Test Bank Partnership Interests & Distributions Chapter 21

Taxation of Individuals and Business Entities, 11e (Spilker)

Chapter 21 Dispositions of Partnership Interests and Partnership Distributions

1) Jason is a 25 percent partner in the JJM Partnership when he sells his entire interest to Lavelle for $76,000. At the time of the sale, Jason's basis in JJM is $87,000. JJM does not have any debt or hot assets. Jason will recognize a gain of $11,000 on the sale of his partnership interest.

2) A partner's debt relief from the sale of a partnership interest will decrease his outside basis.

3) In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when the partnership assets include cash and land held for five years as an investment.

4) Hot assets include assets other than cash, capital assets, and §1231 assets.

5) Federico is a 30 percent partner in the FRM Partnership when he sells his entire interest to Maria for $98,000. At the time of the sale, Federico's basis in FRM is $74,000. FRM does not have any debt. In addition, FRM's assets include accounts receivable with zero tax basis and $21,000 fair market value at the date of the sale. The remaining assets of the partnership are capital and §1231 assets. Federico will recognize ordinary income of $24,000 on the sale of his partnership interest.

6) Under the entity concept, a partnership interest is an intangible asset similar to an ownership interest in a corporation. As such, a partnership interest is generally treated as a capital asset, the disposal of which results in capital gain or loss.

7) If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income (loss).

8) The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their partnership interests as capital.

9) When determining a partner's gain on the sale of partnership interest, the selling partner must include her share of partnership debt relief in the amount realized.

10) Operating distributions completely terminate a partner's interest in the partnership.

11) A partner that receives cash in an operating distribution recognizes loss if the cash distributed is less than the partner's outside basis in the partnership immediately before the distribution.

12) Cash distributions include decreases in a partner's share of partnership liabilities.

13) In an operating distribution, when a partnership distributes property other than money with a basis that exceeds the partner's outside basis, the partner assigns a carryover basis to the distributed asset and recognizes a gain.

14) A partner that receives cash in an operating distribution recognizes gain if the cash distributed exceeds the partner's outside basis in the partnership immediately before the distribution.

15) Barry has a basis in his partnership interest of $50,000 when the partnership distributes $60,000 in cash to Barry. As a result of the distribution, Barry reduces his basis in the partnership interest to $0, has a $60,000 basis in the cash received, and recognizes a gain of $10,000 on the distribution.

16) A partnership making an operating distribution will recognize gain or loss only when the partner that receives the distribution recognizes gain or loss.

17) Jaime has a basis in her partnership interest of $50,000 when the partnership distributes (in an operating distribution) two parcels of land to Jaime, each valued at $30,000. Prior to the distribution, the partnership's basis in parcel A is $40,000 and the basis in parcel B is $20,000. Jaime allocates $20,000 of basis to parcel A and $30,000 of basis to parcel B.

18) A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets.

19) Ted is a 30 percent partner in the TDW Partnership, with an outside basis of $20,000. TDW distributes $15,000 of cash in complete liquidation of Ted's interest. Ted recognizes a capital loss of $5,000 on the distribution.

20) Catherine is a 30 percent partner in the ACW Partnership, with an outside basis of $20,000. ACW distributes land with a basis of $12,000 and fair value of $18,000 to Catherine in complete liquidation of her interest. Catherine recognizes a capital loss of $2,000 on the distribution.

21) A partner recognizes gain when she receives cash in excess of her outside basis in a liquidating distribution.

22) A partner recognizes a loss when she receives cash and other property with inside bases greater than her outside basis in a liquidating distribution.

23) Martha is a 40 percent partner in the MMM Partnership, with an outside basis of $50,000. MMM distributes $40,000 cash and accrual-basis accounts receivable with a basis and fair market value of $20,000. Martha does not recognize gain or loss on the distribution and takes a basis in the cash of $40,000 and a basis in the receivables of $10,000.

24) A disproportionate distribution is a distribution in which the partner's share of the partnership's hot assets either increases or decreases as a result of the distribution.

25) Inventory is substantially appreciated if the fair market value of all inventory items exceeds 100 percent of their basis to the partnership.

26) When a partner receives more than a proportionate share of hot assets in a distribution, the transaction is treated as though the partnership distributes a proportionate share of cold assets to the partner and then the partner sells some or all of those cold assets back to the partnership at fair market value in exchange for a portion of the hot assets actually received in the distribution.

27) A §754 election is made by a distributee partner for a tax year in which (1) the distributee partner recognizes gain or loss on a distribution from a partnership or (2) the distributee partner's basis in distributed assets differs from the partnership's inside basis in those assets.

28) Unrealized receivables include accounts receivable for which of the following partnerships?

A) Accrual-method partnerships.

B) Cash-method partnerships.

C) Neither cash- nor accrual-method partnerships.

D) Both cash- and accrual-method partnerships.

29) Jackson is a 30 percent partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash. At the time of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is Jackson's gain or loss on the sale of his interest?

A) $48,000 capital gain.

B) $48,000 ordinary income.

C) $24,000 capital gain and $24,000 ordinary income.

D) Gain or loss cannot be determined.

30) Which of the following statements regarding the sale of a partnership interest is false?

A) The seller's primary tax concern in a partnership interest sale is calculating the amount and character of gain or loss on the sale.

B) The selling partner determines the gain or loss as the difference between the amount realized and her outside basis in the partnership.

C) Hot assets change the character of a gain on the sale from ordinary income to capital gain.

D) Any debt relief increases the amount the partner realizes from the sale.

31) At the end of last year, Cynthia, a 20 percent partner in the five-person CYG partnership, has an outside basis of $30,000, including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?

A) $7,500 capital loss.

B) $7,500 ordinary loss.

C) $7,500 capital gain.

D) $7,500 ordinary income.

32) Which of the following assets would not be classified as a hot asset?

A) Inventory.

B) Depreciation recapture.

C) Cash.

D) Accounts receivable for a cash-method taxpayer.

33) The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year:

Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

A) $30,000 ordinary income.

B) $30,000 capital gain.

C) $10,000 ordinary income; $20,000 capital gain.

D) $10,000 capital gain; $20,000 ordinary income.

34) The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year:

Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $100,000 cash, what is the amount and character of Susan's gain or loss from the sale?

A) $10,000 capital gain.

B) $10,000 ordinary income.

C) $20,000 ordinary income; $10,000 capital gain.

D) $10,000 capital loss; $20,000 ordinary income.

35) Daniel acquires a 30 percent interest in the PPZ Partnership from Paolo, an existing partner, for $39,000 of cash. The PPZ Partnership has borrowed $10,000 of recourse liabilities as of the date Daniel bought the interest. What is Daniel's basis in his partnership interest?

A) $39,000.

B) $42,000.

C) $46,000.

D) $49,000.

36) The SSC Partnership, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year:

Which of SSC's assets are considered hot assets under §751(a)?

A) Cash and accounts receivable.

B) Cash and land.

C) Accounts receivable and land.

D) Accounts receivable and inherent recapture in the equipment under §1245.

37) Shauna is a 50 percent partner in the SH Partnership. Shauna sells one-half of her interest to Kara for $60,000 cash. Just before the sale, Shauna's basis in her entire partnership interest is $150,000, including her $60,000 share of the partnership liabilities. SH's assets on the sale date are as follows:

What is the amount and character of Shauna's gain or loss on the sale?

A) $30,000 ordinary income and $15,000 capital loss.

B) $45,000 capital gain.

C) $15,000 capital loss.

D) $15,000 ordinary income and $30,000 capital gain.

38) Under which of the following circumstances will a partner recognize a gain from an operating distribution?

A) A partner will never recognize a gain from an operating distribution.

B) A partner will recognize a gain from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.

C) A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest.

D) A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

39) Under which of the following circumstances will a partner recognize a loss from an operating distribution?

A) A partner will never recognize a loss from an operating distribution.

B) A partner will recognize a loss from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.

C) A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest.

D) A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

40) In which type of distribution may a partner recognize a loss on the distribution?

A) Operating distributions.

B) Liquidating distributions.

C) Neither operating nor liquidating distributions.

D) Both operating and liquidating distributions.

41) Sarah is a 50 percent partner in the SF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Sarah receives a proportionate operating distribution of $20,000 cash. What is the amount and character of Sarah's recognized gain or loss and what is her basis in her partnership interest?

A) $0 gain, $36,000 basis.

B) $0 gain, $56,000 basis.

C) $20,000 ordinary income, $56,000 basis.

D) $20,000 ordinary income, $36,000 basis.

42) Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is the amount and character of Riley's recognized gain or loss and what is his basis in his partnership interest?

A) $0 gain, $36,000 basis.

B) $0 gain, $42,000 basis.

C) $0 gain, $50,000 basis.

D) $0 gain, $56,000 basis.

43) Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?

A) Cash $6,000, land $0.

B) Cash $6,000, land $8,000.

C) Cash $6,000, land $14,000.

D) Cash $6,000, land $22,000.

44) Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $44,000. On December 31, KH makes a proportionate operating distribution of $50,000 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH?

A) $0 gain, $0 basis.

B) $6,000 capital gain, $0 basis.

C) $6,000 capital loss, $0 basis.

D) $6,000 capital gain, $44,000 basis.

45) Jenny has a $54,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an $80,000 fair value and a $64,000 basis to JM. The land is encumbered with a $30,000 mortgage (JM's only liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?

A) $80,000 land basis, $0 JM basis.

B) $64,000 land basis, $0 JM basis.

C) $64,000 land basis, $5,000 JM basis.

D) $80,000 land basis, $5,000 JM basis.

46) Marcella has a $65,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Marcella of $10,000 cash and inventory with an $80,000 fair value and a $40,000 basis to JM. What is Marcella's basis in the inventory and her remaining basis in JM after the distribution?

A) $80,000 inventory basis, $0 JM basis.

B) $40,000 inventory basis, $0 JM basis.

C) $40,000 inventory basis, $15,000 JM basis.

D) $80,000 inventory basis, $15,000 JM basis.

47) Which of the following statements is true regarding partnership operating distributions?

A) Partners will never recognize a gain on an operating distribution.

B) Partners receiving a distribution of property other than money will take a basis in the property equal to its fair market value.

C) Partners will never recognize a loss on an operating distribution.

D) None of the statements are true.

48) Which of the following statements is true regarding partnership operating distributions?

A) If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution, the partner will recognize a loss.

B) If a partner's outside basis is less than the bases of the assets distributed in an operating distribution, the partner will recognize a loss.

C) If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution, the partner will recognize a gain.

D) None of the statements are true.

49) Which of the following is true concerning a partner's basis in assets (other than money) distributed in an operating distribution?

A) A partner's bases in the distributed assets will be greater than the partnership's bases in the assets.

B) A partner's bases in the distributed assets will be equal to the partnership's bases in the assets.

C) A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the assets.

D) None of the statements are true.

50) Under what conditions will a partner recognize a gain in a liquidating distribution?

A) When a partnership distributes only money and the amount of the distribution exceeds the partner's outside basis.

B) When a partnership distributes only money and the amount of the distribution is less than the partner's outside basis.

C) When a partnership distributes money, hot assets, and other property and the amount of the distribution exceeds the partner's outside basis.

D) When a partnership distributes money, hot assets, and other property and the amount of the distribution is less than the partner's outside basis.

51) Which of the following statements is false concerning partnership liquidating distributions?

A) A partner who receives a liquidating distribution can retain an interest in the partnership.

B) A partnership agreement may restrict the sale of a partnership, making a liquidating distribution the only way a partner can close out his interest in the partnership.

C) Liquidating a single partner's interest is similar in concept to a corporate redemption of a shareholder's interest.

D) None of these statements are false.

52) Which of the following statements regarding a partner's basis of inventory received in a liquidating distribution is true?

A) Partners may either increase or decrease the basis in inventory distributed in a liquidating distribution.

B) Partners may only increase the basis in inventory distributed in a liquidating distribution.

C) Partners may only decrease the basis in inventory distributed in a liquidating distribution.

D) None of these statements are true.

53) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $26,000 cash to Randolph in complete liquidation of his interest. RD has only capital assets and no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $37,000. What is the amount and character of Randolph's gain or loss on the distribution?

A) $0 gain or loss.

B) $11,000 capital gain.

C) $11,000 ordinary income.

D) $11,000 capital loss.

54) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash and inventory with a fair value of $20,000 (inside basis of $10,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $27,000. What is the amount and character of Randolph's gain or loss on the distribution?

A) $0 gain or loss.

B) $8,000 capital gain.

C) $8,000 capital loss.

D) $2,000 capital loss.

55) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, inventory with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of $5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $37,000. What is Randolph's basis in the distributed inventory and land?

A) $10,000 inventory, $10,000 land.

B) $10,000 inventory, $5,000 land.

C) $20,000 inventory, $10,000 land.

D) $10,000 inventory, $12,000 land.

56) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, an investment with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of $5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $48,000. What is Randolph's basis in the distributed investment and land?

A) $10,000 investment, $5,000 land.

B) $22,000 investment, $11,000 land.

C) $20,000 investment, $10,000 land.

D) $20,000 investment, $13,000 land.

57) Jessica is a 25 percent partner in the JRL Partnership. On January 1, JRL distributes $40,000 cash to Jessica. JRL has no hot assets or liabilities at the date of the distribution. Jessica's basis in her JRL partnership interest is $28,000. What is the amount and character of Jessica's gain or loss from the distribution?

A) $0.

B) $12,000 ordinary income.

C) $12,000 capital loss.

D) $12,000 capital gain.

58) Which of the following statements regarding liquidating distributions is true?

A) A partner will recognize a gain when the partnership distributes only money and the amount is greater than the partner's outside basis.

B) A partner will recognize a gain when the partnership distributes only money and hot assets and the inside bases of the distributed assets are greater than the partner's outside basis.

C) A partner will recognize a gain when the partnership distributes money, hot assets, and other property and the inside bases of the distributed assets are greater than the partner's outside basis.

D) A partner will recognize a gain when the partnership distributes only money and the amount is less than the partner's outside basis.

59) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate liquidating distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is the amount and character of Daniela's gain or loss from the distribution?

A) $0.

B) $14,000 ordinary income.

C) $4,000 capital loss.

D) $4,000 capital gain.

60) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $0) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is Daniela's basis in the distributed inventory and accounts receivable?

A) $8,000 inventory, $0 accounts receivable.

B) $6,000 inventory, $1,000 accounts receivable.

C) $5,000 inventory, $0 accounts receivable.

D) $16,000 inventory, $8,000 accounts receivable.

61) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is Daniela's basis in the distributed inventory and accounts receivable?

A) $2,000 inventory, $2,000 accounts receivable.

B) $8,000 inventory, $12,000 accounts receivable.

C) $0 inventory, $4,000 accounts receivable.

D) $16,000 inventory, $8,000 accounts receivable.

62) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate, liquidating distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is the amount and character of Daniela's gain or loss from the distribution?

A) $0.

B) $16,000 ordinary income.

C) $16,000 capital gain.

D) $20,000 capital gain.

63) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate, liquidating distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $20,000. What is the amount and character of Tyson's gain or loss from the distribution?

A) $0.

B) $4,000 capital gain.

C) $12,000 ordinary income.

D) $12,000 capital gain.

64) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $20,000. What is Tyson's basis in the distributed land?

A) $0.

B) $4,000.

C) $8,000.

D) $16,000.

65) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and land with a fair value of $8,000 (inside basis of $12,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $24,000. What is Tyson's basis in the distributed inventory and land?

A) $8,000 inventory, $12,000 land.

B) $16,000 inventory, $8,000 land.

C) $0 inventory, $8,000 land.

D) $8,000 inventory, $0 land.

66) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash, inventory with a $10,000 fair value (inside basis $4,000), land A with a fair value of $8,000 (inside basis of $12,000), and land B with a fair value of $6,000 (inside basis of $4,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $23,000. What is Tyson's basis in the distributed inventory, land A, and land B?

A) $10,000 inventory, $8,000 land A, $6,000 land B.

B) $4,000 inventory, $12,000 land A, $4,000 land B.

C) $0 inventory, $2,857 land A, $143 land B.

D) $4,000 inventory, $2,000 land A, $1,000 land B.

67) Brian is a 25 percent partner in the BC Partnership. On January 1, BC distributes $20,000 cash and land with a $16,000 fair value (inside basis $8,000) to Brian. BC has no liabilities at the date of the distribution. Brian's basis in his BC Partnership interest is $16,000. What is the amount and character of Brian's gain or loss on the distribution?

A) $0.

B) $4,000 capital gain.

C) $12,000 capital gain.

D) $20,000 capital gain.

68) Which of the following statements regarding disproportionate distributions is false?

A) A disproportionate distribution occurs when a partner receives more than his proportionate share of the partnership's hot assets.

B) A disproportionate distribution occurs when a partner receives less than his proportionate share of the partnership's hot assets.

C) The tax provisions related to disproportionate distributions attempt to preserve the partners' share of ordinary income potential.

D) Disproportionate distributions will only occur in liquidating distributions.

69) Which of the following statements regarding hot assets for purposes of disproportionate distributions is false?

A) Hot assets include unrealized receivables.

B) Hot assets include any inventory.

C) Hot assets include substantially appreciated inventory.

D) The definition of hot assets for distributions and sales of partnership interests differs.

70) The PW Partnership's balance sheet includes the following assets immediately before it liquidates:

In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Pamela's recognized gain or loss?

A) $0.

B) $5,000 capital gain.

C) $5,000 ordinary income.

D) $2,500 capital gain and $2,500 ordinary income.

71) The PW Partnership's balance sheet includes the following assets immediately before it liquidates:

In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Wade's recognized gain or loss?

A) $0.

B) $5,000 capital gain.

C) $5,000 ordinary income.

D) $2,500 capital gain and $2,500 ordinary income.

72) Kathy is a 25 percent partner in the KDP Partnership and receives a parcel of land with a fair value of $150,000 (inside basis of $100,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $200,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. What is KDP's special basis adjustment from the distribution?

A) $0.

B) $50,000 positive basis adjustment.

C) $100,000 positive basis adjustment.

D) $100,000 negative basis adjustment.

73) Which of the following is false concerning special basis adjustments under Section 754?

A) Special basis adjustments are intended to eliminate discrepancies between inside and outside bases.

B) Special basis adjustments are an annual election made by the partnership.

C) Special basis adjustments can occur when a new investor purchases a partnership interest.

D) Special basis adjustments can occur when a partner recognizes a gain or loss from a distribution.

74) Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000. Just prior to the sale, Paul's outside and inside bases in KDP are $48,000. KDP's balance sheet includes the following:

If KDP has a §754 election in place, what is Kathy's special basis adjustment?

A) $0.

B) $36,000.

C) $12,000.

D) None of the choices are correct.

75) Kathy is a 25 percent partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. Which of the following statements is true?

A) KDP will increase the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.

B) KDP will increase the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.

C) KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.

D) KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.

76) Joan is a one-third partner in the PDJ Partnership. PDJ Partnership uses the proration method to allocate income and losses to partners with varying interests. On May 1, Joan sells her interest to Freddie for a cash payment of $75,000. On January 1, Joan's basis in PDJ is $57,000. PDJ generates $60,000 of ordinary income and $9,000 of tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale date:

What is the amount and character of Joan's gain or loss on the sale?

77) Joan is a 30 percent partner in the OJT Partnership when she sells her entire interest to Crissy for $100,000 cash. At the time of the sale, Joan's basis in OJT is $63,000 (which includes her $10,000 share of OJT liabilities). OJT does not have any hot assets. What is the amount and character of Joan's gain or loss on the sale?

78) The VRX Partnership (a calendar year-end entity) has the following assets and no liabilities:

The equipment was purchased for $360,000 and VRX has taken $90,000 of depreciation. The stock was purchased seven years ago. What are VRX's hot assets for purposes of a sale of partnership interest?

79) Victor is a one-third partner in the VRX Partnership, with an outside basis of $156,000 on January 1. Victor sells his partnership interest to Raj on January 1 for $200,000 cash. The VRX Partnership has the following assets and no liabilities as of January 1:

The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock was purchased seven years ago. What is the amount and character of Victor's gain or loss on the sale of his partnership interest?

80) Zayde is a one-third partner in the ARZ Partnership, with an outside basis of $156,000 on January 1. Zayde sells his partnership interest to Thomas on January 1 for $180,000 cash. The ARZ Partnership has the following assets and no liabilities as of January 1:

The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock was purchased three years ago. What is the amount and character of Zayde's gain or loss on the sale of his partnership interest?

81) Marty is a 40 percent owner of MB Partnership. Marty has decided to sell his interest in the business to Emilio for $100,000 cash plus the assumption of his share of MB's liabilities. Assume Marty's inside and outside basis in MB are equal. MB shows the following balance sheet as of the sale date:

What is the amount and character of Marty's recognized gain or loss?

82) Scott is a 50 percent partner in the LS Partnership. Scott has a basis in his partnership interest of $84,000 at the end of the current year, prior to any distribution. On December 31, Scott receives an operating distribution of $9,000 cash and a parcel of land with a $21,000 fair market value and a $12,000 basis to the partnership. LS has no debt or hot assets. What is the amount and character of Scott's recognized gain or loss? What is Scott's basis in the distributed property? What is Scott's ending basis in his partnership interest?

83) Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a pro rata operating distribution to Heidi of $60,000 cash. What is the amount and character of Heidi's recognized gain or loss? What is Heidi's remaining basis in HT?

84) Doris owns a one-third capital and profits interest in the calendar-year DB Partnership. Her adjusted basis for her partnership interest on July 1 of the current year is $20,000. On that date, she receives an operating distribution of her share of partnership assets shown below:

What is the amount and character of Doris's gain or loss on the distribution? What is her basis in the distributed assets?

85) Lola is a 35 percent partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $50,000. What is the amount and character of Lola's gain or loss?

86) Locke is a 50 percent partner in the LS Partnership. Locke has a basis in his partnership interest of $84,000 at the end of the current year, prior to any distribution. On December 31, Locke receives an operating distribution of $30,000 cash. LS has no debt or hot assets. What is the amount and character of Locke's recognized gain or loss? What is Locke's ending basis in his partnership interest?

87) Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a proportionate operating distribution to Teresa of $40,000 cash and stock with a fair value of $20,000 (inside basis of $7,000). What is the amount and character of Teresa's recognized gain or loss? What is Teresa's remaining basis in HT?

88) Esther and Elizabeth are equal partners in the EE Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $40,000 basis in their partnership interests, including their share of partnership liabilities. On December 31, EE Partnership repays $50,000 of debt. What is the amount and character of Esther's recognized gain or loss? What is Esther's remaining basis in EE?

89) Lola is a 35 percent partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $30,000. What is the amount and character of Lola's gain or loss?

90) Katrina is a one-third partner in the KYR Partnership (calendar year-end). Katrina 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:

Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $250,000. What is the amount and character of any recognized gain or loss to Katrina? What is Katrina's basis in the distributed assets?

91) Katrina is a one-third partner in the KYR Partnership (calendar year-end). Katrina 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:

Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $110,000. What is the amount and character of any recognized gain or loss to Katrina? What is Katrina's basis in the distributed assets?

92) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution of $70,000 to liquidate his partnership interest on January 1. Tyson's outside basis is $75,000 including his $10,000 share of TF's liabilities. TF does not hold any hot assets. What is the amount and character of Tyson's recognized gain or loss?

93) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside basis is $22,000). Tyson's outside basis is $105,000, including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?

94) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside basis is $22,000). Tyson's outside basis is $90,000, including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?

95) BPA Partnership is an equal partnership in which each of the partners has a basis in her partnership interest of $20,000. BPA reports the following balance sheet:

a. Identify the hot assets if Brooke decides to sell her interest in BPA.

b. Are these assets "hot" for purposes of distributions?

c. If BPA distributes the land to Brooke in complete liquidation of her partnership interest, what tax issues should be considered?

96) Nadine Fimple is a one-third partner in the NWL Partnership with equal inside and outside bases. On January 1, NWL distributes $100,000 to Nadine in complete liquidation of her FPL interest. NWL's balance sheet as of January 1 is as follows:

What is the amount and character of Nadine's recognized gain or loss on the distribution?

97) Nadine Fimple is a one-half partner in the NL Partnership with equal inside and outside bases. On January 1, NL distributes accounts receivable with a fair value of $100,000 to Nadine as an operating distribution. NL's balance sheet as of January 1 is as follows:

What is the amount and character of Nadine's recognized gain or loss on the distribution?

98) Carmello is a one-third partner in the CDW Partnership with equal inside and outside bases. On December 31, Carmello sells his interest to Conrad for $100,000 cash. CDW makes a §754 election and its balance sheet as of December 31 is as follows:

What is the amount and sign (positive or negative) of Conrad's special basis adjustment? If CDW sells the capital asset next year for $300,000, what is the amount of gain Conrad will recognize because of the sale?

99) Tatia's basis in her TRQ Partnership interest is $33,000. Tatia receives a distribution of $22,000 cash from TRQ in complete liquidation of her interest. The three partners in TRQ share profits, losses, and capital equally. TRQ has the following balance sheet:

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

b. If TRQ has a §754 election in place, what is the amount and sign (positive or negative) of the special basis adjustment?

100) Daniel's basis in the DAT Partnership is $135,000. DAT distributes its land to Daniel in complete liquidation of his partnership interest. DAT reports the following balance sheet just before the distribution:

If DAT has a §754 election in place, what is the amount and sign (positive or negative) of the special basis adjustment resulting from the distribution to Daniel? What is DAT's basis in its remaining assets?