- Immediately after the contribution, what amount of gain, if any, does A recognize, and what is A's outside basis in the partnership interest?
Answer: $5,000 gain; A's outside basis is $0.
Choice C is correct. Under IRC §§ 722 and 752(b), A's pre-distribution basis in the partnership interest is the $30,000 adjusted basis of the contributed land. Because the partnership is equal and the liability is recourse, A's share of the liability after contribution is $35,000, so $35,000 of the liability is treated as shifted to B and is a deemed cash distribution to A. That deemed distribution exceeds A's $30,000 basis by $5,000, so A recognizes $5,000 gain under IRC § 731(a); under IRC § 733, the outside basis is reduced to zero. Choice A ignores the liability shift. Choice B treats the basis reduction but omits the gain required by § 731(a). Choice D treats the entire $70,000 liability as distributed to A rather than only the $35,000 shifted to B.
- Which of the following is correct regarding the disallowance of losses on a sale or exchange of property, other than an interest in the partnership, between a partnership and a partner?
Answer: A loss is disallowed if the partner owns, directly or indirectly, more than 50% of the capital interest or the profits interest in the partnership.
Choice D is correct. Under IRC § 707(b)(1)(A), a loss on a sale or exchange of property between a partnership and a partner owning, directly or indirectly, more than 50% of the capital interest or profits interest in the partnership is disallowed. Choice B misstates the test: loss disallowance does not depend on whether the property is a capital asset in the seller's hands. Choice C misstates the effect: the loss is disallowed and cannot be revived by allocating it through the partnership agreement. Choice A misstates the threshold: disallowance applies when the partner owns more than 50% of either the capital interest or the profits interest, not both.
- Which statement is correct regarding Noah's tax treatment for the year of receipt?
Answer: Noah has no taxable income from the interest in the year of receipt because the interest is substantially nonvested and no § 83(b) election was made.
IRC § 83(a), (b), and (h). Choice B is correct. A capital interest received for services is property transferred in connection with the performance of services, but § 83(a) includes its fair market value in income only when the property becomes substantially vested. Because Noah's interest is substantially nonvested and he did not make a § 83(b) election, he has no income in the year of receipt. Choice A applies § 83(a) but ignores the substantial risk of forfeiture. Choice C mischaracterizes the compensation as capital gain and accelerates inclusion. Choice D is wrong because, under § 83(h), the service recipient's deduction is generally tied to the service provider's inclusion, so the partnership is not entitled to an immediate $80,000 deduction when inclusion is deferred.
- How much gain, if any, must Ben recognize on the contribution?
Answer: $10,000
IRC §§ 721, 731, 752. Under §752(b), a decrease in a partner's share of partnership liabilities is treated as a distribution of money. AB's assumption of the liability decreased Ben's share from $160,000 to $80,000, a deemed distribution of $80,000. Ben's basis in the partnership interest before the distribution was $70,000, so the $80,000 deemed distribution exceeds basis by $10,000. Under §731(a)(1), Ben recognizes $10,000 gain; §721(a) defers the rest of the contribution. Choice B is correct. Choice A ($0) treats §721 as covering the liability relief, but §752(b) overrides it to the extent of the deemed distribution. Choice C ($80,000) is the deemed distribution itself, not the amount by which it exceeds Ben's basis. Choice D ($90,000) subtracts the entire $160,000 liability from basis and ignores Ben's continuing 50% share of the liability after the contribution.
- What amount of the gain from the sale is allocated to Priya on PQ's 2025 return?
Answer: $102,000
IRC §§ 704(c), 723. The partnership takes a carryover basis of $40,000 in the contributed land, so the sale produces $120,000 of gain ($160,000 - $40,000). The $60,000 built-in gain at contribution ($100,000 fair market value - $40,000 basis) must be allocated to Priya under §704(c). The remaining $60,000 of post-contribution gain is allocated under the partnership agreement: 70% to Priya, or $42,000. Priya's total allocation is $102,000. Choice D is correct. Choice A ($42,000) is only Priya's share of the post-contribution gain and omits the mandatory §704(c) allocation of built-in gain. Choice B ($60,000) is only the built-in gain and ignores the remaining gain allocated per the agreement. Choice C ($84,000) applies the 70/30 ratio to the entire gain, ignoring the §704(c) layer requiring the built-in gain to go to Priya.
- What are the tax consequences to Ariana on the contribution?
Answer: Ariana recognizes no gain, and her initial basis in AB is $40,000.
IRC §§ 721, 722, 731, and 752; Treas. Reg. § 1.752-1(f). Choice A is correct. Under § 721, no gain is recognized on a contribution of property to a partnership in exchange for a partnership interest, but § 752 treats a net decrease in the partner's share of liabilities as a deemed distribution of money. Ariana's § 722 basis begins at $100,000; she is allocated $60,000 of the partnership's recourse liability under § 752(a), and she is relieved of the $120,000 mortgage under § 752(b), producing a basis of $100,000 + $60,000 - $120,000 = $40,000. The net deemed distribution is $60,000, which does not exceed her basis, so no gain is recognized. Choice B incorrectly uses the full $120,000 liability relief instead of the net $60,000 relief. Choice C ignores the liability shift entirely. Choice D double-counts the liability by recognizing gain based on the full liability exceeding basis while also reducing basis for the net distribution.
- How much of Tina's allocable loss may she deduct for 2025, and what amount is suspended?
Answer: Tina may deduct $10,000 of the loss in 2025; $50,000 is suspended.
IRC §§ 704(d), 752(a), 465, and 469; Treas. Reg. § 1.752-2. Choice B is correct. Tina's initial basis is her $10,000 cash contribution. A limited partner's share of a recourse liability is determined by economic risk of loss, and because only Uma is personally liable and Tina has no obligation to restore a deficit, Tina's share of the $80,000 debt is zero. Her at-risk amount is also $10,000, so § 465 does not allow more than that amount. Under § 704(d), her $60,000 distributive share of loss is deductible only to the extent of her basis, so $10,000 is deductible and $50,000 is suspended. Choice C incorrectly allocates half of the recourse debt to Tina even though she bears no economic risk of loss. Choice D ignores the basis and at-risk limits. Choice A would be the passive-activity result if Tina had no passive income, but the facts state that she meets the regulatory standard for material participation, so the loss is not passive.
- Which statement correctly describes the treatment of the guaranteed payment for 2025?
Answer: Greta reports $30,000 as ordinary income subject to self-employment tax; PRS deducts $30,000, and the partners share $70,000 of ordinary income.
IRC §§ 707(c), 162(a), and 1402(a). Choice C is correct. The payment is a guaranteed payment because it is determined without regard to partnership income. It is deductible by the partnership under § 162 if it is ordinary and necessary, so PRS's ordinary income is reduced to $70,000. Greta must include the $30,000 in gross income under § 61 through § 707(c), and because she is a general partner receiving the payment for services, it is included in her net earnings from self-employment. Choice A has the correct deduction and income-sharing result but incorrectly states that the guaranteed payment is not subject to self-employment tax. Choice B incorrectly treats the payment as a nontaxable draw rather than as a guaranteed payment. Choice D incorrectly treats guaranteed payments as nondeductible distributions of profits.
- Which statement is correct regarding BCD's ability to use the September 30 taxable year?
Answer: BCD may elect under § 444 to use a September 30 taxable year and must make the required payments under § 7519.
IRC §§ 706(b), 444, and 7519. Choice A is correct. Under § 444, a partnership may elect a taxable year other than its required year if the deferral period is not longer than three months, and it must make the required payments under § 7519. For a partnership whose required year is the calendar year, a September 30 year-end creates a three-month deferral period, so the election is available. Choice B is wrong because the election and required payment are mandatory even though the deferral is exactly three months. Choice C is wrong because § 444 does not require all partners' consent or a least-aggregate-deferral computation. Choice D is wrong because a business purpose is one route to a different year under § 706(b), but § 444 provides a separate statutory election for a limited deferral.
- How should VW characterize the $55,000 gain on the sale?
Answer: $55,000 of the gain is ordinary income because the contributed inventory was disposed of within five years of the contribution.
IRC §§ 721, 723, and 724(b). Choice D is correct. No gain is recognized at contribution under § 721, and the partnership takes a $20,000 carryover basis under § 723, so the sale produces $55,000 of gain. Under § 724(b), if contributed property was inventory in the hands of the contributing partner, any gain or loss recognized by the partnership on a disposition within five years of the contribution is ordinary. The entire $55,000 gain is therefore ordinary. Choice A improperly splits the gain between pre-contribution and post-contribution appreciation; § 724(b) makes the entire gain ordinary within the five-year period. Choice B applies a general capital-asset holding-period rule and ignores § 724(b). Choice C reverses the character split and also ignores § 724(b).
- What amount of the $22,000 loss may Rhea deduct on her 2025 return?
Answer: $14,000
IRC §§ 704(d), 705(a)(1)(B), 733. A partner's loss is allowable only to the extent of adjusted basis at the end of the partnership year, determined without regard to that loss. Rhea's basis before the loss is $10,000 + $6,000 ordinary income + $2,000 tax-exempt interest - $4,000 cash distribution = $14,000. Tax-exempt interest increases outside basis even though it is not taxable, and a cash distribution reduces outside basis. The $22,000 loss is deductible only to the extent of $14,000; the remaining $8,000 is suspended and carried forward under §704(d). Choice C is correct. Choice A ($10,000) uses only Rhea's beginning basis and ignores all current-year basis adjustments. Choice B ($12,000) adds ordinary income and subtracts the distribution but omits the basis increase for tax-exempt interest. Choice D ($18,000) includes both income items but fails to reduce basis for the cash distribution.
- How is the gain on the sale allocated between Priya and Qadir?
Answer: Priya $75,000; Qadir $15,000
IRC §§ 721, 723, and 704(c); Treas. Reg. § 1.704-3. Choice C is correct. The partnership takes a $40,000 carryover basis in the contributed land under § 723, so the sale produces $90,000 of recognized gain ($130,000 − $40,000). Section 704(c) requires that the $60,000 built-in gain at contribution ($100,000 FMV − $40,000 basis) be allocated to Priya, the contributing partner. The remaining $30,000 of post-contribution gain is allocated equally under the partnership agreement, so Priya receives $75,000 and Qadir receives $15,000. Choice A allocates the entire $90,000 gain to Priya and ignores the $30,000 post-contribution gain. Choice B gives Priya the $60,000 built-in gain but then assigns the entire $30,000 post-contribution gain to Qadir; the post-contribution gain must also be shared equally, so Qadir should receive only $15,000. Choice D ignores § 704(c) and splits the entire gain according to the general 50/50 sharing ratio. The absence of a § 754 election is irrelevant because the sale is by the partnership, not a transfer of a partnership interest.
- Which of the following is correct regarding the taxable year of a partnership for 2025?
Answer: If no majority interest taxable year exists and the principal partners do not all have the same taxable year, the partnership generally must use the taxable year that results in the least aggregate deferral of income to the partners.
IRC § 706(b)(1)(B) and (b)(3), with Treas. Reg. § 1.706-1(b)(2) and (b)(3). A partnership must use its majority interest taxable year; if there is none, the taxable year of all its principal partners; and if neither exists, the year the regulations prescribe, which is the taxable year that results in the least aggregate deferral of income to the partners. A partnership may use a different year only by establishing a business purpose under § 706(b)(1)(C) or making a § 444 election. Choice B is correct. Choice A misstates the test: the required year minimizes the aggregate deferral of income, not the partners' aggregate tax liability. Choice C misstates the principal-partner threshold: under § 706(b)(3), a principal partner is a partner with an interest of 5% or more in partnership profits or capital. Choice D misstates the fallback: the least aggregate deferral year is required, and the partnership needs no IRS approval to use it, even when it is not the calendar year.
- Which of the following is correct regarding the treatment of a guaranteed payment for services made to a partner?
Answer: The payment is included in the partner's gross income in the partner's tax year in which the partnership's tax year ends, and it is ordinary income to the partner.
Choice A is correct. Under IRC § 707(c) and Treas. Reg. § 1.707-1(c), a guaranteed payment determined without regard to partnership income is ordinary income to the partner and is included in the partner's taxable year in which the partnership's taxable year ends. Choice B misstates the timing; payment or credit alone does not control the inclusion year. Choice C confuses a guaranteed payment with a distributive share; the payment is not a distributive share and is separately reported on Schedule K-1. Choice D misstates deductibility; § 707(c) payments are generally deductible under IRC § 162(a), subject to § 263, and are not limited to current-year partnership taxable income.
- Which of the following is correct regarding the tax treatment of this distribution?
Answer: The contributing partner recognizes the remaining §704(c) gain as if the property had been sold for its fair market value at the time of the distribution.
Choice A is correct. Under IRC § 704(c)(1)(B), if contributed property is distributed to another partner within seven years of the contribution, the contributing partner recognizes the §704(c) gain that would have been allocated to that partner if the property had been sold for fair market value at the distribution date. Choice B is wrong because the contributing partner, not the partnership, recognizes the gain, and a §754 election affects basis adjustments rather than triggering or allocating §704(c) gain. Choice C overlooks the §704(c)(1)(B) exception to the general nonrecognition rule for property distributions. Choice D is wrong because a distributee partner generally recognizes gain only if money distributed exceeds outside basis; the property's appreciation does not create ordinary income to the distributee.
