Sales, and Exchanges
Only a cash basis partnership is concerned with the problem of â€œunrealized
inclusion of accounts receivable of an accrual basis partnership in the
determination of its â€œsubstantially appreciated inventory itemsâ€ reduces the
chances of the partnership being affected by Section 751.
partner’s interest in a partnership is a capital asset.
When a partner acquires an interest in a partnership by purchase, the basis of
the underlying assets of the partnership must be adjusted to reflect the price
the incoming partner paid for his interest.
Where property for which a special basis adjustment was made because a
partnership interest was purchased is distributed to a nonpurchasing partner,
the basis adjustment carries over to the distributee partner.
With respect to the allocation of a basis adjustment to partnership assets, the
total fair market value of all of the assets is compared with the total
adjusted basis of those same assets and the difference between the two amounts
is allocated to each asset based upon its relative adjusted basis.
partner who receives a current property distribution (other than cash), made
pro rata to all the partners, will not have to report a gain with respect to
a general rule, property distributed to a partner, not in liquidation of an
interest in the partnership, takes the same basis in the hands of the partner
as it had in the hands of the partnership.
the partnership agreement is silent but the partners recognize that a retiring
partner had created substantial goodwill for the partnership while a partner, the
retiring partner may report as capital gain so much of the payments for the
partnership interest as are designated as payment â€œfor goodwill.â€
partnership may elect to adjust the basis of its property merely because one
partner sells an interest to another partner and there is no transfer of any
partnership assets involved.
CHOICE QUESTIONSâ€”CHAPTER 20
April 1, George Hart, Jr. acquired a 25 percent interest in the Wilson, Hart,
and Company partnership by gift from his father. The 25 percent partnership
interest had been acquired by a $50,000 cash investment by Hart, Sr. 10 years
ago. The fair market value of Hart, Sr.’s partnership interest was $60,000 at
the time of the gift. Hart, Jr. sold the 25 percent interest for $85,000 on December
17. What type and amount of capital gain should Hart, Jr. report on his tax
Long-term capital gain of $25,000
Short-term capital gain of $25,000
Long-term capital gain of $35,000
Short-term capital gain of $35,000
Ralph Elin contributed a plot of land to the partnership of Anduz and Elin.
Elin’s adjusted basis for this land was $50,000, and its fair market value was
$75,000. Under the partnership agreement, Elin’s capital account was credited
with the full fair market value of the land. Anduz matched Elin’s contribution
with a $75,000 cash contribution to the partnership. Thus, each partner’s
capital account was credited with $75,000. Elin and Anduz share profits and
losses equally. What is the adjusted basis of Elin’s interest in the
July 1, Clark Cootes acquired a 20 percent interest in the partnership of Davis
& Denny, by contributing a parcel of land for which his basis was $8,000.
At the date of the contribution, the land had a fair market value of $20,000
and was subject to a mortgage of $4,000. Responsibility for the mortgage was
assumed by the partnership. Assuming there are no other partnership
liabilities, the basis of Clark’s interest in the partnership is:
For 20 years, Henry Humboldt has been a 25 percent partner in HIG, a calendar
year, cash basis partnership. This year, HIG averaged ordinary partnership
income of $20,000 each month. As of September 30, when Henry’s adjusted basis
for his partnership interest, prior to consideration of the current year
operations, was $40,000, he sold his interest to George for $90,000. Henry
should include in his current year return as income from the partnership:
$70,000 long-term capital gain
$50,000 long-term capital gain
$20,000 long-term capital gain and $50,000 ordinary income
$5,000 long-term capital gain and $45,000 ordinary income
$70,000 ordinary income
John Albin is a retired partner of Brill & Crum, a personal service
partnership. Albin has not rendered any services to Brill & Crum since his
retirement over 10 years ago. Under the provisions of Albin’s retirement
agreement, Brill & Crum is obligated to pay Albin 10 percent of the
partnership’s net income each year. In compliance with this agreement, Brill
& Crum paid Albin $25,000 this year. How should Albin treat this $25,000?
Short-term capital gain
Long-term capital gain
partnership has no Section 751 assets. Assuming that the partnership has a Code
Sec. 754 election in effect, the partnership would make all of the following
Increase the basis of partnership property because of capital gain which a
distributee partner recognizes in a current distribution.
Decrease the basis of partnership property because of capital loss which a
distributee partner recognizes in a liquidating distribution.
Increase the basis of partnership property because the distributee partner’s
basis for the partnership interest limits the basis assigned to partnership
property received in a current distribution.
Decrease the basis of partnership property because the amount of the
distributee partner’s basis assigned to partnership property distributed in a
liquidating distribution exceeds the partnership’s pre-distribution basis in
the basis of partnership property for the excess of the amount a purchasing
partner pays for a partnership interest over the partner’s proportionate share
of the partnership’s basis in its properties.
Mark, Pete and Mickey are equal partners in the 2MP Partnership. At the
beginning of the year, Mark’s basis in his partnership interest was $15,000,
Pete’s basis was $10,000, and Mickey’s basis was $20,000. The partnership
reported taxable income of $30,000 (allocated equally among the partners). At
year-end, the partnership made a nonliquidating distribution of $25,000 cash to
Pete. How much income or gain will Pete recognize on receipt of the
distribution (assume the partnership has no hot assets)? Assume the partnership
has no liabilities.
none of the above
Ellen is a 25 percent partner in Heartland Partners. Her tax basis in her
partnership interest is $18,000. She received a non-liquidating distribution of
land with a tax basis of $23,000 and a fair market value of $45,000. The
partnership has no liabilities. What will be Ellen’s tax basis in the land
received in the non-liquidating distribution?
none of the above