- For a partnership required to designate a partnership representative for its 2025 taxable year, which of the following is correct?
Answer: The partnership representative has the sole authority to act on behalf of the partnership in partnership-level proceedings, and the representative need not be a partner.
Choice B is correct. Under IRC § 6223 and Treas. Reg. § 301.6223-1, the designated partnership representative has the sole authority to act on behalf of the partnership in a centralized partnership audit proceeding, and the representative need not be a partner. If no valid designation is made, the IRS may select a person with substantial U.S. presence. Choice A incorrectly requires partner status and that the representative be a natural person; a partnership representative may be a partner or any other person, including an entity, with substantial U.S. presence. Choice C is contrary to the sole-authority rule: the representative may settle an adjustment without obtaining each affected partner's consent. Choice D confuses the representative's role with the partnership's liability for an imputed underpayment.
- For 2025, PRS is a calendar-year partnership with three equal partners: A, B, and C. On March 15, A sells her entire one-third interest to D. On November 1, B sells his entire one-third interest to E. C continues as a partner, and PRS continues to operate its business. Which of the following is correct regarding PRS and its partners?
Answer: PRS does not terminate, but the partnership's taxable year closes for A on March 15 and for B on November 1, and remains open for C and for PRS itself.
Choice C is correct. Under IRC § 708(b), a partnership terminates for federal tax purposes only if no part of its business continues to be carried on by any partner in a partnership; the former 50%-sale technical termination rule was repealed and does not apply in 2025. Under IRC § 706(c)(2)(A), the partnership's taxable year closes with respect to a partner whose entire interest terminates, so A's partnership year closes on March 15 and B's on November 1. The partnership's year remains open for C. Choice A misstates the current law by applying the repealed technical termination rule. Choice B incorrectly closes the year for all partners; the year closes only with respect to the departing partners. Choice D ignores the § 706(c)(2)(A) closing; a sale of an entire interest is a terminating event.
- PRS is a calendar-year partnership with three equal partners. PRS has no liabilities and its only asset is a rental property with an adjusted basis of $300,000 and a fair market value of $600,000. In 2025, C sells her entire one-third interest to D for $200,000. PRS does not make a § 754 election for 2025. Which of the following is correct?
Answer: D's basis in the partnership interest is $200,000, and PRS's basis in the rental property remains $300,000.
Choice A is correct. Under IRC § 742, D's basis in the acquired partnership interest is its cost, $200,000. Under IRC § 743(a), the basis of partnership property is not adjusted on a transfer of a partnership interest unless a § 754 election is in effect or the transfer gives rise to a substantial built-in loss. Here the partnership has built-in gain, not a substantial built-in loss, and it made no § 754 election, so PRS's basis in the rental property remains $300,000. Choice B states the § 743(b) adjustment that would be required if a § 754 election were in effect; no election was made. Choice C incorrectly substitutes C's share of PRS's inside basis for D's cost basis. Choice D would improperly increase the property's basis to its fair market value; § 743 does not require or permit that absent an election.
- Which statement is correct for federal tax purposes as a result of these sales?
Answer: PQR does not terminate, and P and Q must include their distributive shares of PQR items through June 30 on their 2025 returns.
IRC § 708(b)(1) terminates a partnership only when no part of its business continues; the pre-2018 technical-termination rule for sales of 50% or more of interests within 12 months no longer applies. Because PQR's business continued, PQR did not terminate. Under IRC § 706(c)(2)(A), a partnership's taxable year closes with respect to a partner who sells or exchanges his or her entire interest, so P and Q report their distributive shares through June 30 on their 2025 returns. Choice B states the repealed technical-termination rule. Choice C ignores the § 706(c) closing for P and Q. Choice D incorrectly conditions termination on a § 754 election; that election affects basis adjustments, not termination.
- A and B are equal partners in PRS, a partnership for which a § 754 election is in effect. A retires, and PRS distributes to him, in complete liquidation of his partnership interest, land with an adjusted basis to PRS of $80,000 and a fair market value of $140,000. A's adjusted basis in his partnership interest immediately before the distribution is $100,000, and he recognizes no gain or loss on the distribution. What is the § 734(b) adjustment to the basis of PRS's remaining property?
Answer: A decrease of $20,000
Governing authority: IRC §§ 732(b), 734(b)(2)(B), and 754. In a distribution in complete liquidation of a partner's interest, the distributee's basis in the distributed property is, under § 732(b), the adjusted basis of the partnership interest reduced by money distributed. A takes a $100,000 basis in the land. Because that substituted basis exceeds PRS's $80,000 basis in the land, and the § 754 election is in effect, § 734(b)(2)(B) decreases the basis of PRS's remaining property by $20,000 ($100,000 - $80,000). Choice B is correct. Choice A ($0) would ignore the adjustment because no gain or loss was recognized; the adjustment applies to the basis difference even when no gain or loss is recognized. Choice C ($40,000) is the land's fair market value minus A's outside basis ($140,000 - $100,000); fair market value is not the measure under § 732(b)/§ 734(b). Choice D ($60,000) is the land's fair market value minus PRS's adjusted basis ($140,000 - $80,000), measuring unrealized appreciation rather than the substituted-basis excess.
- Greenwood Partners, a calendar-year partnership with four equal partners, validly extended its 2025 Form 1065. The return was not filed until one month after the extended due date, and Greenwood had no reasonable cause for the delay. What is the minimum late-filing penalty under IRC § 6698?
Answer: $1,020
Choice C is correct. IRC § 6698 imposes a penalty for a partnership's failure to file a timely return; for returns due in 2026, the penalty is $255 per partner per month (or fraction of a month) for up to 12 months. Greenwood has four partners and was one month late, so the penalty is $255 × 4 × 1 = $1,020. Choice A uses the per-partner monthly rate as a flat penalty. Choice B uses only two partners instead of four. Choice D applies the 12-month maximum rather than the one-month period actually involved.
- Which statement is correct regarding the basis of the inherited partnership interest and the partnership's inside basis?
Answer: The estate's basis in the partnership interest is $180,000, and the partnership increases the basis of its assets by $90,000 for the estate's benefit under § 743(b).
IRC §§ 1014(a), 743(b) and 754. Property acquired from a decedent takes a basis equal to its fair market value at death, so the estate's basis in the partnership interest is $180,000. Section 743(b) applies to a transfer of a partnership interest by sale or exchange or upon the death of a partner when a § 754 election is in effect. The adjustment is the transferee's outside basis minus its share of the adjusted basis of partnership property: $180,000 − $90,000 = $90,000. The increase is for the estate's benefit only and is allocated among partnership assets under § 755. Choice D is correct. Choice A is wrong because the § 754 election is made by the partnership, not the transferee, and the partnership's election already in effect covers this transfer. Choice B is wrong twice: § 1014 gives the estate a $180,000 basis, not the decedent's $60,000, and § 743(b) expressly covers a transfer upon the death of a partner. Choice C is wrong because a $60,000 adjustment does not equal the estate's $180,000 outside basis minus its $90,000 share of inside basis, which is $90,000.
- What is the penalty imposed on CDE under IRC § 6698?
Answer: $6,120
IRC § 6698 imposes a penalty on a partnership that fails to file a timely partnership return unless the failure is due to reasonable cause. For 2025 partnership returns due in 2026, the penalty is $255 per partner per month (or fraction of a month), up to 12 months. CDE had 12 partners and was two months late, so the penalty is 12 × $255 × 2 = $6,120, which is Choice D. Choice A treats the penalty as a flat partnership amount. Choice B uses four months instead of two. Choice C uses one month instead of two.
- PRS is a cash-basis partnership with three equal partners: A, B, and C. Its only assets are $30,000 cash and accounts receivable for services performed, with a zero adjusted basis and a $90,000 fair market value; the receivables are unrealized receivables within the meaning of IRC § 751. A, whose adjusted basis in his partnership interest is $12,000, sells his entire one-third interest to D for $40,000, the interest's fair market value. What amount must A report as ordinary income from the sale?
Answer: $30,000
Governing authority: IRC § 751(a) and Treas. Reg. § 1.751-1(a)(1) and (g). On the sale of a partnership interest, the portion of the amount realized attributable to the seller's share of the partnership's unrealized receivables is treated as amount realized from the sale of a noncapital asset, and the seller's basis in the interest is allocated to those receivables in an amount equal to his share of the partnership's basis in them. A's share of the receivables' fair market value is $30,000 (one-third of $90,000). PRS's basis in the receivables is zero, so the basis allocated to them is zero, and A reports $30,000 of ordinary income. The remaining $10,000 of the sales price is allocated to A's share of the cash, against which his remaining $12,000 of outside basis is applied, producing a $2,000 capital loss; the net gain on the sale is $28,000. Choice C is correct. Choice A ($18,000) subtracts A's entire $12,000 outside basis from the $30,000 receivables allocation; the receivables are assigned only PRS's zero basis in them, not A's outside basis. Choice B ($28,000) is the net gain on the sale reported entirely as ordinary income; it incorrectly nets the $2,000 capital loss on the cash against the $30,000 of ordinary income from the receivables. Choice D ($40,000) treats the full sales price as ordinary income, ignoring A's basis entirely.
- PRS, a cash-basis calendar-year partnership, has two equal partners, A and B. On October 1, 2025, C contributes cash and becomes a one-third partner; A and B each become one-third partners. C performed no services for PRS before that date. In December 2025, PRS collects $30,000 for consulting services performed by A and B before October 1 and pays a $9,000 year-end bonus to an unrelated employee for services performed before October 1. The partnership agreement states that all 2025 items are allocated equally among A, B, and C. Which of the following is correct?
Answer: The fee and the bonus must be allocated to A and B because, under § 706(d), cash-basis items attributable to services performed before C's admission are assigned to the period before admission.
Choice D is correct. IRC § 706(d) prevents retroactive allocations when partners' interests change during the year. For cash-basis items such as payments for services, § 706(d)(2) requires the item to be allocated to the period to which it economically relates. The fee was earned before October 1, and the bonus was for services performed before October 1, so both belong to A and B. Choice A overstates § 704(a); it does not override § 706(d). Choice B incorrectly treats the bonus differently; it is also a cash-basis item for services and must follow the same period allocation. Choice C uses the payment date, which is the ordinary cash-basis recognition rule but not the § 706(d)(2) allocation rule for a year in which partnership interests change.
- PRS, a calendar-year partnership with a § 754 election in effect, has three equal partners. Partner B sells his entire one-third interest to T for $130,000 cash. T's share of PRS's liabilities is $30,000. At the sale date, PRS's assets have the following adjusted bases and fair market values: cash, $60,000 (basis equals fair market value); equipment, $270,000 adjusted basis and $300,000 fair market value; land, $60,000 adjusted basis and $120,000 fair market value. What is the amount of T's adjustment to the basis of PRS's property under § 743(b)?
Answer: $30,000
Governing authority: IRC §§ 742, 743(b), and 752(a); Treas. Reg. § 1.743-1. A transferee's basis in a purchased partnership interest is the amount paid plus his share of partnership liabilities, because the liability share is treated as a contribution of money under § 752(a). When a § 754 election is in effect, § 743(b) adjusts the partnership's inside basis by the excess of the transferee's basis in the interest over his proportionate share of the partnership's adjusted basis in its property. T's basis in the interest is $160,000 ($130,000 cash paid plus $30,000 share of liabilities). PRS's total adjusted basis is $390,000 ($60,000 cash + $270,000 equipment + $60,000 land), and T's one-third share is $130,000. The adjustment is $160,000 − $130,000 = $30,000. Choice D is correct. Choice A ($0) compares only the $130,000 cash price with the $130,000 share of inside basis, omitting the $30,000 liability share from T's basis. Choice B ($10,000) is T's share of the appreciation in the equipment alone (one-third of $30,000), ignoring the land. Choice C ($20,000) is T's share of the appreciation in the land alone (one-third of $60,000), ignoring the equipment. Because T paid fair market value for the interest, the adjustment also equals T's share of the partnership's total unrealized appreciation (one-third of $90,000).
- How must A report the gain from the sale on her 2025 federal income tax return?
Answer: $30,000 as ordinary income and $10,000 as long-term capital gain.
IRC § 751(a) requires the portion of the gain on the sale of a partnership interest attributable to the seller's share of unrealized receivables and inventory items to be reported as ordinary income. A's share of the receivables built-in gain is 25% × ($100,000 − $0) = $25,000, and her share of the inventory built-in gain is 25% × ($60,000 − $40,000) = $5,000, so the ordinary-income portion is $30,000. Her total gain is $70,000 − $30,000 = $40,000, leaving $10,000 long-term capital gain because the interest was held more than one year. Choice A ignores the § 751 assets and reports the entire gain as capital gain. Choice C reverses the ordinary-income and capital-gain amounts. Choice D treats the entire gain as ordinary income, ignoring the capital gain attributable to the land.
- What amount of the 2025 interest deduction may HD allocate to T?
Answer: $1,250
IRC § 706(d)(2)(A) requires a cash-basis partnership to allocate the listed cash-basis items—interest, taxes, payments for services, and payments for the use of property—according to the varying interests of the partners during the period to which the item is attributable. The interim closing-of-the-books method does not control those items. The $11,000 interest payment arose at $1,000 per month for January through November. The $5,000 attributable to July through November is the only portion allocable to the period after T became a partner, and T's 25% share is $1,250. Choice A ignores the post-admission portion entirely. Choice C allocates the entire $11,000 using T's 25% share as of the payment date. Choice D uses the five-month post-admission amount but does not apply T's 25% share.
- What is the tax effect to B as a result of C's admission?
Answer: B recognizes no gain, and her adjusted basis in the partnership interest is reduced to $10,000.
IRC § 752(b) treats a decrease in a partner's share of partnership liabilities as a distribution of money. B's share decreased by $50,000 ($80,000 − $30,000). Under IRC § 731(a), the deemed distribution reduces B's outside basis, and gain is recognized only to the extent the distribution exceeds basis. Because $50,000 is less than B's $60,000 basis, B recognizes no gain and her basis becomes $10,000. Choice B would be the result only if B had no basis in the interest before the deemed distribution. Choice A ignores the § 752(b) deemed distribution. Choice D treats the deemed distribution as ordinary income; any gain from a distribution in excess of basis would be capital gain under § 731(a).
- Which of the following correctly states the tax result of the distribution to D and DEF?
Answer: D recognizes no gain, takes a $60,000 basis in the land, and DEF increases the basis of its remaining property by $20,000, to $120,000.
IRC §§ 731(a), 732(b) and 734(b)(1)(B). D recognizes no gain under § 731(a)(1) because no money is distributed. Under § 732(b), in a distribution that liquidates a partner's entire interest, the distributee's basis in distributed property is the partner's outside basis. Because DEF had no liabilities and the land was not subject to any liability, no § 752 deemed distribution of money is involved, so D's basis in the land is $60,000. Because DEF has a § 754 election in effect, § 734(b)(1)(B) requires DEF to increase the basis of its remaining property by the excess of the partnership's predistribution basis in the distributed land ($80,000) over D's basis in that land ($60,000): $80,000 − $60,000 = $20,000. The remaining property basis rises from $100,000 to $100,000 + $20,000 = $120,000. Choice D is correct. Choice A reverses the § 734(b) direction: a decrease under § 734(b)(2)(B) applies only when the distributee's basis in the distributed property exceeds the partnership's predistribution basis in it, and here the partnership's $80,000 basis exceeds D's $60,000 basis. Choice B incorrectly carries over the partnership's $80,000 adjusted basis; § 732(b) instead substitutes D's $60,000 outside basis in a complete liquidation, and that basis reduction is what triggers the § 734(b) adjustment. Choice C uses fair market value, which is not the distributee's basis under § 732(b).
