. B) Ordinary income from subsidiaries. C) Employee benefit programs. D) Depreciation.
A) Guaranteed payments to partners. Guaranteed payments are subtracted as expenses for computing taxable income but also separately stated as income to the recipient partner.
*During the current year, Norman contributed property held more than 1 year to the MaryAnn Partnership for a 40% interest. The total capital after his contribution was $50,000. His tax basis in the property was $8,000, and it had a fair market value of $10,000 at the time of the contribution to the partnership. What gain or loss should Norman report on the contribution of his property to the partnership?* A) No gain or loss. B) $2,000 long-term capital gain. C) $12,000 long-term capital gain. D) $12,000 long-term capital gain of which $10,000 is deferred.
A) No gain or loss. This answer is correct. When property is contributed to a partnership in exchange for a partnership interest, the general rule is that no gain or loss is recognized by the partner or the partnership. This rule applies even though the contributed property is appreciated and the partner receives a disproportionate interest in the partnership. Precontribution gain on the asset will be allocated to the contributing partner when the partnership later sells the asset. Property does not include services, however, and if Norman received part of his interest in the partnership for performing services, he must recognize ordinary income to that extent. [1]
*Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 recourse mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?* A) $0 B) $16,000 C) $26,000 D) $32,000
A) $0 A partner's basis in a partnership equals the adjusted basis of the property contributed plus the partner's share of all partnership liabilities minus any liability of the partner assumed by the partnership. A liability assumed by the partnership is treated as a distribution to the partner. The basis of this partnership interest is the basis of the contributed land ($16,000) reduced by the liability assumed by the partnership ($24,000) and increased by the partner's share of recourse partnership liabilities ($6,000 = $24,000 × 0.25) and recognized gain on contributed property ($2,000). Thus, the basis will be $0. [1]
*Gavin, a 50% partner in the ABC Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, ABC incurred a $12,000 loss. In the current year, ABC reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Gavin's basis at the end of the current year?* A) $1,000 B) $3,000 C) $3,500 D) $6,500
A) $1,000 In the preceding year, Gavin's basis of $4,000 is reduced to $0 after ABC's $12,000 loss (Gavin's share of the loss is $6,000). Basis is not reduced below zero, and Gavin has an excess loss of $2,000 ($4,000 - $6,000). In the current year, $3,500 of ABC Partnership's ordinary income is added to Gavin's basis. The excess loss from the preceding year is deductible in a subsequent year in which the adjusted basis is greater than zero. Therefore, Gavin's basis of $3,500 is reduced by the $2,000 excess loss. Additionally, 50% of the pro rata distribution is deducted from Gavin's basis. Gavin's basis at the end of the current year is $1,000 ($1,500 - $500). [1] [2]
*Pert contributed land with a fair market value of $20,000 to a new partnership in exchange for a 50% partnership interest. The land had an adjusted basis to Pert of $12,000 and was subject to a $4,000 mortgage, which the partnership assumed. What is the adjusted basis of Pert's partnership interest?* A) $10,000 B) $12,000 C) $18,000 D) $20,000
A) $10,000 The basis of an interest in a partnership acquired by the contribution of property is the adjusted basis of such property to the contributing partner. A decrease in a partner's personal liabilities by reason of the assumption by the partnership of such liabilities is treated as a distribution of money to the partner, which in turn reduces the basis of the partner's interest (but not below zero). When Pert became a 50% partner, his net liability relief was 50% of the $4,000 mortgage. Pert's basis in his partnership interest is the $12,000 basis in the property contributed less the $2,000 of liability relief (limited to zero). [1]
*Gray is a 50% partner in Fabco Partnership. Gray's tax basis in Fabco on January 1, 2022, was $5,000. Fabco made no distributions to the partners during 2022 and recorded the following:* *- Ordinary income: $20,000* *- Tax-exempt income: $8,000* *- Portfolio income: $4,000* *What is Gray's tax basis in Fabco on December 31, 2022?* A) $21,000 B) $16,000 C) $12,000 D) $10,000
A) $21,000 The partner's initial basis in the partnership interest is adjusted upward or downward for the partner's distributive share of partnership taxable income (loss) and for separately stated taxable and nontaxable items. Thus, Gray must increase the $5,000 basis by 50% of each of the $20,000 of ordinary income, the $8,000 of tax-exempt income, and the $4,000 of portfolio income. [1]
*Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2022 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2022 partnership income consisted of...* *- Net business income before guaranteed payments: $80,000* *- Net long-term capital gains: $10,000* *What amount of income should Evan report from Vista Partnership on her 2022 tax return?* A) $37,500 B) $27,500 C) $22,500 D) $20,000
A) $37,500 A partner will report the ownership portion of the partnership income. Partnership income is the balance of the taxable income of a partnership that is not required to be separately stated. Capital gains and losses are generally segregated from ordinary net income and carried into the income of the individual partners. Any guaranteed payment (GP), while deductible for the partnership, is included in gross income of the receiving partner. Reportable income is calculated as follows: Business income pre-GP: $80,000 Less: GP: $(20,000) = Reportable partnership income: $60,000 25% interest: $15,000 Guaranteed payment: $20,000 25% capital gain: $2,500 = Total: $$37,500 [1]
*Fact Pattern:* Jones and Curry formed Major Partnership as equal partners by contributing the assets below:* *Jones:* *- Asset = Cash* *- Adjusted Basis = $45,000* *- Fair Market = $45,000* *Curry:* *- Asset = Land* *- Adjusted Basis = $30,000* *- Fair Market = $57,000* *The land was held by Curry as a capital asset, subject to a $12,000 mortgage, which was assumed by Major.* *What was Jones's initial basis in the partnership interest?* A) $51,000 B) $45,000 C) $39,000 D) $33,000
A) $51,000 The basis of an interest in a partnership acquired by the contribution of property is the adjusted basis of the property contributed to the partnership plus the partner's share of liabilities assumed by the partnership. Jones's initial basis in the partnership is $45,000 plus one-half of the $12,000 mortgage assumed by the partnership (or $6,000). Thus, Jones's basis in the partnership is $51,000. [2]
Partnership LIFE's profits and losses are shared equally among the four partners. The adjusted basis of Partner E's interest in the partnership on December 31, Year 1, was $25,000. On January 2, Year 2, Partner E withdrew $10,000 cash. The partnership reported $200,000 as ordinary income on its Year 2 partnership return. In addition, Partner E's share of nondeductible entertainment expense was $5,000. What is the amount of E's basis in the partnership on December 31, Year 2? A) $60,000 B) $61,000 C) $65,000 D) $71,000
A) $60,000 The adjusted basis of a partner's interest is the original basis of such interest, increased by the partner's distributive share of the partnership's income and allocable portion of liabilities, and decreased by the partner's distributive share of partnership loss and distributions (Secs. 705, 733, and 752). Partnership basis is also reduced by nondeductible expenses. Beginning basis: $25,000 Ordinary income ($200,000 × 25%): $50,000 Cash distribution: $(10,000) Entertainment expense: $(5,000) = Year-end basis: $60,000
Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey's $10,000 recourse mortgage on the land. What is Bailey's basis for his partnership interest? A) $15,000 B) $18,000 C) $65,000 D) $75,000
B) $18,000 A partner's basis in a partnership equals the adjusted basis of the property contributed plus the partner's share of all partnership liabilities minus any liability of the partner assumed by the partnership. A liability assumed by the partnership is treated as a distribution to the partner. The basis of this partnership interest is the basis of the contributed land ($25,000) reduced by the liability assumed by the partnership ($10,000) and increased by the partner's share of partnership liabilities ($3,000 = $10,000 × 30%).
*Jane has a 30% interest in a cash-basis general partnership. Her adjusted basis in the partnership was $50,000 at the beginning of Year 1. There were no distributions to Jane during the year. On August 1, Year 1, the partnership borrowed $200,000 for the following reasons:* *- Purchase depreciable business equipment: $30,000* *- Pay balance on existing note in full: $170,000* *All of the partners are personally liable for all partnership debts. The partnership incurred a $250,000 loss in Year 1. What amount can Jane claim as a loss from the partnership on her Year 1 individual income tax return?* A) $50,000 B) $59,000 C) $60,000 D) $75,000
B) $59,000 A partner may deduct his or her distributive share of partnership loss only to the extent of his or her adjusted basis in the partnership at the end of the year in which the loss occurs. Jane's adjusted basis at year end is: - Adjusted basis at beginning of year: $50,000 - Plus: Jane's allocable share of recourse liabilities ($200,000 × 30%): $60,000 - Less: Jane's allocable share of reduction in recourse liabilities ($170,000 × 30%): $(51,000) = Adjusted basis at end of year before loss: $59,000 Jane's distributive share of the loss is $75,000 ($250,000 × 30%). However, Jane's allowable loss for the year is limited to her end-of-the-year basis of $59,000. [1] [2]
*Molloy contributed $40,000 in cash in exchange for a one-third interest in the RST Partnership. In the first year of partnership operations, RST had taxable income of $60,000. In addition, Molloy received a $5,000 distribution of cash and, at the end of the partnership year, had a one-third share in the $18,000 of partnership recourse liabilities. What was Molloy's basis in RST at year end?* A) $55,000 B) $61,000 C) $71,000 D) $101,000
B) $61,000 A partner's initial basis in the partnership interest received is equal to any cash contribution made. The basis of a partner's interest in a partnership is adjusted up for allocable share of partnership taxable income and increases in the partner's share of partnership liabilities and adjusted down for distributions from the partnership to the partner. Molloy's basis at year end is $61,000 ($40,000 initial basis + $20,000 taxable income - $5,000 distribution + $6,000 liability assumed). [1]
The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account... A) Begins with the date of contribution to the partnership. B) Includes the period during which the property was held by the contributing partner. C) Is equal to the contributing partner's holding period prior to contribution to the partnership. D) Depends on the character of the property transferred.
B) Includes the period during which the property was held by the contributing partner. The partnership's holding period for contributed property includes the period of time the property was held by the contributing partner. The holding period of the partner "tacks on" because the partnership receives a carryover basis in the contributed property. This is true even if the contributing partner recognizes a gain or loss (due to being relieved of debt in excess of basis).
*The method used to depreciate partnership property is an election made by...* A) The partnership and must be the same method used by the principal partner. B) The partnership and may be any method approved by the IRS. C) The principal partner. D) Each individual partner.
B) The partnership and may be any method approved by the IRS. The partnership, although a conduit, is an entity distinct from the partners for certain tax purposes. Elections available with respect to the treatment of partnership items are generally made by the partnership. Accounting method and depreciation method elections, for example, are made by the partnership. [1]
*"Hot assets" of a partnership would include which of the following?* A) Cash. B) Unrealized receivables. C) Section 1231 assets. D) Capital assets.
B) Unrealized receivables. A sale or exchange of a partnership interest results in capital gain or loss, except that any gain realized attributable to "hot assets" is ordinary income. "Hot assets" include unrealized receivables and inventory. [1]
*Bob acquired a 50% interest in a partnership by contributing depreciable property that had an adjusted basis of $15,000 and a fair market value of $45,000. The property was subject to a liability of $32,000, which the partnership assumed for legitimate business purposes. What is the partnership's basis in the property for depreciation?* A) $0 B) $13,000 C) $15,000 D) $16,000
C) $15,000 This answer is correct. The partnership's basis for contributed property is the adjusted basis of such property to the contributing partner at the time of contribution, plus any gain recognized by the partner related to the property. But, because liability relief creates gain through a deemed cash distribution, the gain does not increase the partnership's basis. However, Bob is required to recognize $1,000 ($15,000 adjusted basis - $32,000 liability + 50% interest × $32,000 liability) upon contribution of the asset in order to bring his basis in the partnership up to zero. The partner's basis is $0 and the basis of the contributing partner carries over to the partnership. [1]
*Mr. Almond farmed a total of 200 acres of land, comprised of two parcels of land located about one-half mile apart. One parcel was 120 acres, and the second parcel was 80 acres. Mr. Almond found moving his workers and equipment between the two parcels to be very expensive. He approached the ABC farming partnership, which owned 80 acres next to Mr. Almond's 120-acre parcel, about joining the partnership. Mr. Almond has a cost basis of $100,000 in his 80 acres. The fair market value of his 80 acres at the time of the proposed exchange was $400,000, and the fair market value of the ABC partnership's 80 acres was $350,000. In 2022, Mr. Almond transferred his 80 acres to the ABC partnership and received a $350,000 interest in the ABC partnership, plus $50,000 cash. What was the amount of Mr. Almond's recognized gain in 2022?* A) $50,000 B) $300,000 C) $37,500 D) No gain.
C) $37,500 A transfer of land for a partnership interest is tax free. However, when property other than a partnership interest is also distributed, the transaction is treated as part sale and part tax-free contribution. Mr. Almond is treated as having sold 1/8 of the property for $50,000 ($400,000 FMV of the property - $350,000 partnership interest received). One-eighth of his $100,000 cost basis is $12,500, so the recognized gain on the sale is $37,500 ($50,000 - $12,500). [1] [2]
*Sunshine Partnership is owned equally by partners Buddy, Jeb, and Bob. Sunshine owns an intangible asset with a basis of $0 and a fair market value of $800, a printing machine with a basis of $300 and a fair market value of $2,000, and a collating machine with a basis of $150 and a fair market value of $200. Bob has a basis of $400 in his partnership interest. The intangible asset and the collating machine are distributed to Bob in liquidation of his interest. What are Bob's bases in his intangible asset and collating machine?* *1. Machine* *2. Intangible* A) 1. $400: 2. $0 B) 1. $150: 2. $0 C) 1. $165: 2. $235 D) 1. $200: 2. $200
C) 1. $165: 2. $235 The Taxpayer Relief Act of 1998 modified the allocation of basis to distributed property. Under the new law, the distributee partner's basis in his or her partnership interest is first allocated to unrealized receivables and inventory. If the distributee partner's allocable basis exceeds the basis the partnership had in the distributed unrealized receivables and inventory, that remaining basis is allocated among any other assets to the extent of the partnership's basis in the other distributed assets. To the extent allocable basis exceeds the partnership's basis in the other distributed assets, it is allocated in relation to the unrealized appreciation in those assets. Finally, any remaining basis is allocated among those assets based on the relative fair market value of those assets. Therefore, Bob must first allocate basis to the collating machine ($150) since the intangible asset has no basis. Next, the remaining basis is allocated among the two assets based on the unrealized appreciation in those assets. The intangible asset would be allocated a basis of $235 [($800 ÷ $850) × $250], and the collating machine would receive basis of $15 [($50 ÷ $850) × $250]. The total bases allocated to the collating machine and the intangible asset are $165 and $235, respectively. [2]
*Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses if the partner is an individual?* *1. At-Risk* *2. Passive Loss* A) 1. Yes: 2. No B) 1. No: 2. Yes C) 1. Yes: 2. Yes D) 1. No: 2. No
C) 1. Yes: 2. Yes Each partner may deduct no more of his or her distributive share of partnership loss than the amount for which (s)he is at risk in the partnership. Each partner's share is passive unless the partner materially (or actively) participates in the partnership activity. Thus, each partner must apply passive limits to his or her distributive share. These rules do not apply to partners who are widely held corporations. [1]
*In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is...* A) A tax year that results in the greatest aggregate deferral of income. B) A calendar year. C) A tax year of one or more partners with a more-than-50% interest in profits and capital. D) A tax year of a principal partner having a 10% or greater interest.
C) A tax year of one or more partners with a more-than-50% interest in profits and capital. Unless an exception applies, the partnership must use a required tax year. A required tax year is the first of (1) the tax year of partners owning more than 50% of partnership capital and profits if they have the same year as determined on the first day of the partnership's tax year, (2) the same tax year of all principal partners (i.e., partners owning 5% or more of capital or profits), or (3) the least aggregate deferral tax year. In the absence of an election to adopt an annual accounting period, the partnership must use the tax year of partners owning more than 50% interest in profits and capital. [1]
*Don and Warren formed an equal partnership to build drag-racing vehicles. Don contributed $5,000 in cash, and Warren contributed a truck with a fair market value of $5,000 and an adjusted tax basis of $4,500. They plan to use the truck for hauling parts and cars. When Warren purchased the truck 1 year earlier, he elected to use the straight line method to depreciate the truck using the mid-year convention over its 5-year recovery period. The partnership should...* A) Record the truck on the books at $5,000 and depreciate it using the allowable method and convention over a 5-year recovery period. B) Record the truck on the books at $5,000 and depreciate it over its remaining recovery period using the straight line method and mid-year convention. C) Record the truck on the books at $4,500 and depreciate it over its remaining recovery period using the straight line method and mid-year convention. D) Record the truck on the books at $4,500 and depreciate it using the allowable method and convention over a 5-year recovery period.
C) Record the truck on the books at $4,500 and depreciate it over its remaining recovery period using the straight line method and mid-year convention. The partnership's basis for contributed property is the same as the basis of the property transferred. Also, the holding period for the contributed property includes the transferor's holding period. Thus, the truck is recorded at $4,500 and depreciated over its remaining life. [1]
*At December 31, 2021, Burns and Cooper were equal partners in a partnership with net assets having a tax basis and fair market value of $100,000. On January 1, 2022, Todd contributed securities with a fair market value of $50,000 (purchased in 2020 at a cost of $35,000) to become an equal partner in the new firm of Burns, Cooper, and Todd. The securities were sold on December 15, 2022, for $65,000. How much of the partnership's capital gain from the sale of these securities should be allocated to Todd?* A) $5,000 B) $10,000 C) $15,000 D) $20,000
D) $20,000 A special allocation for the difference between fair market value at the time of contribution and basis of contributed property is required. The gain attributable to the precontribution appreciation in the securities must be allocated entirely to Todd, and the gain attributable to postcontribution appreciation should be shared equally by Burns, Cooper, and Todd. Todd's share is: - Precontribution gain ($50,000 FMV - $35,000 basis): $15,000 - Plus 1/3 of postcontribution gain ($65,000 proceeds - $50,000 1/1/2022 FMV): $5,000 = Todd's share of the capital gain: $20,000 [1] [2]
On January 2, 2022, Arch and Bean contribute cash equally to form the JK Partnership. Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively. For 2022, the partnership's ordinary income was $40,000. A distribution of $5,000 was made to Arch during 2022. What is Arch's share of taxable income for 2022? A) $5,000 B) $10,000 C) $20,000 D) $30,000
D) $30,000 Arch's 75% share of the partnership's $40,000 ordinary income, or $30,000, is Arch's share of taxable income for 2022 even if not distributed. Distributions are received free of tax by the partner, provided (s)he has adequate basis in the partnership, i.e., at least as much basis as the distribution. A partner's basis is increased by his or her share of partnership income and decreased by distributions.
*Ben Krug, sole proprietor of Krug Dairy, hired Jan in 2016 for an agreed salary and the promise of a 10% partnership capital interest if Jan continued in Krug's employ until the end of 2021. On January 1, 2022, when the net worth of the business was $300,000, the partnership was formed as agreed. On what amount will Jan have to pay tax in 2022 for the partnership capital interest she received?* A) $0 B) $12,000 C) $18,000 D) $30,000
D) $30,000 Ordinary income is recognized if services are rendered in return for property. But Jan did not perform services for a partnership. She worked for a sole proprietor in exchange for an interest in a new partnership. The transaction is treated as if Jan received an undivided 10% interest in each of the enterprise's assets and then contributed them to the partnership. The partnership's basis in the assets deemed contributed by Jan is their FMV. Jan recognizes income of 10% of the $300,000 net worth of the enterprise, or $30,000. [1] [2]
*Separately stated items were incorrectly included in ordinary income for REX partnership. Of the revenue items listed, what is the total amount of partnership items that must be separately stated?* *- Dividend income: $5,000* *- Investment income: $17,000* *- Ordinary income from other partnerships: $29,000* *- Tax-exempt income: $32,000* *- Net farm profit: $44,000* *- Royalties: $11,000* *- Cancellation of debt: $20,000* A) $65,000 B) $118,000 C) $97,000 D) $85,000
D) $85,000 Each partnership item of income, gain, deduction, loss, or credit that may vary the tax liability of any partner must be separately stated. Separately stated items include dividend income, investment income, tax-exempt income, royalties, and cancellation of debt. Therefore, the total amount of separately stated items is $85,000 ($5,000 + $17,000 + $32,000 + $11,000 + $20,000). [1] [2]
*Which of the following should be used in computing the basis of a partner's interest acquired from another partner?* *1. Cash Paid by Transferee to Transferor* *2. Transferee's Share of Partnership Liabilities* A) 1. No: 2. Yes B) 1. Yes: 2. No C) 1. No: 2. No D) 1. Yes: 2. Yes
D) 1. Yes: 2. Yes The purchasing partner's basis in his or her partnership interest is its cost basis. It includes both cash paid the seller and the purchaser's allocable share of partnership liabilities. But the partnership's basis in partnership property is not adjusted when a partnership interest is transferred unless a Sec. 754 election is in effect. [2]
*Which of the following entities must pay taxes for federal income tax purposes?* A) General partnership. B) Limited partnership. C) Joint venture. D) C corporation.
D) C corporation. Corporate taxable income computations generally parallel those for individuals. General tax is determined by applying applicable tax rates to taxable income. Shareholders are then subject to federal income tax on distributions out of corporate earnings and profits. In addition to regular income tax, a C corporation may also be subject to the AMT. Partnerships and joint ventures are all pass-through entities, which are taxed at the individual level, not the partnership level. [1]
*At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if...* *I. The fair market value of the contributed property exceeds its adjusted basis.* *II. The property is encumbered by a mortgage with a balance of $100,000.* A) I only. B) II only. C) Both I and II. D) Neither I nor II.
D) Neither I nor II. A partner will generally not recognize income upon contribution of property to a partnership. This is true when the fair market value of the contributed property exceeds the adjusted basis. No gain is recognized when the contributed property is subject to a mortgage unless the liability assumed by the partnership exceeds the partner's basis in the partnership. In the second situation, Black is treated as contributing $250,000 and receiving a cash distribution of $50,000 (50% of the $100,000 liability). Since this does not exceed Black's basis, no gain is recognized. [1]
When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale? A) Each partner reports a capital gain of $33,333. B) The entire gain of $100,000 must be specifically allocated to Acre. C) The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners. D) The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
D) The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership. When determining the gain or loss allocable to each partner, you must first allocate any precontribution gain or loss (gain or loss that existed in the asset at the time it was contributed to the partnership but went unrecognized) to the contributing partner, followed by their proportionate share of the gain or loss. In this case, Acre contributed land with a built-in $40,000 gain ($100,000 FMV - $60,000 adjusted basis). Upon disposition, the partnership realizes a gain of $100,000 ($160,000 amount realized - $60,000 carryover basis). Of this gain, $40,000 is allocated to Acre as precontribution gain. The remaining gain of $60,000 is shared equally among the partners per the partnership agreement. Thus, Acre reports a total gain of $60,000 [$40,000 precontribution gain + ($60,000 remaining gain ÷ 3)] and the other two partners each report a gain of $20,000 ($60,000 remaining gain ÷ 3).