11.9 Paul Rand is a 20% partner in Kind Rand, an Illinois general partnership. Both Paul and the partnership use the cash method and the calendar year. On January 1, year 1, Paul's adjusted basis in his partnership interest is $50,000 (including his share of the partnership's $60,000 recourse borrowing). On March 31, year 1, the partnership distributes $50,000 in cash to Paul, and Paul's partnership interest is reduced immediately from 20% to 10%. Paul's share of the partnership's income for all of year 1 is $20,000. Assume that Kind Rand has no section 751(b) property. Does Paul recognize gain on the March 31 distribution?

a) Yes, because the total of the actual cash distribution and the deemed cash distribution under section 752(b) exceeds Pauls basis as of the distribution date.

b) No, because the section 752(b) deemed distribution is treated as an advance or drawing for this purpose, and Pauls share of the partnerships income for the year exceeds the amount of the section 752(b) deemed distribution

c) No, because no section 752(b) deemed distribution arises from a current, as opposed to a liquidating, distribution.

d) Cannot answer this Question on the facts provided, because the taxability of the distribution to Paul will depend on the method chosen by the partnership to allocate Paul's share of the partnership's income between the period prior to the distribution and the period after it.

12.2 Sealife LLC is a limited liability company taxed as a partnership which is engaged in the business of marine farming. Sealife's operating agreement provides that all profits and losses will be allocated among its partners in proportion to their capital contributions. Unfortunately, Sealife has experienced only losses to date and it has exhausted all its capital, although it does have debt financing that its management believes is sufficient to get Sealife to profitability. One of Sealife's members has other ideas, however, and has been pressuring management to put the company up for sale. Management believes that it can buy some time by offering this investor a special allocation of operating losses, to be offset by an equal allocation of operating profits in the future. They ask you for your opinion on this tax strategy. In your review of Sealife's operating agreement, you note that it provides for the maintenance of proper capital accounts that govern liquidating distributions, and that it contains a qualified income offset and a minimum gain chargeback. Further, no member has any obligation to restore a deficit capital-account balance, except to the extent required by law, and no member has provided any form of credit support for Sealife's debt. You conclude that the suggested allocations:

a) Will not be respected for tax p1.1rposes, because they lack economic effect

b) Will not be respected for tax purposes, because their economic effect is not substantial

c) Will not be respected for tax purposes, because they are impermissible allocations of nonrecourse deductions

d) Will be respected for tax purposes

12.3 McIntosh Labs Inc. wants to sell its home theater business, which is worth $100 million and has a tax basis of $20 million, to Harmon International, Inc., which has a home theatre business of equal value. On the advice of tax counsel, McIntosh enters into a limited partnership with Harman, naming Harman the general partner and McIntosh the limited partner. Each partner contributes all the assets and associated liabilities of its home theater business for a 50% interest in the profits and losses of the limited partnership. Shortly thereafter, the partnership borrows $75 million on a recourse basis, which McIntosh guarantees in full, waiving rights of subrogation. This guarantee reduces by 50 basis points the interest rate on the partnership's debt and you may assume that it is recognized as a payment obligation under Treas. Reg. section 1.752-2(b)(3). The partnership distributes the proceeds of this borrowing to McIntosh, which reduces its partnership interest to 20%. How much gain, if any, does McIntosh recognize on these transactions?

a) $0

b) $48 million

c) $55 million

d) $60 million

12.4 In Question 12.3, how much gain, if any, would McIntosh recognize if it did not waive rights of subrogation?

a) $0

b) $48 million

c) $55 million

d) $60 million