- A partner receives a current (non-liquidating) cash distribution of $15,000 from a partnership. The partner's outside basis before the distribution is $20,000. The tax treatment is:
Answer: The distribution is not taxable; the partner's outside basis is reduced from $20,000 to $5,000.
Current cash distributions reduce outside basis dollar-for-dollar and are not taxable as long as they do not exceed outside basis. $20,000 - $15,000 = $5,000 remaining basis. Answer B is correct. Answer A is incorrect because no income is recognized when a current distribution does not exceed outside basis. Answer C is incorrect because the distribution does reduce outside basis - it is not excluded from the basis calculation. Answer D is incorrect because outside basis never goes below zero; gain is recognized only when a distribution exceeds basis, which does not occur here.
- A partner who receives a distribution of property that includes hot assets may be subject to ordinary income recognition under Section 751(b). The purpose of this rule is to:
Answer: Prevent the conversion of ordinary income (inherent in hot assets) to capital gain through distributions that shift hot assets away from or to partners in disproportionate amounts.
Section 751(b) prevents ordinary income from being converted to capital gain by treating a disproportionate distribution of hot assets as a sale or exchange - preserving ordinary income character. Answer C is correct. Self-employment taxes (A) are separate. Not all distributions are treated as sales (B). The rule is about character conversion, not limiting nontaxable amounts (D).
- A partnership distributes cash of $60,000 to a partner in complete liquidation of their interest. The partner's outside basis is $80,000. The tax consequence is:
Answer: The partner recognizes a $20,000 loss - when a liquidating distribution consists solely of cash and the cash is less than outside basis, a loss may be recognized.
In a cash-only liquidating distribution, a loss equal to outside basis minus cash received is recognized when cash received is less than outside basis. $80,000 - $60,000 = $20,000 loss. Answer D is correct. Gain is not recognized when distribution is less than basis (A). No property was received to assign basis to (B). Cash-only liquidating distributions can generate a recognized loss (C).
- A Section 751(b) 'disproportionate distribution' occurs when:
Answer: A distribution causes a partner to receive more or less of their share of hot assets (unrealized receivables and substantially appreciated inventory) relative to their overall interest, triggering ordinary income treatment for the hot asset portion.
Section 751(b) applies when a distribution is disproportionate in relation to a partner's share of hot assets - the partner is treated as having sold their interest in hot assets to the extent they receive less than their pro-rata share. Answer B is correct. Cash proportionality (A) is not the Section 751(b) trigger. Basis comparisons (C) relate to gain recognition rules. Original contribution ratios (D) are not the Section 751(b) standard.
- In a partnership liquidation, the order in which partner accounts are paid is:
Answer: First, partnership creditors; second, loans from partners; third, partners' positive capital account balances in accordance with the liquidating distribution rules.
In a partnership liquidation, outside creditors are paid first, then partner loans, then partners' capital accounts. Answer A is correct. Partners are paid after creditors (B, C). Claims are not paid pro rata across all categories (D).
- In a liquidating distribution where a partner receives only non-cash property, no loss can be recognized. Instead:
Answer: The partner's remaining outside basis (after reduction for any cash received) is allocated to the distributed property, giving the property a higher tax basis than its FMV or inside basis.
In a property-only liquidating distribution where loss would result, no immediate loss is recognized - instead, the partner's full outside basis is assigned to the distributed property (giving the property a basis that may exceed its FMV), preserving the loss for future recognition when the property is sold. Answer A is correct. Basis is not lost (B). Section 734(b) adjustments are for the partnership's remaining assets (C). The loss is preserved in the property's higher basis, not separately deferred (D).
- A partner has an outside basis of $25,000 and receives a liquidating distribution consisting of: cash of $10,000, inventory (inside basis $8,000, FMV $12,000), and equipment (inside basis $5,000, FMV $9,000). What is the partner's basis in the inventory and equipment?
Answer: The remaining outside basis ($25,000 - $10,000 cash = $15,000) is allocated to the inventory and equipment. If basis allocation is needed, it first goes to each asset up to its FMV, with any excess allocated proportionately.
In liquidating distributions of non-cash property, the remaining outside basis after cash is allocated among properties. The $15,000 is allocated: first to the extent of inside basis (inventory $8,000, equipment $5,000 = $13,000), then the remaining $2,000 is allocated proportionately based on FMV or unrealized appreciation. Answer B correctly describes the allocation process. Inside bases (A) apply to current distributions. FMV (C) doesn't determine tax basis. All to inventory (D) is not the allocation rule.
- A partner receives a cash distribution of $30,000 when their outside basis is only $10,000. The tax consequences are:
Answer: The partner recognizes a $20,000 capital gain (the excess of distribution over outside basis), and the partner's basis is reduced to zero.
When a cash distribution exceeds outside basis, the excess is recognized as gain from the sale of the partnership interest - generally capital gain. $30,000 - $10,000 = $20,000 gain; basis goes to zero. Answer A is correct. The gain is capital, not ordinary (B). At-risk rules don't apply here (C). Excess distributions create gain, not a loss carryforward (D).
- Section 735 provides that if a partner sells or exchanges unrealized receivables distributed from a partnership, any gain or loss on the subsequent sale is:
Answer: Ordinary income or loss, regardless of when the partner sells the receivables - unrealized receivables retain their ordinary income character permanently.
Section 735 provides permanent ordinary income characterization for distributed unrealized receivables - the character never converts to capital gain regardless of holding period. Answer A is correct. No capital gain treatment for unrealized receivables (B). The 5-year rule (C) applies to inventory, not unrealized receivables. The receivables are taxable upon sale (D).
- Section 751 'hot assets' include:
Answer: Unrealized receivables and substantially appreciated inventory - their presence in a partnership causes ordinary income recognition when a partner sells their interest or receives certain distributions.
Hot assets under Section 751 are unrealized receivables and substantially appreciated inventory - they generate ordinary income rather than capital gain when a partnership interest is sold or certain distributions are made. Answer A is correct. Real property and securities (B) are not hot assets unless they are inventory. No dollar threshold applies (C). Goodwill is a Section 751(b) consideration in limited cases but not the primary definition (D).
- In evaluating whether a distribution is 'current' or 'liquidating,' which of the following is correct?
Answer: A liquidating distribution is one that terminates the partner's entire interest in the partnership, either directly or as part of a series of distributions; a current distribution reduces but does not eliminate the partner's interest.
The distinction between current and liquidating distributions is whether the partner's entire interest is terminated - a liquidating distribution terminates the interest (all at once or through a series), while a current distribution merely reduces it. Answer D is correct. Dollar thresholds (A) don't determine the type. Percentage reduction (B) is not the test. Exceeding outside basis (C) determines gain recognition but not the current/liquidating distinction.
- A partner receives a liquidating distribution and the cash and FMV of property received is less than the partner's outside basis. The tax consequence is:
Answer: The partner may recognize a loss equal to the outside basis minus the sum of cash received and the partnership's inside basis in distributed property - but only if the distribution consists solely of cash, unrealized receivables, and/or inventory.
Losses in liquidating distributions are only recognizable if the distribution is limited to cash, unrealized receivables, and inventory - in other cases, no loss is recognized and the excess basis disappears. Answer C is correct. The loss is not a carryforward (A). A loss may be recognized in liquidating distributions under limited circumstances (B). FMV is not the measure (D).
- A current (non-liquidating) distribution of property (other than cash) from a partnership to a partner is generally:
Answer: Nontaxable - the partner takes a carryover basis in the distributed property equal to the partnership's adjusted basis in the property (limited to the partner's outside basis), and outside basis is reduced accordingly.
Non-cash current distributions are generally nontaxable; the partner takes a carryover basis in the property (partnership's inside basis, not exceeding outside basis), and outside basis is reduced. Answer D is correct. FMV recognition (A, B) does not apply to non-liquidating property distributions. Distributions are not deductible (C).
- Upon complete termination of a partnership, each partner is treated as receiving:
Answer: A liquidating distribution of their share of partnership property - generally nontaxable at the time of distribution, with the partners taking carryover or allocated bases in the distributed assets.
Partnership termination results in liquidating distributions to partners - generally nontaxable with basis assigned to distributed property per the liquidating distribution rules. Answer C is correct. FMV cash (A) would be a sale. Proportionate share with gain recognition (B) is not the general rule. Deemed FMV sale (D) is not the termination treatment.
- A partner receives a distribution of inventory from a partnership. Under the anti-abuse rule, if the partner sells the inventory within how many years after the distribution, any gain is treated as ordinary income?
Answer: 5 years.
Under Section 735, if a partner disposes of distributed inventory within 5 years of the distribution, any gain or loss is treated as ordinary income or loss (retaining inventory character). Answer B is correct. 1 year (A), 3 years (C), and 10 years (D) are not the applicable period.
- Which of the following correctly describes how a current distribution of property affects the partnership's inside basis?
Answer: The partnership eliminates its inside basis in the distributed property when it is distributed - the partnership no longer holds the property. If a Section 754 election is in effect, a Section 734(b) adjustment may be required.
When property is distributed, the partnership's inside basis in that property is removed from its books. With a Section 754 election, a 734(b) adjustment may be triggered if there is a significant basis discrepancy. Answer D is correct. Remaining assets' basis is not increased (A). Partnerships generally don't recognize gain on distributions (B). Inside basis changes with the distribution (C).
- A partner's distributive share of partnership losses is $40,000, but their outside basis is only $30,000. The suspended loss may be deducted:
Answer: In a future year when the partner increases their outside basis through additional contributions, income allocations, or increased partnership liabilities.
Suspended losses carry forward and become deductible when the partner's outside basis is increased - through contributions, income allocations, or increased liability share. Answer A is correct. Suspended losses are not deducted on sale (B) - they reduce outside basis which affects gain on sale. Future basis does not justify current deduction (C). Suspended losses are not permanently lost (D).
- A partnership distributes unrealized receivables to a partner in a current distribution. The partner's tax basis in the unrealized receivables is:
Answer: The partnership's adjusted basis in the unrealized receivables at the time of distribution, which is typically zero for cash-basis partnerships, reducing the partner's outside basis by zero.
The partner takes the partnership's inside basis in distributed property - for unrealized receivables in a cash-basis partnership, inside basis is typically zero, so outside basis is reduced by zero. Answer C is correct. FMV (A) doesn't determine carryover basis. Zero basis (B) is the result for cash-basis partnerships but the rule is carryover basis. Face amount (D) is irrelevant to tax basis.
- A partner receives a distribution and recognizes gain under Section 731. What is the character of this gain?
Answer: Capital gain - Section 731 gain from distributions in excess of outside basis is treated as gain from the sale or exchange of the partnership interest, which is capital gain (subject to hot asset rules).
Section 731 gain is treated as gain from sale of the partnership interest - capital gain, unless Section 751 (hot assets) reclassifies some portion as ordinary income. Answer C is correct. Not always ordinary (A). Section 1231 gain doesn't apply to partnership interest sales (B). Passive rules may affect deductibility but don't change character (D).
- A partnership makes a current distribution to a partner of $5,000 cash plus property with an inside basis of $12,000 and FMV of $20,000. The partner's outside basis is $14,000. What is the partner's basis in the distributed property?
Answer: $9,000 - outside basis ($14,000) minus cash received ($5,000) = $9,000 remaining for property.
Outside basis is first reduced by cash received: $14,000 - $5,000 = $9,000 remaining. This remaining $9,000 becomes the partner's basis in the property (limited to inside basis). Answer B is correct. Full outside basis is assigned to cash first (A). Inside basis ($12,000) exceeds remaining outside basis ($9,000), so outside basis applies (C). FMV is not the standard (D).
