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TXX 5771 Test Two Start: August 11, 2016 at 7:45 p.m. End: August 14, 2016 at 11 p.m. There are 33questions worth a total of 99 points. (Each question is worth 3 points). There are three questions marked as extra credit. Please note that incorrect answers on any of the three questions marked as extra credit will not be counted against your grade. Correct answers, however, will be worth 3 points extra credit, for a possible maximum of 9 extra credit points. Please use the provided answer sheet and be sure your name is on the answer sheet. Please read the following carefully. For each question on the exam, you should assume that: 1. unless expressly stated to the contrary, all events occurred in \"the current taxable year;\" 2. all persons are United States citizens; 3. there is no tax avoidance purpose for any transaction, and that with respect to any mortgage on any property, there was a bona fide business purpose for incurring or assuming the debt; 4. unless expressly stated to the contrary, the partnership has no hot assets, has no debts or other liabilities, and does not have a Section 754 election in effect; 5. each partnership is a general partnership; 6. there are no special allocation provisions contained in any partnership agreement; and 7. unless expressly stated to the contrary, or the context of the question requires a conclusion that the distribution was not pro rata - such as the liquidation of the interest of just one partner, all partnership distributions were pro rata. For each exam question, choose the letter for the answer that best answers the question or best completes the sentence. 1. In the current year, Sue received a liquidating distribution of real estate from UTSRQ Partnership, a general partnership. The real estate had an adjusted basis to the partnership of $35,000 and a fair market value of $90,000 on the date of the distribution. Sue's adjusted basis in her 20 percent interest in UTSRQ Partnership was $50,000. How much gain or loss did Sue recognize on receipt of the distribution and what is her basis in the real estate? a. b. c. d. e. 0 gain or loss recognized and a $50,000 basis in the real estate. ($15,000) loss recognized and a $35,000 basis in the real estate. 0 gain or loss recognized and a $35,000 basis in the real estate. $40,000 gain recognized and a $90,000 basis in real estate. $15,000 gain recognized and a $50,000 basis in real estate. 2. Malcolm, a dealer in securities, is a 60 percent owner of the Real Partnership which on July 1, 2015, sold to him Acme Securities which it had held as an investment for three years. The basis of the securities to the Real Partnership was $40,000, and the sales price to Malcolm was $100,000. On his 2015 federal income tax return, Malcolm should report income in the amount and character of a. b. c. d. e. $36,000 long-term capital gain. $36,000 short-term capital gain. $36,000 ordinary income. $18,000 long-term capital gain. $18,100 ordinary income. 3. Bobbie and Fran are partners in the Quick Freeze partnership, owning respectively 60 percent and 40 percent of the partnership's capital and profits. At the beginning of the 2015, their bases in their partnership interests were $18,000 and $12,000, respectively. During the year, the partnership had the following items of income: partnership ordinary income, $30,000; long-term capital gains, $10,000; and taxexempt income from municipal bond interest, $5,000. The partnership distributed $12,000 to Bobbie and $8,000 to Fran. Their respective adjusted bases in their partnership interests at the end of 2015 were: a. b. c. d. e. Bobbie: $45,000; Fran: $30,000 Bobbie: $42,000; Fran: $28,000 Bobbie: $37,000; Fran: $18,000 Bobbie: $30,000; Fran: $20,000 Bobbie: $33,000; Fran: $22,000 4. Rex contributed land to the partnership of Rex, Tex, and Lex Partnership in exchange for a onethird interest in the Partnership. Rex's adjusted basis in the land was $50,000 and its fair market value was $75,000. Rex's Partnership capital account was credited with $75,000. Tex and Lex had each contributed $75,000 cash. Thus, each partner's capital account was $75,000. What is Rex's adjusted basis (outside basis) in his partnership interest? a. b. c. d. $75,000 $50,000 $37,500 cannot be determined from the facts stated 5. Ten years ago, Lisa acquired a one-third interest in Dee Associates, a general partnership. In the current taxable year, when Lisa's entire interest in the partnership was liquidated, Dee Associates' assets consisted of cash of $20,000 and tangible property with an adjusted basis to the partnership of $46,000 and a fair market value of $40,000 on the date of distribution. Dee Associates had no liabilities. Lisa's adjusted basis in her onethird interest in the partnership was $22,000. Lisa received cash of $20,000 in complete liquidation of her entire interest. How much loss will Lisa recognize upon receipt of the liquidating distribution? a. b. c. d. 0 $2,000 short-term capital loss $2,000 long-term capital loss $2,000 ordinary loss 6. Mark, Pete and Mickey are equal partners in the 2MP Partnership, a general partnership. On January 1, 2015, Mark's adjusted basis in his partnership interest was $15,000, Pete's adjusted basis in his partnership interest was $10,000, and Mickey's adjusted basis in his partnership interest was $20,000. The partnership had taxable income of $30,000 in 2014 which was allocated equally among the partners. On December 31, 2015, the partnership made a non-liquidating distribution of $25,000 cash to Pete. How much income or gain did Pete recognize as a result of the distribution? a. b. c. d. 0 $5,000 $15,000 $25,000 7. Ellen is a 25 percent partner in EFGH Partners, a general partnership. Ellen's adjusted basis in her partnership interest is $18,000. During the current taxable year, Ellen received a non-liquidating distribution of land from EFGH Partners that had an adjusted basis to the partnership of $23,000 and a fair market value of $45,000 on the date of distribution. What is Ellen's basis in the land received in the non-liquidating distribution? a. b. c. d. 0 $18,000 $23,000 $45,000 8. Gary is a one-third partner in GNG Partners. a general partnership. Gary's adjusted basis in his partnership interest is $25,000. Gary received a distribution of real estate in a non-liquidating distribution from the partnership. The real estate had an adjusted basis to the partnership of $20,000 and a fair market value of $50,000 on the date of distribution. What is Gary's basis in the real property received in the nonliquidating distribution? a. b. c. d. 0 $20,000 $25,000 $50,000 9. Glenda received a proportionate nonliquidating distribution from the EFG Partnership. The distribution consisted of $10,000 cash and property with an adjusted basis to the partnership of $34,000 and a fair market value of $42,000. Immediately before the distribution, Glenda's adjusted basis in her partnership interest was $60,000. How much is Glenda's basis in the noncash property distributed to her? a. b. c. d. $10,000 $34,000 $42,000 $50,000 10. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $100,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner identical parcels of land held by the partnership for investment that each had a fair market value of $25,000 and a basis to the partnership of $10,000. How much is includible in each partner's gross income for the year as the result of the distribution? a. b. c. d. e. $80,000 $20,000 $25,000 $10,000 0 11. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $100,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. What is each partner's basis in the land distributed to the partner? a. b. c. d. 0 $20,000 $15,000 $10,000 12. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $100,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. What is each partner's adjusted basis in the partner's partnership interest at the close of last year? a. b. c. d. $90,000 $110,000 $120,000 $170,000 13. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $100,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner $30,000 in cash plus identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. How much is includible in each partner's gross income for the year as the result of the distribution? a. $80,000 b. $55,000 c. $30,000 d. $10,000 e. 0 14. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $100,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner $30,000 in cash plus identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. What is each partner's basis in the land distributed to the partner? a. b. c. d. 0 $20,000 $15,000 $10,000 15. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $100,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner $30,000 in cash plus identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. What is each partner's adjusted basis in the partner's partnership interest at the close of last year? a. b. c. d. $90,000 $65,000 $80,000 $110,000 16. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $40,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner $55,000 in cash plus identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. How much is includible in each partner's gross income for the year as the result of the distribution? a. $10,000 b. $55,000 c. $25,000 d. $5,000 e. 0 17. The ABCD partnership has four partners. Each partner's adjusted basis in the partnership interest owned by that partner was $40,000 on the first day of last year. The partnership reported net income for last year of $80,000 (there were no separately stated items to take into account). The partnership distributed pro rata to each partner $55,000 in cash plus identical parcels of land that each had a fair market value of $25,000 and a basis to the partnership of $10,000. What is each partner's adjusted basis in the land distributed to the partner? a. 0 b. $20,000 c. $15,000 d. $10,000 e. $5,000 18. Wilbur Wallace had an adjusted basis in his partnership interest of $35,000 when the partnership made adistribution to him, not in complete termination of his interest, of $30,000 cash and a parcel of real estate which the partnership held as an investment. The real estate had an adjusted basis to the partnership of $10,000 and a fair market value of $15,000. As a result of this distribution: a. Wilbur has ordinary income of $30,000, a capital gain of $15,000, and the real estate has a basis to him of $15,000. b. Wilbur has ordinary income of $5,000, no capital gain and the real estate has a basis to him of $10,000. c. Wilbur has no ordinary income, no capital gain, and the real estate has a basis to him of $5,000. d. Wilbur has no ordinary income, a capital gain of $5,000, and the real estate has a basis of $10,000. e. Wilbur has no ordinary income, a capital gain of $10,000, and the real estate has a basis of $15,000. 19. Shaw's adjusted basis for her partnership interest in Shaw & Zack was $60,000. In complete liquidation of her interest in Shaw & Zack, Shaw received cash of $44,000 plus the following assets: Adjusted Basis to Shaw & Zack LandTract A $24,000 LandTract B Fair Market Value toShaw & Zack $10,000 8,000 8,000 How much is Shaw's basis for Tract B? a. $16,000 b. $8,000 c. $ 7,111 d. $ 4,000 20. Albin is a retired partner of Brill & Crum, a personal service partnership. Albin has not rendered any servicesto 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? a. Not taxable b. Ordinary income c. Short-term capital gain d. Long-term capital gain 21. Gary is a one-third partner in Meadows Partners. His adjusted basis in his partnership interest is $25,000. He received a distribution of real estate in a non-liquidating distribution from the partnership. The real estate had an adjusted basis to the partnership of $20,000 and a fair market value of $50,000. The partnership had no liabilities or hot assets. What will be Gary's basis in the real property received from the partnership? a. zero b. $20,000 c. $25,000 d. $50,000 e. none of the above 22. Martin has an adjusted basis in his one-fifth interest in Gateway Partners of $45,000. The partnership has no liabilitiesand no hot assets. Martin receives a distribution of $33,000 cash in complete liquidation of his interest in thepartnership. How much gain or loss will Martin recognize on receipt of the liquidating cash distribution? a. zero b. $33,000 gain c. ($12,000) loss d. $12,000 gain e. none of the above 23. Steve is a 20 percent partner in Buckman Partners. His adjusted basis in his partnership interest is $65,000, consisting of his $35,000 net capital investment in the partnership plus his $30,000 share of partnership debt. The partnership has no hot assets. Steve receives a distribution of real property in complete liquidation of his partnership interest. The property, which is not encumbered by debt of any kind, has a tax basis to the partnership of $58,000 and a fair market value of $95,000. What will be Steve's basis in the property? a. $65,000 b. $58,000 c. $35,000 d. $95,000 e. none of the above 24. Chen Industries, a general partnership, had the following balance sheets at December 31: Cash Inventory Property 2 (Sec. 1231 asset) Property 3 (Sec. 1231 asset) Basis $50,000 15,000 20,000 100,000 50,00075,000 FMV $50,000 30,000 $135,000 $255,000 Liabilities Capital, Sue Captial, Pan Capital, June 75,000 75,000 30,000 20,000 10,000 30,000 60,000 30,000 $135,000 $255,000 Pan owns a one-third interest in partnership capital and profits. Hisadjusted basis in his partnership interest is $32,500. If he sells his interest to an unrelated buyer for $60,000 cash, how much ordinary income will herecognize on the sale under Code Sec. 751(a)? a. zero b. $5,000 c. $10,000 d. $27,500 e. None of the above 25. BugOff, LLC, a general partnership, had the following balance sheets at December 31: Cash Inventory Depreciable equipment (original cost $120,000) Land Liabilities Capital, April Captial, May Capital, June Basis $50,000 15,000 FMV $50,000 30,000 40,000 45,000 100,000 60,000 $150,000 $240,000 $60,000 45,000 30,000 15,000 $60,000 90,000 60,000 30,000 $150,000 $240,000 On January 1, May sold her one-third interest in the partnership to an unrelated buyer for $60,000. How much ordinary income will May recognize on the sale under Code Sec. 751(a)? a. $5,000 b. $30,000 c. $20,000 d. $25,000 e. None of the above 26. Plainway Partners, a general partnership, had the following balance sheets at December 31: Cash Inventory Land Capital, Tom Captial, Dick Capital, Harry $150,000 $140,000 Basis $50,000 10,000 90,000 $150,000 FMV $50,000 30,000 60,000 $140,000 75,000 60,000 15,000 70,000 56,000 14,000 On January 1, Harry sold his ten percent interest in the partnership to an unrelated buyer for $14,000. How much ordinary income will Harry recognize on the sale under Code Sec. 751(a)? a. Zero, he will recognize a loss on the sale. b. $2,000 c. $20,000 d. $14,000 e. None of the above Question 27 is an Extra Credit Question: 27. Lakeway Partners, a general partnership, had the following balance sheets at December 31: Cash Property 1 (Code Sec. 1231 asset) Land Capital, April Captial, May Capital, June Basis $50,000 50,000 50,000 FMV $50,000 130,000 60,000 $150,000 $240,000 75,000 50,000 25,000 120,000 80,000 40,000 $150,000 $240,000 On January 1, May sold her one-third interest in the partnership to an unrelated buyer for $80,000. If the partnership has a Code Sec. 754 election in effect, what will be its total allowable basis adjustment under CodeSec. 743(b)? a. $30,000 b. $80,000 c. $10,000 d. $90,000 e. None of the above 28. Slate Quarry, a general partnership, had the following balance sheets at December 31: Cash Inventory Land Capital, Fred Capital, Wilma Capital, Barney Basis $30,000 20,000 50,000 FMV $30,000 30,000 90,000 $100,000 $150,000 $60,000 $20,000 $20,000 $100,000 $90,000 $30,000 $30,000 $150,000 On January 1, the partnership distributed the inventory to Barney in complete liquidation of his twentypercent interest in the partnership. How much ordinary income will the partnership recognize on receipt of the distribution under Code Sec. 751(b)? a. zero b. $10,000 c. $2,000 d. $8,000 e. None of the above 29. Arlen Propane, a general partnership, had the following balance sheets at December 31: Cash Inventory Land Liabilities Capital, Hank Capital, Peggy Capital, Bobby $160,000 $210,000 Basis $30,000 20,000 110,000 FMV $30,000 30,000 150,000 $160,000 $210,000 $60,000 $60,000 $20,000 $20,000 $60,000 $90,000 $30,000 $30,000 On January 1, the partnership distributed the land to Hank in complete liquidation of his sixty percent interest in the partnership. The land was encumbered by a $60,000 mortgage, for which Hank assumed responsibility in connection with the distribution. How much ordinary income will Hank recognize on receipt of the distribution under Code Sec. 751(b)? a. zero b. $90,000 c. $6,000 d. $10,000 e. none of the above 30. The adjusted basis of Peter Palmer's partnership interest is $50,000. In complete liquidation of his interest in the partnership, Peter receives $15,000 in cash, inventory items having an adjusted basis to the partnership of $20,000 and a fair market value of $22,000, and two parcels of land. Parcel I has an adjusted basis to the partnership of $18,000 and a fair market value of $15,000 and Parcel II has an adjusted basis to the partnership of $12,000 and a fair market value of $10,000. What is Peter's basis in each of the two parcels of land? a. Parcel 1, $6,000; Parcel 2, $9,000 b. Parcel 1, $3,000; Parcel 2, $12,000 c. Parcel 1, $12,000; Parcel 2, $3,000 d. Parcel 1, $9,000; Parcel 2, $6,000 31. Efosa is a partner in Far Away Partners, a general partnership. His adjusted basis in his partnership interest is $28,000. The partnership has no liabilities and no hot assets. Efosa received a liquidating distribution consisting of $10,000 cash, and two properties. Property 1 has an adjusted basis to the partnership of $16,000 and a fair market value of $20,000. Property 2 has an adjusted basis to the partnership of $8,000 and a fair market value of $15,000. What will be Efosa's basis in Property 2? a. $8,000 b. $15,000 c. $6,000 d. $18,000 e. None of the above Question 32 is an Extra Credit Question: 32. Until February, Marion was a partner in Winston and Company, an accounting firm organized as a partnership. Her adjusted basis in her partnership interest was $50,000. She retired from the partnership, receiving a $125,000 cash distribution in complete liquidation of her interest in the partnership. Of the amount distributed, $25,000 represented Marion's share of the partnership's uncollected receivables, $65,000 represented her share of other partnership property, and $35,000 represented her share of partnership goodwill. The partnership agreement required that retiring partners be compensated for their shares of partnership goodwill. How much ordinary income will Marion recognize underCode Section 736 on receipt of the distribution? a. $75,000 b. $25,000 c. $35,000 d. $60,000 e. None of the above Question 33 is an Extra Credit Question: 33. Wycliffe Production, LLP, a general partnership, had the following balance sheets at December 31: Cash Property 1 (Sec. 1231 asset) Property 2 (Sec. 1231 asset) Capital, J Captial, R Capital, N Basis $50,000 50,000 10,000 FMV $50,000 50,000 50,000 $120,000 $240,000 30,000 30,000 60,000 60,000 60,000 120,000 $120,000 $240,000 J, a 25 percent partner, sold her interest in the partnership the next day for $60,000. If the partnership has a Code Section 754 election in effect, by how much will it be required to increase its tax basis in Property 2 under Code Section 743(b)? a. $90,000 b. $20,000 c. $10,000 d. $15,000 e. None of the above