Chapter 21 Test Bank

1. Award: 1.
00 point
Jason is a 25 percent partner in the JJM Partnership when he sells his entire interest to Lavelle for $76,000. At the
time of the sale, Jason's basis in JJM is $87,000. JJM does not have any debt or hot assets. Jason will recognize a
gain of $11,000 on the sale of his partnership interest.
 True
 False
Given the facts in this problem, Jason would recognize a loss of $11,000.
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True / False Difficulty: 1 Easy Learning Objective: 21-01 Determine the tax
consequences to the buyer and seller of the
disposition of a partnership interest, including
the amount and character of gain or loss
recognized.
2. Award: 1.00 point
A partner's debt relief from the sale of a partnership interest will decrease his outside basis.
 True
 False
Any debt relief increases the amount realized from the sale.
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True / False Difficulty: 2 Medium Learning Objective: 21-01 Determine the tax
recognized.
In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when
the partnership assets include cash and land held for five years as an investment.
 True
 False
Ordinary income will be realized on gain attributable to unrealized receivables or inventory items (hot assets).
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recognized.
Hot assets include assets other than cash, capital assets, and §1231 assets.
 True
 False
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recognized.
Federico is a 30 percent partner in the FRM Partnership when he sells his entire interest to Maria for $98,000. At
the time of the sale, Federico's basis in FRM is $74,000. FRM does not have any debt. In addition, FRM's assets
include accounts receivable with zero tax basis and $21,000 fair market value at the date of the sale. The remaining
assets of the partnership are capital and §1231 assets. Federico will recognize ordinary income of $24,000 on the
sale of his partnership interest.
 True
 False
Federico would recognize ordinary income of $6,300 ($21,000 × 0.30) and capital gain of $17,700 on the sale
($98,000 − $74,000 − $6,300).
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recognized.
Under the entity concept, a partnership interest is an intangible asset similar to an ownership interest in a
corporation. As such, a partnership interest is generally treated as a capital asset, the disposal of which results in
capital gain or loss.
 True
 False
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recognized.
If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion
of the sale proceeds to these assets and recognize ordinary income (loss).
 True
 False
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recognized.
The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their
partnership interests as capital.
 True
 False
The purpose of the hot asset rules is to ensure that partners recognize ordinary gain or loss on the sale of their
partnership interests if their partnership holds hot assets.
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recognized.
When determining a partner's gain on the sale of partnership interest, the selling partner must include her share of
partnership debt relief in the amount realized.
 True
 False
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recognized.
Operating distributions completely terminate a partner's interest in the partnership.
 True
 False
Liquidating distributions completely terminate a partner's interest.
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True / False Difficulty: 1 Easy Learning Objective: 21-02 List the reasons for
distributions, and compare operating and
liquidating distributions.
A partner that receives cash in an operating distribution recognizes loss if the cash distributed is less than the
partner's outside basis in the partnership immediately before the distribution.
 True
 False
Partners may only recognize losses for liquidating distributions.
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consequences of proportionate operating
distributions.
Cash distributions include decreases in a partner's share of partnership liabilities.
 True
 False
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distributions.
In an operating distribution, when a partnership distributes property other than money with a basis that exceeds the
partner's outside basis, the partner assigns a carryover basis to the distributed asset and recognizes a gain.
 True
 False
A partner's basis in property distributed in an operating distribution is limited to the partner's outside basis prior to
the distribution. Also, gains are only recognized when a cash distribution exceeds a partner's basis prior to the
distribution.
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distributions.
A partner that receives cash in an operating distribution recognizes gain if the cash distributed exceeds the
partner's outside basis in the partnership immediately before the distribution.
 True
 False
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distributions.
Barry has a basis in his partnership interest of $50,000 when the partnership distributes $60,000 in cash to Barry.
As a result of the distribution, Barry reduces his basis in the partnership interest to $0, has a $60,000 basis in the
cash received, and recognizes a gain of $10,000 on the distribution.
 True
 False
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distributions.
A partnership making an operating distribution will recognize gain or loss only when the partner that receives the
distribution recognizes gain or loss.
 True
 False
Partnerships generally do not recognize gains or losses when they make distributions.
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distributions.
Jaime has a basis in her partnership interest of $50,000 when the partnership distributes (in an operating
distribution) two parcels of land to Jaime, each valued at $30,000. Prior to the distribution, the partnership’s basis in
parcel A is $40,000 and the basis in parcel B is $20,000. Jaime allocates $20,000 of basis to parcel A and $30,000
of basis to parcel B.
 True
 False
In this situation, the original basis of the distributed property is reduced by the amount of unrealized depreciation, if
any, in the distributed property according to §732(c)(3).
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True / False Difficulty: 3 Hard Learning Objective: 21-03 Determine the tax
distributions.
A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized
receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed
assets.
 True
 False
The partner's outside basis must be greater than the amount of cash distributed and the sum of the inside bases of
the distributed hot assets for loss recognition.
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consequences of proportionate liquidating
distributions.
Ted is a 30 percent partner in the TDW Partnership, with an outside basis of $20,000. TDW distributes $15,000 of
cash in complete liquidation of Ted's interest. Ted recognizes a capital loss of $5,000 on the distribution.
 True
 False
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distributions.
Catherine is a 30 percent partner in the ACW Partnership, with an outside basis of $20,000. ACW distributes land
with a basis of $12,000 and fair value of $18,000 to Catherine in complete liquidation of her interest. Catherine
recognizes a capital loss of $2,000 on the distribution.
 True
 False
No loss recognition since asset distributed is not cash or a hot asset.
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distributions.
A partner recognizes gain when she receives cash in excess of her outside basis in a liquidating distribution.
 True
 False
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distributions.
A partner recognizes a loss when she receives cash and other property with inside bases greater than her outside
basis in a liquidating distribution.
 True
 False
For loss recognition, two conditions must be met: (1) the distribution includes only cash or hot assets; and (2) the
partner's outside basis is greater than any cash distributed and the sum of the inside bases of the distributed hot
assets.
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distributions.
Martha is a 40 percent partner in the MMM Partnership, with an outside basis of $50,000. MMM distributes $40,000
cash and accrual-basis accounts receivable with a basis and fair market value of $20,000. Martha does not
recognize gain or loss on the distribution and takes a basis in the cash of $40,000 and a basis in the receivables of
$10,000.
 True
 False
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distributions.
A disproportionate distribution is a distribution in which the partner's share of the partnership's hot assets either
increases or decreases as a result of the distribution.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 21-05 Explain the

significance of disproportionate distributions.
Inventory is substantially appreciated if the fair market value of all inventory items exceeds 100 percent of their
basis to the partnership.
 True
 False
Inventory is considered substantially appreciated if its fair market value is more than 120 percent of its basis.
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True / False Difficulty: 1 Easy Learning Objective: 21-05 Explain the

When a partner receives more than a proportionate share of hot assets in a distribution, the transaction is treated as
though the partnership distributes a proportionate share of cold assets to the partner and then the partner sells
some or all of those cold assets back to the partnership at fair market value in exchange for a portion of the hot
assets actually received in the distribution.
 True
 False
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True / False Difficulty: 3 Hard Learning Objective: 21-05 Explain the

A §754 election is made by a distributee partner for a tax year in which (1) the distributee partner recognizes gain or
loss on a distribution from a partnership or (2) the distributee partner's basis in distributed assets differs from the
partnership's inside basis in those assets.
 True
 False
A §754 election is made by the partnership.
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True / False Difficulty: 2 Medium Learning Objective: 21-06 Explain the rationale
for special basis adjustments, determine when
they are necessary, and calculate the special
basis adjustment for dispositions and
distributions.
Unrealized receivables include accounts receivable for which of the following partnerships?
 Accrual-method partnerships.
 Cash-method partnerships.
 Neither cash- nor accrual-method partnerships.
 Both cash- and accrual-method partnerships.
Accrual-basis taxpayers do not consider accounts receivable as unrealized receivables because they have already
realized and recognized these items as ordinary income.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 21-01 Determine the tax
recognized.
Jackson is a 30 percent partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000
cash. At the time of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is
Jackson's gain or loss on the sale of his interest?
 $48,000 capital gain.
 $48,000 ordinary income.
 $24,000 capital gain and $24,000 ordinary income.
 Gain or loss cannot be determined.
Jackson recognizes a gain determined as the difference between the amount realized on the sale and his basis in
the partnership interest. Because JJM has no hot assets, the gain will be characterized as capital.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 21-01 Determine the tax
recognized.
Which of the following statements regarding the sale of a partnership interest is false?
 The seller's primary tax concern in a partnership interest sale is calculating the amount and character of
gain or loss on the sale.
 The selling partner determines the gain or loss as the difference between the amount realized and her
outside basis in the partnership.
 Hot assets change the character of a gain on the sale from ordinary income to capital gain.
 Any debt relief increases the amount the partner realizes from the sale.
Hot assets change the character of a gain on the sale from capital gain to ordinary income.
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recognized.
At the end of last year, Cynthia, a 20 percent partner in the five-person CYG partnership, has an outside basis of
$30,000, including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership
interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot
assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?
 $7,500 capital loss.
 $7,500 ordinary loss.
Cynthia's gain is the difference between the amount realized ($22,500 cash plus $15,000 debt relief) and her
outside basis ($30,000) for a $7,500 gain. The gain is capital because CYG has no hot assets.
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recognized.
At the end of last year, Cynthia, a 20 percent partner in the five-person CYG partnership, has an outside basis of
$36,000, including her $24,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership
interest to Roger for a cash payment of $25,500 and the assumption of her share of CYG's debt. CYG has no hot
assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?
 $10,500 ordinary loss.
Cynthia's gain is the difference between the amount realized ($25,500 cash plus $24,000 debt relief) and her
outside basis ($36,000) for a $13,500 gain. The gain is capital because CYG has no hot assets.
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recognized.
Which of the following assets would not be classified as a hot asset?
 Inventory.
 Depreciation recapture.
 Cash.
 Accounts receivable for a cash-method taxpayer.
Hot assets include all assets except for cash, capital assets, and §1231 assets.
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recognized.
The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the
current year:
Basis FMV
Cash $ 180,000 $ 180,000
Accounts receivable 0 60,000
Land 90,000 120,000
Total $ 270,000 $ 360,000
Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire
partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize
from the sale?
 $30,000 capital gain.
 $10,000 ordinary income; $20,000 capital gain.
 $10,000 capital gain; $20,000 ordinary income.
$10,000 capital gain; $20,000 ordinary income: Susan's share of unrealized receivables is $20,000 ($60,000
unrealized receivables × 1/3 interest). Susan will recognize $20,000 of ordinary income and a $10,000 capital gain,
determined as the difference between the total gain of $30,000 and the ordinary income of $20,000.
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recognized.
The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the
current year:
Basis FMV
Cash $ 180,000 $ 180,000
Land 90,000 120,000
Total $ 270,000 $ 360,000
Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire
partnership interest to Emma for $100,000 cash, what is the amount and character of Susan's gain or loss from the
sale?
 $20,000 ordinary income; $10,000 capital gain.
 $10,000 capital loss; $20,000 ordinary income.
Total gain is $10,000 ($100,000 sales price minus $90,000 basis). Ordinary component is Susan's share of hot
assets, $20,000. Capital loss of ($10,000) is the $10,000 total gain minus $20,000 ordinary income.
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recognized.
Daniel acquires a 30 percent interest in the PPZ Partnership from Paolo, an existing partner, for $39,000 of cash.
The PPZ Partnership has borrowed $10,000 of recourse liabilities as of the date Daniel bought the interest. What is
Daniel's basis in his partnership interest?
 $39,000.
 $42,000.
 $46,000.
 $49,000.
Daniel's outside basis will include his $3,000 (30% × $10,000) share of the partnership liabilities.
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recognized.
Daniel acquires a 30 percent interest in the PPZ Partnership from Paolo, an existing partner, for $47,000 of cash.
The PPZ Partnership has borrowed $18,000 of recourse liabilities as of the date Daniel bought the interest. What is
Daniel's basis in his partnership interest?
 $47,000.
 $52,400.
 $59,600.
 $65,000.
Daniel's outside basis will include his $5,400 (30% × $18,000) share of the partnership liabilities.
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recognized.
The SSC Partnership, a cash-method partnership, has a balance sheet that includes the following assets on
December 31 of the current year:
Basis FMV
Cash $ 180,000 $ 180,000
Equipment (cost = $100,000) 40,000 50,000
Land 90,000 120,000
Total $ 310,000 $ 410,000
Which of SSC's assets are considered hot assets under §751(a)?
 Cash and accounts receivable.
 Cash and land.
 Accounts receivable and land.
 Accounts receivable and inherent recapture in the equipment under §1245.
The accounts receivable and the $10,000 depreciation recapture are considered hot assets under §751(a).
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recognized.
Shauna is a 50 percent partner in the SH Partnership. Shauna sells one-half of her interest to Kara for $60,000
cash. Just before the sale, Shauna's basis in her entire partnership interest is $150,000, including her $60,000
share of the partnership liabilities. SH's assets on the sale date are as follows:
Basis FMV
Cash $ 80,000 $ 80,000
Inventory 60,000 180,000
Land held for investment 160,000 100,000
Total $ 300,000 $ 360,000
What is the amount and character of Shauna's gain or loss on the sale?
rev: 07_09_2020_QC_CS-219199
 $30,000 ordinary income and $15,000 capital loss.
 $15,000 ordinary income and $30,000 capital gain.
Shauna's total gain from the sale of one-half of her interest is $15,000 (amount realized of $60,000 cash plus
$30,000 debt relief minus her outside basis of $75,000). SH has hot assets (inventory), and the portion Shauna sells
is $30,000 ($120,000 appreciation times 25 percent). This represents the ordinary income from the sale. The
difference between the total gain and the ordinary income is a $15,000 capital loss.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 21-01 Determine the tax
recognized.
Under which of the following circumstances will a partner recognize a gain from an operating distribution?
 A partner will never recognize a gain from an operating distribution.
 A partner will recognize a gain from an operating distribution when the partnership distributes property
other than money with an inside basis greater than the partner's basis in the partnership interest.
 A partner will recognize a gain from an operating distribution when the partnership distributes money in
an amount that is less than the partner's basis in the partnership interest.
 A partner will recognize a gain from an operating distribution when the partnership distributes money in
an amount that is greater than the partner's basis in the partnership interest.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 21-02 List the reasons for
Under which of the following circumstances will a partner recognize a loss from an operating distribution?
 A partner will never recognize a loss from an operating distribution.
 A partner will recognize a loss from an operating distribution when the partnership distributes property
other than money with an inside basis greater than the partner's basis in the partnership interest.
 A partner will recognize a loss from an operating distribution when the partnership distributes money in
an amount that is less than the partner's basis in the partnership interest.
 A partner will recognize a loss from an operating distribution when the partnership distributes money in
an amount that is greater than the partner's basis in the partnership interest.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 21-02 List the reasons for
In which type of distribution may a partner recognize a loss on the distribution?
 Operating distributions.
 Liquidating distributions.
 Neither operating nor liquidating distributions.
 Both operating and liquidating distributions.
Only in liquidating distributions may a partner recognize a loss. The more specific situation is where the partnership
distributes only cash, unrealized receivables, and inventory and the sum of the bases of the distributed assets is
less than the partner's basis in his partnership interest.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 21-02 List the reasons for
Sarah is a 50 percent partner in the SF Partnership and has an outside basis of $56,000 at the end of the year prior
to any distributions. On December 31, Sarah receives a proportionate operating distribution of $20,000 cash. What
is the amount and character of Sarah's recognized gain or loss and what is her basis in her partnership interest?
 $0 gain, $36,000 basis.
 $0 gain, $56,000 basis.
 $20,000 ordinary income, $56,000 basis.
 $20,000 ordinary income, $36,000 basis.
Sarah does not recognize any gain or loss on the distribution. She reallocates her basis in SF to the cash in an
amount equal to the distribution, $20,000. Her remaining basis is $36,000 ($56,000 − $20,000).
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distributions.
Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior
to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a
parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is the amount and character of Riley's
recognized gain or loss and what is his basis in his partnership interest?
 $0 gain, $36,000 basis.
 $0 gain, $42,000 basis.
 $0 gain, $50,000 basis.
 $0 gain, $56,000 basis.
Riley does not recognize any gain or loss on the distribution. He reduces his basis in RF by the amount of cash
received ($6,000) and by the basis assigned to the land (transferred basis of $8,000).
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distributions.
Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior
to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a
parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?
 Cash $6,000, land $0.
 Cash $6,000, land $8,000.
 Cash $6,000, land $14,000.
 Cash $6,000, land $22,000.
Riley takes a transferred basis in the distributed property. The cash has a basis equal to $6,000 and the land has a
basis equal to $8,000 (RF's basis in the land).
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distributions.
Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago
by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $44,000. On
December 31, KH makes a proportionate operating distribution of $50,000 cash to Harrison. What is the amount
and character of Harrison's recognized gain or loss and what is his remaining basis in KH?
 $0 gain, $0 basis.
 $6,000 capital gain, $0 basis.
 $6,000 capital loss, $0 basis.
 $6,000 capital gain, $44,000 basis.
Harrison recognizes a gain equal to the difference between his basis in KH and the distribution because he
receives only money in the distribution and the amount exceeds his basis in KH. He allocates his entire basis in KH
to the basis in the money received, resulting in $0 basis in KH after the distribution.
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distributions.
Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago
by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $46,500. On
December 31, KH makes a proportionate operating distribution of $47,500 cash to Harrison. What is the amount and
character of Harrison's recognized gain or loss and what is his remaining basis in KH?
 $0 gain, $0 basis.
 $1,000 capital gain, $0 basis.
 $1,000 capital loss, $0 basis.
 $1,000 capital gain, $46,500 basis.
Harrison recognizes a gain equal to the difference between his basis in KH and the distribution because he
receives only money in the distribution and the amount exceeds his basis in KH. He allocates his entire basis in KH
to the basis in the money received, resulting in $0 basis in KH after the distribution.
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distributions.
Jenny has a $54,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any
distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an
$80,000 fair value and a $64,000 basis to JM. The land is encumbered with a $30,000 mortgage (JM's only
liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?
 $80,000 land basis, $0 JM basis.
 $64,000 land basis, $5,000 JM basis.
 $80,000 land basis, $5,000 JM basis.
Jenny takes a transferred basis in the land equal to $64,000. Her remaining basis in JM is $5,000, determined as:
Predistribution basis in JM $ 54,000

Plus: deemed contribution 15,000
Less: basis allocated to land (64,000)
Remaining basis in JM $ 5,000
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distributions.
Jenny has a $67,700 basis in her 50 percent partnership interest in the JM Partnership before receiving any
distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an $87,000
fair value and a $70,000 basis to JM. The land is encumbered with a $33,000 mortgage (JM's only liability). What is
Jenny's basis in the land and her remaining basis in JM after the distribution?
 $70,000 land basis, $14,200 JM basis.
 $87,000 land basis, $14,200 JM basis.
Jenny takes a transferred basis in the land equal to $70,000. Her remaining basis in JM is $14,200, determined as:
Predistribution basis in JM $ 67,700

Plus: deemed contribution 16,500
Less: basis allocated to land (70,000)
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distributions.
Marcella has a $65,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any
distributions. This year JM makes a proportionate operating distribution to Marcella of $10,000 cash and inventory
with an $80,000 fair value and a $40,000 basis to JM. What is Marcella's basis in the inventory and her remaining
basis in JM after the distribution?
 $80,000 inventory basis, $0 JM basis.
 $40,000 inventory basis, $0 JM basis.
 $40,000 inventory basis, $15,000 JM basis.
 $80,000 inventory basis, $15,000 JM basis.
Marcella takes a transferred basis in the inventory equal to $40,000. Her remaining basis in JM is $15,000,
determined as:
Pre-distribution basis in JM $ 65,000

Less: basis allocated to cash (10,000)
basis allocated to inventory (40,000)
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distributions.
Which of the following statements is true regarding partnership operating distributions?
 Partners will never recognize a gain on an operating distribution.
 Partners receiving a distribution of property other than money will take a basis in the property equal to its
fair market value.
 Partners will never recognize a loss on an operating distribution.
 None of the statements are true.
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distributions.
Which of the following statements is true regarding partnership operating distributions?
 If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution,
the partner will recognize a loss.
 If a partner's outside basis is less than the bases of the assets distributed in an operating distribution, the
partner will recognize a loss.
 If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution,
the partner will recognize a gain.
 None of the statements are true.
Partners will never recognize a loss on an operating distribution.
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distributions.
Which of the following is true concerning a partner's basis in assets (other than money) distributed in an operating
distribution?
 A partner's bases in the distributed assets will be greater than the partnership's bases in the assets.
 A partner's bases in the distributed assets will be equal to the partnership's bases in the assets.
 A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the
assets.
 None of the statements are true.
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distributions.
Under what conditions will a partner recognize a gain in a liquidating distribution?
 When a partnership distributes only money and the amount of the distribution exceeds the partner's
outside basis.
 When a partnership distributes only money and the amount of the distribution is less than the partner's
outside basis.
 When a partnership distributes money, hot assets, and other property and the amount of the distribution
exceeds the partner's outside basis.
 When a partnership distributes money, hot assets, and other property and the amount of the distribution
is less than the partner's outside basis.
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distributions.
Which of the following statements is false concerning partnership liquidating distributions?
 A partner who receives a liquidating distribution can retain an interest in the partnership.
 A partnership agreement may restrict the sale of a partnership, making a liquidating distribution the only
way a partner can close out his interest in the partnership.
 Liquidating a single partner's interest is similar in concept to a corporate redemption of a shareholder's

interest.
 None of these statements are false.
In contrast to operating distributions, in which the partners retain a continuing interest in the partnership, liquidating
distributions terminate a partner's interest in the partnership.
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distributions.
Which of the following statements regarding a partner's basis of inventory received in a liquidating distribution is
true?
 Partners may either increase or decrease the basis in inventory distributed in a liquidating distribution.
 Partners may only increase the basis in inventory distributed in a liquidating distribution.
 Partners may only decrease the basis in inventory distributed in a liquidating distribution.
 None of these statements are true.
A partner may not increase the basis of inventory received in a liquidating distribution because she would
essentially be converting a capital loss into an ordinary loss.
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distributions.
Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $26,000 cash to Randolph in
complete liquidation of his interest. RD has only capital assets and no liabilities at the date of the distribution.
Randolph's basis in his RD Partnership interest is $37,000. What is the amount and character of Randolph's gain or
loss on the distribution?
 $0 gain or loss.
 $11,000 capital loss.
Randolph recognizes a capital loss on the distribution of $11,000, representing the difference between his basis in
RD of $37,000 and the cash distribution of $26,000. He recognizes a loss because he receives only cash in the
distribution and the amount is less than his basis in his partnership interest.
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distributions.
Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash and inventory
with a fair value of $20,000 (inside basis of $10,000) to Randolph in complete liquidation of his interest. RD has no
liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $27,000. What is the
amount and character of Randolph's gain or loss on the distribution?
Randolph recognizes a $2,000 loss because RD distributes only cash and inventory and the adjusted bases of the
property distributed is less than his basis in RD.
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distributions.
Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $19,000 cash and inventory
with a fair value of $34,400 (inside basis of $17,200) to Randolph in complete liquidation of his interest. RD has no
liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $38,800. What is the
amount and character of Randolph's gain or loss on the distribution?
Randolph recognizes a $2,600 loss because RD distributes only cash and inventory and the adjusted bases of the
property distributed is less than his basis in RD.
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distributions.
Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, inventory with a
fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of
$5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution.
Randolph's basis in his RD Partnership interest is $37,000. What is Randolph's basis in the distributed inventory and
land?
 $10,000 inventory, $10,000 land.
 $10,000 inventory, $5,000 land.
 $20,000 inventory, $10,000 land.
 $10,000 inventory, $12,000 land.
Randolph's bases in the distributed assets are $15,000 cash, $10,000 inventory, and $12,000 land. He first allocates
his outside basis to the distributed assets in an amount equal to RD's basis. He then allocates remaining basis to
assets other than cash and hot assets with unrealized appreciation. Finally, the remaining basis is allocated to
assets other than cash and hot assets based on their relative fair market values.
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distributions.
Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, an investment
with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis
of $5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution.
Randolph's basis in his RD Partnership interest is $48,000. What is Randolph's basis in the distributed investment
and land?
 $10,000 investment, $5,000 land.
 $22,000 investment, $11,000 land.
Randolph's bases in the distributed assets are $15,000 cash, $22,000 investment, and $11,000 land. He first
allocates his outside basis to the distributed assets in an amount equal to RD's basis ($15,000 cash, 10,000
investment, and $5,000 land). He then allocates remaining basis to assets other than cash and hot assets with
unrealized appreciation. This step results in increases to the investment of $10,000 and to the land of $5,000.
Finally, the remaining unallocated basis ($3,000) is allocated to assets other than cash and hot assets based on
their relative fair values ($2,000 to investment and $1,000 to the land).
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distributions.
Jessica is a 25 percent partner in the JRL Partnership. On January 1, JRL distributes $40,000 cash to Jessica. JRL
has no hot assets or liabilities at the date of the distribution. Jessica's basis in her JRL partnership interest is
$28,000. What is the amount and character of Jessica's gain or loss from the distribution?
 $0.
Jessica recognizes a $12,000 capital gain on the distribution because JRL distributes only money to her and the
amount exceeds her outside basis in JRL.
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distributions.
Which of the following statements regarding liquidating distributions is true?
 A partner will recognize a gain when the partnership distributes only money and the amount is greater
than the partner's outside basis.
 A partner will recognize a gain when the partnership distributes only money and hot assets and the inside
bases of the distributed assets are greater than the partner's outside basis.
 A partner will recognize a gain when the partnership distributes money, hot assets, and other property
and the inside bases of the distributed assets are greater than the partner's outside basis.
 A partner will recognize a gain when the partnership distributes only money and the amount is less than
the partner's outside basis.
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distributions.
Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate liquidating
distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000) to Daniela. JRD has no
liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is the
amount and character of Daniela's gain or loss from the distribution?
 $0.
Daniela will not recognize any gain or loss on the distribution. She will instead reduce the basis of the inventory she
receives in complete liquidation of her interest.
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distributions.
Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of
$16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of
$8,000 (inside basis of $0) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD
Partnership interest is $21,000. What is Daniela's basis in the distributed inventory and accounts receivable?
 $8,000 inventory, $0 accounts receivable.
 $6,000 inventory, $1,000 accounts receivable.
 $5,000 inventory, $0 accounts receivable.
Daniela's bases in the distributed assets are $16,000 cash, $5,000 inventory, and $0 accounts receivable. She first
allocates her outside basis to the distributed assets in an amount equal to JRD's basis ($16,000 cash, 8,000
inventory, and $0 accounts receivable). She then reduces the basis of the inventory and accounts receivable by the
required decrease in proportion to their adjusted bases. The entire required decrease of $3,000 is allocated only to
the inventory because the accounts receivable has no basis.
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distributions.
$8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in
her JRD Partnership interest is $20,000. What is Daniela's basis in the distributed inventory and accounts
receivable?
 $2,000 inventory, $2,000 accounts receivable.
 $0 inventory, $4,000 accounts receivable.
Daniela's bases in the distributed assets are $16,000 cash, $2,000 inventory, and $2,000 accounts receivable. She
first allocates her outside basis to the distributed assets in an amount equal to JRD's basis ($16,000 cash, 8,000
inventory, and $12,000 accounts receivable). This results in a required decrease of $16,000. She reduces the basis
in the accounts receivable by the unrealized depreciation ($4,000). Finally, she reduces the basis of the inventory
and accounts receivable by the remaining required decrease ($12,000) in proportion to their adjusted bases after
considering the previous steps. This results in a decrease of $6,000 to the inventory and $6,000 to the accounts
receivable.
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distributions.
$9,400 (inside basis of $14,100) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her
JRD Partnership interest is $21,200. What is Daniela's basis in the distributed inventory and accounts receivable?
 $850 inventory, $850 accounts receivable.
 $0 inventory, $4,700 accounts receivable.
Daniela's bases in the distributed assets are $19,500 cash, $850 inventory, and $850 accounts receivable. She first
allocates her outside basis to the distributed assets in an amount equal to JRD's basis ($19,500 cash, 9,400
inventory, and $14,100 accounts receivable). This results in a required decrease of $21,800. She reduces the basis in
the accounts receivable by the unrealized depreciation ($4,700). Finally, she reduces the basis of the inventory and
accounts receivable by the remaining required decrease ($17,100) in proportion to their adjusted bases after
considering the previous steps. This results in a decrease of $8,550 to the inventory and $8,550 to the accounts
receivable.
References
distributions.
Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate, liquidating
distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with
a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution.
Daniela's basis in her JRD Partnership interest is $20,000. What is the amount and character of Daniela's gain or
loss from the distribution?
 $0.
Daniela will not recognize any gain or loss on the distribution. She will instead reduce the basis of the assets she
receives in complete liquidation of her interest.
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distributions.
Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate, liquidating distribution
of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of
the distribution. Tyson's basis in his KT Partnership interest is $20,000. What is the amount and character of Tyson's
gain or loss from the distribution?
 $0.
Tyson is not required to recognize any gain or loss on the distribution. He will instead reduce the basis of the land
he receives in complete liquidation of his interest.
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distributions.
Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000
cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the
distribution. Tyson's basis in his KT Partnership interest is $20,000. What is Tyson's basis in the distributed land?
 $0.
 $4,000.
 $8,000.
 $16,000.
Tyson's basis in the distributed land is $4,000. He first allocates his outside basis to the distributed assets in an
amount equal to KT's basis ($16,000 cash and $8,000 land). This results in a required decrease of $4,000. He
reduces the basis in the land by the required decrease, which results in a basis of $4,000 to the land.
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distributions.
cash, inventory with a $16,000 fair value (inside basis $8,000), and land with a fair value of $8,000 (inside basis of
$12,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is
$24,000. What is Tyson's basis in the distributed inventory and land?
 $8,000 inventory, $12,000 land.
 $16,000 inventory, $8,000 land.
 $0 inventory, $8,000 land.
 $8,000 inventory, $0 land.
Tyson's bases in the distributed assets are $16,000 cash, $8,000 inventory, and $0 land. He first allocates his
outside basis to the distributed assets in an amount equal to KT's basis ($16,000 cash, $8,000 inventory, and
$12,000 land). This results in a required decrease of $12,000. He reduces the basis in the land by the unrealized
depreciation ($4,000). Finally, he reduces the basis of the land (other property) by the remaining required decrease
($8,000).
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distributions.
cash, inventory with a $10,000 fair value (inside basis $4,000), land A with a fair value of $8,000 (inside basis of
$12,000), and land B with a fair value of $6,000 (inside basis of $4,000) to Tyson. KT has no liabilities at the date of
the distribution. Tyson's basis in his KT Partnership interest is $23,000. What is Tyson's basis in the distributed
inventory, land A, and land B?
 $10,000 inventory, $8,000 land A, $6,000 land B.
 $4,000 inventory, $12,000 land A, $4,000 land B.
 $0 inventory, $2,857 land A, $143 land B.
 $4,000 inventory, $2,000 land A, $1,000 land B.
Tyson's bases in the distributed assets are $16,000 cash, $4,000 inventory, $2,000 land A, and $1,000 land B. He
first allocates his outside basis to the distributed assets in an amount equal to KT's basis ($16,000 cash, $4,000
inventory, $12,000 land A, and $4,000 land B). This results in a required decrease of $13,000 ($36,000 − $23,000).
He reduces the basis in land A by the unrealized depreciation ($4,000), which leaves a required decrease of
$9,000 that Tyson must allocate to the two parcels of land based on their relative adjusted bases. This results in an
additional decrease to land A of $6,000 and a decrease to land B of $3,000.
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distributions.
Brian is a 25 percent partner in the BC Partnership. On January 1, BC distributes $20,000 cash and land with a
$16,000 fair value (inside basis $8,000) to Brian. BC has no liabilities at the date of the distribution. Brian's basis in
his BC Partnership interest is $16,000. What is the amount and character of Brian's gain or loss on the distribution?
 $0.
Brian must recognize $4,000 of capital gain because he receives money in excess of his outside basis ($20,000 −
$16,000).
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distributions.
Which of the following statements regarding disproportionate distributions is false?
 A disproportionate distribution occurs when a partner receives more than his proportionate share of the
partnership's hot assets.
 A disproportionate distribution occurs when a partner receives less than his proportionate share of the
partnership's hot assets.
 The tax provisions related to disproportionate distributions attempt to preserve the partners' share of
ordinary income potential.
 Disproportionate distributions will only occur in liquidating distributions.
Disproportionate distributions can occur in either operating or liquidating distributions.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 21-05 Explain the

Which of the following statements regarding hot assets for purposes of disproportionate distributions is false?
 Hot assets include unrealized receivables.
 Hot assets include any inventory.
 Hot assets include substantially appreciated inventory.
 The definition of hot assets for distributions and sales of partnership interests differs.
For purposes of disproportionate distributions, hot assets include substantially appreciated inventory and
unrealized receivables (§751(b)). The definition of hot assets for sales of partnership interests is defined under
§751(a) to include all inventory items and unrealized receivables.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 21-05 Explain the

The PW Partnership's balance sheet includes the following assets immediately before it liquidates:
Basis FMV
Cash $ 10,000 $ 10,000
Unrealized receivables 0 10,000
Total $ 10,000 $ 20,000
In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners).
Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the
liquidation. What is the amount and character of Pamela's recognized gain or loss?
 $0.
 $5,000 ordinary income.
This is a disproportionate distribution. In essence, Pamela is treated as having sold her share of the hot assets
($5,000) to the partnership in exchange for cold assets. This deemed sale generates ordinary income to Pamela
equal to her share of the appreciation in the receivables. Pamela has a $5,000 basis in PW; therefore, she does not
recognize any gain on the cash portion ($5,000) of the distribution.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 21-05 Explain the

The PW Partnership';s balance sheet includes the following assets immediately before it liquidates:
Basis FMV
Cash $ 10,000 $ 10,000
Unrealized receivables 0 10,000
Total $ 10,000 $ 20,000
In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners).
Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the
liquidation. What is the amount and character of Wade's recognized gain or loss?
 $0.
This is a disproportionate distribution. In essence, PW is deemed to have distributed Wade's proportionate share of
the unrealized receivables ($5,000). Since the receivables have no basis, the distribution does not affect Wade's
outside basis. PW then distributes the remaining $5,000 of receivables to Wade. These receivables are Pamela's
share that PW purchased from Pamela. PW has a $5,000 basis in the receivables and Wade takes a $5,000 basis in
these receivables. He reduces his outside basis to zero. These events result in no immediate gain or loss to Wade.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 21-05 Explain the

Kathy is a 25 percent partner in the KDP Partnership and receives a parcel of land with a fair value of $150,000
(inside basis of $100,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately
before the distribution is $200,000. KDP currently has a §754 election in effect and has no hot assets or liabilities.
What is KDP's special basis adjustment from the distribution?
 $0.
 $50,000 positive basis adjustment.
 $100,000 negative basis adjustment.
A partnership will have a negative basis adjustment when a partner receiving distributed property takes a basis in
the property greater than the partnership's basis in the property. In this case, Kathy increases the basis of the land
from $100,000 to $200,000. The $100,000 represents the amount of the negative basis adjustment to KDP.
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Kathy is a 25 percent partner in the KDP Partnership and receives a parcel of land with a fair value of $160,000
(inside basis of $120,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately
before the distribution is $210,000. KDP currently has a §754 election in effect and has no hot assets or liabilities.
What is KDP's special basis adjustment from the distribution?
 $0.
 $90,000 negative basis adjustment.
A partnership will have a negative basis adjustment when a partner receiving distributed property takes a basis in
the property greater than the partnership's basis in the property. In this case, Kathy increases the basis of the land
from $120,000 to $210,000. The $90,000 represents the amount of the negative basis adjustment to KDP.
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Which of the following is false concerning special basis adjustments under Section 754?
 Special basis adjustments are intended to eliminate discrepancies between inside and outside bases.
 Special basis adjustments are an annual election made by the partnership.
 Special basis adjustments can occur when a new investor purchases a partnership interest.
 Special basis adjustments can occur when a partner recognizes a gain or loss from a distribution.
Once a partnership makes a §754 election, the partnership is bound to make the special basis adjustments for all
subsequent sales of partnership interests and partnership distributions. The election may only be revoked with
permission from the IRS.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 21-06 Explain the rationale
distributions.
Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000. Just prior to the sale, Paul's
outside and inside bases in KDP are $48,000. KDP's balance sheet includes the following:
Assets: Basis FMV

Cash $ 48,000 $ 48,000
Liabilities and Capital:

Capital-Paul 48,000
Capital-Kristi 48,000
Capital-David 48,000
If KDP has a §754 election in place, what is Kathy's special basis adjustment?
 $0.
 $36,000.
 $12,000.
 None of the choices are correct.
Kathy's special basis adjustment is $12,000, the difference between her outside basis ($60,000) and inside basis
($48,000).
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Multiple Choice Difficulty: 1 Easy Learning Objective: 21-06 Explain the rationale
distributions.
Kathy is a 25 percent partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her
partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a §754
election in effect and has no hot assets or liabilities. Which of the following statements is true?
 KDP will increase the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the
distribution.
 KDP will increase the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the
distribution.
 KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the
distribution.
 KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the
distribution.
Since Kathy receives only cash in a liquidating distribution and the amount is less than her outside basis, Kathy
recognizes a loss of $40,000. KDP will then decrease the basis of the partnership assets by the amount of the loss
recognized by Kathy.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 21-06 Explain the rationale
distributions.
Kathy is a 25 percent partner in the KDP Partnership and receives $131,000 cash in complete liquidation of her
partnership interest. Kathy's outside basis immediately before the distribution is $149,000. KDP currently has a §754
election in effect and has no hot assets or liabilities. Which of the following statements is true?
 KDP will increase the basis of its assets by $18,000 and Kathy will recognize a $18,000 loss on the
distribution.
 KDP will increase the basis of its assets by $18,000 and Kathy will recognize a $18,000 gain on the
distribution.
 KDP will decrease the basis of its assets by $18,000 and Kathy will recognize a $18,000 loss on the
distribution.
 KDP will decrease the basis of its assets by $18,000 and Kathy will recognize a $18,000 gain on the
distribution.
Since Kathy receives only cash in a liquidating distribution and the amount is less than her outside basis, Kathy
recognizes a loss of $18,000. KDP will then decrease the basis of the partnership assets by the amount of the loss
recognized by Kathy.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 21-06 Explain the rationale
distributions.
Joan is a one-third partner in the PDJ Partnership. PDJ Partnership uses the proration method to allocate income
and losses to partners with varying interests. On May 1, Joan sells her interest to Freddie for a cash payment of
$75,000. On January 1, Joan's basis in PDJ is $57,000. PDJ generates $60,000 of ordinary income and $9,000 of
tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale
date:
Basis Fair Market Value

Cash $ 45,000 $ 45,000
Land held for investment $ 45,000 $ 90,000
What is the amount and character of Joan's gain or loss on the sale?
$5,000 capital loss.
Loss of $5,000 equals the amount realized ($75,000) minus Joan's outside basis of $80,000 ($57,000 +
1/3($60,000) + 1/3($9,000)).
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Essay Difficulty: 1 Easy Learning Objective: 21-01 Determine the tax

recognized.
Joan is a one-third partner in the PDJ Partnership. PDJ Partnership uses the proration method to allocate income
and losses to partners with varying interests. On May 1, Joan sells her interest to Freddie for a cash payment of
$98,200. On January 1, Joan's basis in PDJ is $72,800. PDJ generates $85,500 of ordinary income and $11,100 of
tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale
date: (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)
Basis Fair Market Value

Cash $ 48,000 $ 48,000
Land held for investment $ 48,000 $ 96,000
What is the amount and character of Joan's gain or loss on the sale?
Loss of $6,800 equals the amount realized ($98,200) minus Joan's outside basis of $105,000 ($72,800 +
1/3($85,500) + 1/3($11,100)).
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recognized.
Joan is a 30 percent partner in the OJT Partnership when she sells her entire interest to Crissy for $100,000 cash.
At the time of the sale, Joan's basis in OJT is $63,000 (which includes her $10,000 share of OJT liabilities). OJT
does not have any hot assets. What is the amount and character of Joan's gain or loss on the sale?
$47,000 capital gain.
Joan's gain is determined as the amount realized of $110,000 ($100,000 cash + 10,000 debt relief) minus Joan's
outside basis in OJT of $63,000.
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recognized.
The VRX Partnership (a calendar year-end entity) has the following assets and no liabilities:
Basis FMV
Cash $ 27,000 $ 27,000
Inventory 103,500 121,500
Equipment 270,000 337,500
Stock investment 67,500 62,500
Totals $ 468,000 $ 566,500
The equipment was purchased for $360,000 and VRX has taken $90,000 of depreciation. The stock was
purchased seven years ago. What are VRX's hot assets for purposes of a sale of partnership interest?
The hot assets include the potential depreciation recapture in the equipment ($67,500), the accounts receivable,
and the inventory.
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recognized.
Victor is a one-third partner in the VRX Partnership, with an outside basis of $156,000 on January 1. Victor sells his
partnership interest to Raj on January 1 for $200,000 cash. The VRX Partnership has the following assets and no
liabilities as of January 1:
Basis FMV
Cash $ 27,000 $ 27,000
Inventory 103,500 121,500
Equipment 270,000 337,500
Totals $ 468,000 $ 600,000
The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock
was purchased seven years ago. What is the amount and character of Victor's gain or loss on the sale of his
partnership interest?
$9,500 capital gain and $34,500 ordinary income.
The total gain from the sale is $44,000 ($200,000 amount realized minus $156,000 outside basis). However,
because VRX has hot assets (accounts receivable, depreciation recapture, and inventory), a portion of the gain will
be ordinary income. The amount is equal to Victor's share of the ordinary income if VRX sold its assets for their fair
value on January 1. Victor's share is one-third of the gain on the accounts receivable ($18,000), inventory ($18,000),
and equipment ($67,500) for a total of 1/3 × $103,500 = $34,500 ordinary income. The capital gain from the sale
($9,500) is the difference between the total gain of $44,000 and ordinary income of $34,500.
References
Essay Difficulty: 2 Medium Learning Objective: 21-01 Determine the tax

recognized.
Victor is a one-third partner in the VRX Partnership, with an outside basis of $191,750 on January 1. Victor sells his
partnership interest to Raj on January 1 for $245,000 cash. The VRX Partnership has the following assets and no
liabilities as of January 1: (Do not round intermediate calculations. Round your final answer to the nearest whole
dollar amount.)
Basis FMV
Cash $ 28,200 $ 28,200
Inventory 125,000 147,500
Equipment 319,500 396,000
Totals $ 543,100 $ 700,600
was purchased seven years ago. What is the amount and character of Victor's gain or loss on the sale of his
$11,750 capital gain and $41,500 ordinary income.
because VRX has hot assets (accounts receivable, depreciation recapture, and inventory), a portion of the gain will
be ordinary income. The amount is equal to Victor's share of the ordinary income if VRX sold its assets for their fair
value on January 1. Victor's share is one-third of the gain on the accounts receivable ($25,500), inventory ($22,500),
and equipment ($76,500) for a total of 1/3 × $124,500 = $41,500 ordinary income. The capital gain from the sale
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recognized.
Zayde is a one-third partner in the ARZ Partnership, with an outside basis of $156,000 on January 1. Zayde sells his
partnership interest to Thomas on January 1 for $180,000 cash. The ARZ Partnership has the following assets and
no liabilities as of January 1:
Basis FMV
Cash $ 27,000 $ 27,000
Inventory 103,500 121,500
Equipment 270,000 337,500
Totals $ 468,000 $ 600,000
was purchased three years ago. What is the amount and character of Zayde's gain or loss on the sale of his
$10,500 capital loss and $34,500 ordinary income.
because ARZ has hot assets (accounts receivable, depreciation recapture, and inventory) a portion of the gain will
be ordinary income. The amount is equal to Zayde's share of the ordinary income if ARZ sold its assets for their fair
value on January 1. Zayde's share is one-third of the gain on the accounts receivable ($18,000), inventory ($18,000),
and equipment ($67,500) for a total of 1/3 × $103,500 = $34,500 ordinary income. The capital loss from the sale
References

recognized.
Marty is a 40 percent owner of MB Partnership. Marty has decided to sell his interest in the business to Emilio for
$100,000 cash plus the assumption of his share of MB's liabilities. Assume Marty's inside and outside basis in MB
are equal. MB shows the following balance sheet as of the sale date:
Assets: Basis FMV

Cash $ 160,000 $ 160,000
Receivables 50,000 50,000
Inventory 80,000 170,000
Totals $ 350,000 $ 420,000
Liabilities and capital:

Liabilities $ 120,000
Capital-Marty 92,000
Capital-Barry 138,000
Totals $ 350,000
What is the amount and character of Marty's recognized gain or loss?
$28,000 capital loss and $36,000 ordinary income.
Amount realized:
Cash $ 100,000
Debt relief 48,000 $ 148,000
Less: basis in partnership interest (including liabilities) (140,000)
Marty's realized and recognized gain $ 8,000
To the extent Marty realizes any amounts attributable to hot assets, his gain will be classified as ordinary. If MB sold
its assets for their fair market value at the sale date, the ordinary gain would be as follows:
Tax basis FMV Gain/Loss Marty's 40%

Inventory $ 80,000 $ 170,000 $ 90,000 $ 36,000
Total gain $ 8,000
Less: ordinary income 36,000
Capital loss $ (28,000)
References

recognized.
Scott is a 50 percent partner in the LS Partnership. Scott has a basis in his partnership interest of $84,000 at the
end of the current year, prior to any distribution. On December 31, Scott receives an operating distribution of $9,000
cash and a parcel of land with a $21,000 fair market value and a $12,000 basis to the partnership. LS has no debt or
hot assets. What is the amount and character of Scott's recognized gain or loss? What is Scott's basis in the
distributed property? What is Scott's ending basis in his partnership interest?
Scott recognizes no gain or loss. He takes a $9,000 basis in the cash and $12,000 basis in the land. His ending
basis in LS is $63,000.
Scott takes a transferred basis in the distributed property ($9,000 cash; $12,000 land). He reduces his basis in LS
from $84,000 to $63,000 ($84,000 − $9,000 − $12,000).
References

distributions.
Scott is a 50 percent partner in the LS Partnership. Scott has a basis in his partnership interest of $99,000 at the
end of the current year, prior to any distribution. On December 31, Scott receives an operating distribution of
$10,500 cash and a parcel of land with a $28,500 fair market value and a $27,000 basis to the partnership. LS has
no debt or hot assets. What is the amount and character of Scott's recognized gain or loss? What is Scott's basis in
the distributed property? What is Scott's ending basis in his partnership interest?
Scott recognizes no gain or loss. He takes a $10,500 basis in the cash and $27,000 basis in the land. His ending
basis in LS is $61,500.
Scott takes a transferred basis in the distributed property ($10,500 cash; $27,000 land). He reduces his basis in LS
from $99,000 to $61,500 ($99,000 − $10,500 − $27,000).
References

distributions.
Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by
contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests.
On December 31, the partnership makes a pro rata operating distribution to Heidi of $60,000 cash. What is the
amount and character of Heidi's recognized gain or loss? What is Heidi's remaining basis in HT?
$10,000 capital gain; $0 basis in HT.
See computation below for gain calculation. Heidi allocates her entire outside basis to the money received and has
no remaining basis in HT after the distribution.
Description Amount
Distribution of money $ 60,000
Less: basis in HT 50,000
Gain (capital) $ 10,000
References

distributions.
On December 31, the partnership makes a pro rata operating distribution to Heidi of $58,000 cash. What is the
amount and character of Heidi's recognized gain or loss? What is Heidi's remaining basis in HT?
$6,000 capital gain; $0 basis in HT.
See computation below for gain calculation. Heidi allocates her entire outside basis to the money received and has
no remaining basis in HT after the distribution.
Description Amount
Distribution of money $ 58,000
Less: basis in HT 52,000
Gain (capital) $ 6,000
References

distributions.
Doris owns a one-third capital and profits interest in the calendar-year DB Partnership. Her adjusted basis for her
partnership interest on July 1 of the current year is $20,000. On that date, she receives an operating distribution of
her share of partnership assets shown below:
Asset's Fair Market

Partnership's Basis in Asset Value
Cash $ 81,000 $ 81,000
Inventory 36,000 24,000
Land 120,000 135,000
What is the amount and character of Doris's gain or loss on the distribution? What is her basis in the distributed
assets?
$7,000 capital gain. Her basis in the cash is $27,000, inventory is $0, and land is $0.
Doris recognizes $7,000 gain on the distribution since the $27,000 cash distributed to her exceeds her $20,000
outside basis. She takes a basis in the cash equal to $27,000. She takes no basis in the other distributed assets.
References
Essay Difficulty: 3 Hard Learning Objective: 21-03 Determine the tax

distributions.
Doris owns a one-third capital and profits interest in the calendar-year DB Partnership. Her adjusted basis for her
partnership interest on July 1 of the current year is $18,800. On that date, she receives an operating distribution of
her share of partnership assets shown below:
Asset's Fair Market

Partnership's Basis in Asset
Value
Cash $ 90,000 $ 90,000
Inventory 34,800 24,600
Land 117,000 138,000
What is the amount and character of Doris's gain or loss on the distribution? What is her basis in the distributed
assets?
$11,200 capital gain. Her basis in the cash is $30,000, inventory is $0, and land is $0.
Doris recognizes $11,200 gain on the distribution since the $30,000 cash distributed to her exceeds her $18,800
outside basis. She takes a basis in the cash equal to $30,000. She takes no basis in the other distributed assets.
References

distributions.
Lola is a 35 percent partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete
liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution.
Lola's basis in LW is $50,000. What is the amount and character of Lola's gain or loss?
Lola's loss is calculated as the difference between her basis in LW and the cash distribution of $39,000.
References

distributions.
Lola's loss is calculated as the difference between her basis in LW and the cash distribution of $47,500.
References

distributions.
Locke is a 50 percent partner in the LS Partnership. Locke has a basis in his partnership interest of $84,000 at the
end of the current year, prior to any distribution. On December 31, Locke receives an operating distribution of
$30,000 cash. LS has no debt or hot assets. What is the amount and character of Locke's recognized gain or loss?
What is Locke's ending basis in his partnership interest?
Locke recognizes no gain or loss. His ending basis is $54,000.
Locke reallocates his basis to the cash and reduces his basis in LS from $84,000 to $54,000.
References

distributions.
Locke is a 50 percent partner in the LS Partnership. Locke has a basis in his partnership interest of $82,000 at the
end of the current year, prior to any distribution. On December 31, Locke receives an operating distribution of
$36,000 cash. LS has no debt or hot assets. What is the amount and character of Locke's recognized gain or loss?
What is Locke's ending basis in his partnership interest?
Locke recognizes no gain or loss. His ending basis is $46,000.
Locke reallocates his basis to the cash and reduces his basis in LS from $82,000 to $46,000.
References

distributions.
On December 31, the partnership makes a proportionate operating distribution to Teresa of $40,000 cash and stock
with a fair value of $20,000 (inside basis of $7,000). What is the amount and character of Teresa's recognized gain
or loss? What is Teresa's remaining basis in HT?
Teresa does not recognize any gain or loss on the distribution. She takes a basis of $40,000 in the cash and $7,000
in the stock. Teresa's remaining basis in HT is $3,000.
Teresa allocates $40,000 of her outside basis to the money received, then an additional $7,000 to the stock
(transferred basis). These reductions leave a remaining basis in HT of $3,000 after the distribution.
References

distributions.
On December 31, the partnership makes a proportionate operating distribution to Teresa of $38,500 cash and stock
with a fair value of $22,250 (inside basis of $7,900). What is the amount and character of Teresa's recognized gain
or loss? What is Teresa's remaining basis in HT?
Teresa does not recognize any gain or loss on the distribution. She takes a basis of $38,500 in the cash and $7,900
in the stock. Teresa's remaining basis in HT is $3,600.
Teresa allocates $38,500 of her outside basis to the money received, then an additional $7,900 to the stock
(transferred basis). These reductions leave a remaining basis in HT of $3,600 after the distribution.
References

distributions.
Esther and Elizabeth are equal partners in the EE Partnership. The partners formed the partnership seven years ago
by contributing cash. Prior to any distributions, the partners each have a $40,000 basis in their partnership
interests, including their share of partnership liabilities. On December 31, EE Partnership repays $50,000 of debt.
What is the amount and character of Esther's recognized gain or loss? What is Esther's remaining basis in EE?
Esther does not recognize any gain or loss on the distribution and her remaining basis in EE is $15,000.
Repayment of liabilities is treated as a cash distribution. Esther's share of the debt reduction is $25,000. Since this
amount is less than her outside basis ($40,000) she does not recognize a gain or loss. She reduces her outside
basis by the $25,000, which leaves her $15,000 of outside basis in EE after the debt repayment.
References

distributions.
Esther and Elizabeth are equal partners in the EE Partnership. The partners formed the partnership seven years ago
by contributing cash. Prior to any distributions, the partners each have a $50,400 basis in their partnership
interests, including their share of partnership liabilities. On December 31, EE Partnership repays $68,400 of debt.
What is the amount and character of Esther's recognized gain or loss? What is Esther's remaining basis in EE?
Esther does not recognize any gain or loss on the distribution and her remaining basis in EE is $16,200.
Repayment of liabilities is treated as a cash distribution. Esther's share of the debt reduction is $34,200. Since this
amount is less than her outside basis ($50,400) she does not recognize a gain or loss. She reduces her outside
basis by the $34,200, which leaves her $16,200 of outside basis in EE after the debt repayment.
References

distributions.
Lola's gain is calculated as the difference between her basis in LW and the cash distribution of $39,000.
References

distributions.
Katrina is a one-third partner in the KYR Partnership (calendar year-end). Katrina decides she wants to exit the
partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The
partnership has no liabilities and holds the following assets as of January 1:
Basis FMV
Cash $ 180,000 $ 180,000
Land 300,000 360,000
Totals $ 555,000 $ 900,000
Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $250,000.
What is the amount and character of any recognized gain or loss to Katrina? What is Katrina's basis in the distributed
assets?
Katrina does not recognize any gain or loss on the distribution. Her bases in the distributed assets are $60,000
cash, $0 accounts receivable, $47,500 stock, and $142,500 land.
Katrina uses the three-step process described in the text to determine her basis in the distributed property. Katrina
determines that she has a required increase of $65,000 ($250,000 − ($555,000 × 1/3)) to allocate among the
capital assets (stock and land). She first allocates the required increase according to the unrealized appreciation in
the stock and land. She then increases the bases of the capital assets in proportion to their relative fair values.
References

distributions.
Katrina is a one-third partner in the KYR Partnership (calendar year-end). Katrina decides she wants to exit the
partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The
partnership has no liabilities and holds the following assets as of January 1:
Basis FMV
Cash $ 180,000 $ 180,000
Land 300,000 360,000
Totals $ 555,000 $ 900,000
Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $110,000.
What is the amount and character of any recognized gain or loss to Katrina? What is Katrina's basis in the distributed
assets?
Katrina does not recognize any gain or loss on the distribution. Her bases in the distributed assets are $60,000
cash, $0 accounts receivable, $10,000 stock, and $40,000 land.
Katrina uses the three-step process described in the text to determine her basis in the distributed property. Katrina
determines that she has a required decrease of $75,000 ($110,000 − ($555,000 × 1/3)) to allocate between the
capital assets (stock and land). She then decreases the bases of the capital assets in proportion to their relative
bases.
References

distributions.
Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution of $70,000 to liquidate his
partnership interest on January 1. Tyson's outside basis is $75,000 including his $10,000 share of TF's liabilities. TF
does not hold any hot assets. What is the amount and character of Tyson's recognized gain or loss?
The gain is determined as the difference between the amount realized of $80,000 ($70,000 cash + $10,000 debt
relief) and Tyson's outside basis of $75,000.
References

distributions.
Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership
interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside
basis is $22,000). Tyson's outside basis is $105,000, including his $10,000 share of TF's liabilities. What is the
amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?
$3,000 capital loss; $22,000 basis in inventory.

Tyson recognizes a loss equal to the difference between the amount realized of $102,000 ($70,000 cash + $22,000
inventory + $10,000 debt relief) and his outside basis of $105,000. Because his basis in TF is greater than the
partnership bases in the distributed assets and the distributed assets consist only of money and inventory, Tyson
recognizes a capital loss. He takes a transferred basis in the distributed inventory.
References

distributions.
Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership
interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside
basis is $22,000). Tyson's outside basis is $90,000, including his $10,000 share of TF's liabilities. What is the
amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?
Tyson does not recognize any gain or loss on the distribution; $10,000 basis in inventory.
Tyson does not recognize gain or loss. Instead he reduces the basis in the inventory. Tyson's allocable basis is
$80,000 ($90,000 outside basis − $10,000 debt relief). The difference between the allocable basis and the bases
of assets distributed is $12,000. This is Tyson's required decrease to the inventory. Tyson takes a basis in the
inventory of $10,000 ($22,000 transferred basis − $12,000 required decrease).
References

distributions.
BPA Partnership is an equal partnership in which each of the partners has a basis in her partnership interest of
$20,000. BPA reports the following balance sheet:
Basis FMV
Inventory $ 40,000 $ 60,000
Land 20,000 30,000
Total $ 60,000 $ 90,000
Brooke, capital $ 20,000

Penelope, capital 20,000
Amanda, capital 20,000
Total $ 60,000
a. Identify the hot assets if Brooke decides to sell her interest in BPA.
b. Are these assets "hot" for purposes of distributions?
c. If BPA distributes the land to Brooke in complete liquidation of her partnership interest, what tax issues should be
considered?
a. Inventory is considered "hot" for purposes of a sale of partnership interests.

b. Yes, the inventory is also considered "hot" for distribution purposes.
c. If BPA distributes the land to Brooke, the distribution would be a disproportionate distribution because Brooke
would receive more than her share of the cold assets. Brooke would be treated as having sold her share of hot
assets to BPA in exchange for cold assets. The deemed sale would generate ordinary income to Brooke.
§751(a) includes unrealized receivables and inventory items as hot assets for purposes of a sale of partnership
interest. However, for distributions, §751(b) defines hot assets as substantially appreciated inventory and unrealized
receivables. BPA's inventory is considered substantially appreciated because its fair market value exceeds its basis
by more than 120 percent.
References
Essay Difficulty: 1 Easy Learning Objective: 21-05 Explain the

Nadine Fimple is a one-third partner in the NWL Partnership with equal inside and outside bases. On January 1,
NWL distributes $100,000 to Nadine in complete liquidation of her FPL interest. NWL's balance sheet as of January 1
is as follows:
Basis FMV
Cash $ 120,000 $ 120,000
Inventory 60,000 180,000
Total $ 180,000 $ 300,000
Nadine, capital $ 60,000

Wendell, capital 60,000
Louis, capital 60,000
Total $ 180,000
What is the amount and character of Nadine's recognized gain or loss on the distribution?
$40,000 ordinary income.
Nadine's distribution is a disproportionate distribution because she does not receive her share of NWL's hot assets.
As a result, Nadine is deemed to have sold her share of the hot assets for cold assets and recognizes ordinary
income of $40,000, equal to her share of the appreciation on the hot assets not distributed (1/3 × ($180,000 −
$60,000)).
References
Essay Difficulty: 3 Hard Learning Objective: 21-05 Explain the

Nadine Fimple is a one-half partner in the NL Partnership with equal inside and outside bases. On January 1, NL
distributes accounts receivable with a fair value of $100,000 to Nadine as an operating distribution. NL's balance
sheet as of January 1 is as follows:
Basis FMV
Cash $ 100,000 $ 100,000
Total $ 100,000 $ 200,000

Total $ 100,000
No gain or loss on the distribution.
Nadine's distribution is a disproportionate distribution because she receives more than her proportionate share of
NL's hot assets. NL is deemed to have distributed Nadine's proportionate share of the unrealized receivables
($50,000) to Nadine. Since the receivables have no basis, the distribution does not affect Nadine's outside basis. NL
then distributes the remaining $50,000 of receivables to Nadine. These receivables are Louis's (the other partner's)
share of the hot assets that NL was deemed to have purchased in order to distribute them to Nadine. This deemed
purchase by NL resulted in ordinary income for the partnership of $50,000 and NL has a $50,000 basis in the
receivables. When NL distributes these receivables to Nadine, she takes a $50,000 basis in these receivables. She
reduces her outside basis to zero. These events result in no immediate gain or loss to Nadine.
References

Nadine Fimple is a one-half partner in the NL Partnership with equal inside and outside bases. On January 1, NL
distributes accounts receivable with a fair value of $114,000 to Nadine as an operating distribution. NL's balance
sheet as of January 1 is as follows:
Basis FMV
Cash $ 114,000 $ 114,000
Total $ 114,000 $ 228,000

Total $ 114,000
No gain or loss on the distribution.
Nadine's distribution is a disproportionate distribution because she receives more than her proportionate share of
NL's hot assets. NL is deemed to have distributed Nadine's proportionate share of the unrealized receivables
($57,000) to Nadine. Since the receivables have no basis, the distribution does not affect Nadine's outside basis. NL
then distributes the remaining $57,000 of receivables to Nadine. These receivables are Louis's (the other partner's)
share of the hot assets that NL was deemed to have purchased in order to distribute them to Nadine. This deemed
purchase by NL resulted in ordinary income for the partnership of $57,000 and NL has a $57,000 basis in the
receivables. When NL distributes these receivables to Nadine, she takes a $57,000 basis in these receivables. She
reduces her outside basis to zero. These events result in no immediate gain or loss to Nadine.
References

Carmello is a one-third partner in the CDW Partnership with equal inside and outside bases. On December 31,
Carmello sells his interest to Conrad for $100,000 cash. CDW makes a §754 election and its balance sheet as of
December 31 is as follows:
Basis FMV
Cash $ 60,000 $ 60,000
Capital asset (nondepreciable) 120,000 240,000
Total $ 180,000 $ 300,000
Carmello, capital $ 60,000

Doug, capital 60,000
Wendy, capital 60,000
Total $ 180,000
What is the amount and sign (positive or negative) of Conrad's special basis adjustment? If CDW sells the capital
asset next year for $300,000, what is the amount of gain Conrad will recognize because of the sale?
$40,000 positive special basis adjustment; $20,000 gain on the sale of the capital asset.
Conrad's special basis adjustment is determined by subtracting Conrad's $60,000 share of the inside basis of
partnership assets from his $100,000 purchase price. When Conrad acquires the partnership interest, the $40,000
adjustment is allocated to the capital asset. When the partnership sells the capital asset for $300,000, Conrad can
offset $40,000 of the $60,000 [($300,000 − $120,000) × 1/3] gain he would otherwise recognize. Conrad
recognizes the remaining $20,000 of gain allocated to him.
References
Essay Difficulty: 3 Hard Learning Objective: 21-06 Explain the rationale

distributions.
Carmello is a one-third partner in the CDW Partnership with equal inside and outside bases. On December 31,
Carmello sells his interest to Conrad for $109,000 cash. CDW makes a §754 election and its balance sheet as of
December 31 is as follows: (Do not round intermediate calculations. Round your final answer to the nearest whole
dollar amount.)
Basis FMV
Cash $ 57,750 $ 57,750
Capital asset (nondepreciable) 122,700 244,500
Total $ 180,450 $ 302,250
Carmello, capital $ 60,150

Doug, capital 60,150
Wendy, capital 60,150
Total $ 180,450
What is the amount and sign (positive or negative) of Conrad's special basis adjustment? If CDW sells the capital
asset next year for $297,300, what is the amount of gain Conrad will recognize because of the sale?
$48,850 positive special basis adjustment; $9,350 gain on the sale of the capital asset.
Conrad's special basis adjustment is determined by subtracting Conrad's $60,150 share of the inside basis of
partnership assets from his $109,000 purchase price. When Conrad acquires the partnership interest, the $48,850
adjustment is allocated to the capital asset. When the partnership sells the capital asset for $297,300, Conrad can
offset $48,850 of the $58,200 [($297,300 − $122,700) × 1/3] gain he would otherwise recognize. Conrad recognizes
the remaining $9,350 of gain allocated to him.
References
Essay Difficulty: 3 Hard Learning Objective: 21-06 Explain the rationale

distributions.
Tatia's basis in her TRQ Partnership interest is $33,000. Tatia receives a distribution of $22,000 cash from TRQ in
complete liquidation of her interest. The three partners in TRQ share profits, losses, and capital equally. TRQ has
the following balance sheet:
Assets: Basis FMV

Cash $ 22,000 $ 22,000
Stock (investment) 11,000 22,000
Land 66,000 22,000
Totals $ 99,000 $ 66,000

Capital-Tatia $ 33,000
Capital-Rihanna 33,000
Capital-Quinn 33,000
Totals $ 99,000
a. What is the amount and character of Tatia's recognized gain or loss? What is the effect on the partnership assets?
b. If TRQ has a §754 election in place, what is the amount and sign (positive or negative) of the special basis
adjustment?
a. $11,000 capital loss; no effect on TRQ's assets.

b. $11,000 negative adjustment to TRQ assets.
Tatia receives only money in the distribution and the amount is less than her outside basis, so she recognizes a
capital loss on the liquidation. If TRQ has a §754 election in effect at the time of the distribution, TRQ will have a
special basis adjustment of $11,000 and will decrease TRQ's bases because Tatia recognized a loss on the
liquidating distribution.
References
Essay Difficulty: 2 Medium Learning Objective: 21-06 Explain the rationale

distributions.
Tatia's basis in her TRQ Partnership interest is $34,000. Tatia receives a distribution of $22,300 cash from TRQ in
complete liquidation of her interest. The three partners in TRQ share profits, losses, and capital equally. TRQ has
the following balance sheet:
Assets: Basis FMV

Cash $ 22,100 $ 22,100
Land 68,700 22,300
Totals $ 102,000 $ 66,600

Capital-Tatia $ 34,000
Capital-Rihanna 34,000
Capital-Quinn 34,000
Totals $ 102,000
a. What is the amount and character of Tatia's recognized gain or loss? What is the effect on the partnership assets?
b. If TRQ has a §754 election in place, what is the amount and sign (positive or negative) of the special basis
adjustment?
a. $11,700capital loss; no effect on TRQ's assets.

b. $11,700negative adjustment to TRQ assets.
Tatia receives only money in the distribution and the amount is less than her outside basis, so she recognizes a
capital loss on the liquidation. If TRQ has a §754 election in effect at the time of the distribution, TRQ will have a
special basis adjustment of $11,700 and will decrease TRQ's bases because Tatia recognized a loss on the
liquidating distribution.
References

distributions.
Daniel's basis in the DAT Partnership is $135,000. DAT distributes its land to Daniel in complete liquidation of his
partnership interest. DAT reports the following balance sheet just before the distribution:
Assets: Basis FMV

Cash $ 110,000 $ 110,000
Land 55,000 110,000
Totals $ 405,000 $ 330,000

Capital-Daniel $ 135,000
Capital-Alexandra 135,000
Capital-Travis 135,000
Totals $ 405,000
If DAT has a §754 election in place, what is the amount and sign (positive or negative) of the special basis
adjustment resulting from the distribution to Daniel? What is DAT's basis in its remaining assets?
The partnership has an $80,000 negative special basis adjustment. DAT's basis in remaining assets: $110,000 cash;
$160,000 stock.
DAT's special basis adjustment will decrease the remaining assets because Daniel increased the basis in the
distributed land. Because DAT has only capital assets, DAT adjusts the basis in the remaining capital asset, the
stock. DAT will reduce the basis in the stock by the $80,000 adjustment to $160,000.
References

distributions.
Daniel's basis in the DAT Partnership is $136,000. DAT distributes its land to Daniel in complete liquidation of his
partnership interest. DAT reports the following balance sheet just before the distribution:
Assets: Basis FMV

Cash $ 111,000 $ 111,000
Land 55,200 111,000
Totals $ 408,000 $ 332,200

Capital-Daniel $ 136,000
Capital-Alexandra 136,000
Capital-Travis 136,000
Totals $ 408,000
If DAT has a §754 election in place, what is the amount and sign (positive or negative) of the special basis
adjustment resulting from the distribution to Daniel? What is DAT's basis in its remaining assets?
The partnership has an $80,800 negative special basis adjustment. DAT's basis in remaining assets: $111,000 cash;
$161,000 stock.
DAT's special basis adjustment will decrease the remaining assets because Daniel increased the basis in the
distributed land. Because DAT has only capital assets, DAT adjusts the basis in the remaining capital asset, the
stock. DAT will reduce the basis in the stock by the $80,800 adjustment to $161,000.
References

distributions.

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1. Award: 1.

2. Award: 1.00 point

4. Award: 1.00 point

6. Award: 1.00 point

8. Award: 1.00 point

10. Award: 1.00 point

Operating distributions completely terminate a partner's interest in the partnership.

Liquidating distributions completely terminate a partner's interest.

Partners may only recognize losses for liquidating distributions.

12. Award: 1.00 point

Cash distributions include decreases in a partner's share of partnership liabilities.

14. Award: 1.00 point

16. Award: 1.00 point

18. Award: 1.00 point

20. Award: 1.00 point

No loss recognition since asset distributed is not cash or a hot asset.

22. Award: 1.00 point

24. Award: 1.00 point

True / False Diﬃculty: 1 Easy Learning Objective: 21-05 Explain the

True / False Diﬃculty: 1 Easy Learning Objective: 21-05 Explain the

26. Award: 1.00 point

True / False Diﬃculty: 3 Hard Learning Objective: 21-05 Explain the

A §754 election is made by the partnership.

28. Award: 1.00 point

 Neither cash- nor accrual-method partnerships.

 Both cash- and accrual-method partnerships.

 $48,000 capital gain.

 $48,000 ordinary income.

 $24,000 capital gain and $24,000 ordinary income.

 Gain or loss cannot be determined.

30. Award: 1.00 point

 $7,500 capital loss.

 $7,500 ordinary loss.

 $7,500 capital gain.

 $7,500 ordinary income.

32. Award: 1.00 point

 $10,500 capital loss.

 $10,500 ordinary loss.

 $13,500 capital gain.

 $1,500 ordinary income.

Which of the following assets would not be classiﬁed as a hot asset?

 Accounts receivable for a cash-method taxpayer.

 $30,000 ordinary income.

 $30,000 capital gain.

 $10,000 ordinary income; $20,000 capital gain.

 $10,000 capital gain; $20,000 ordinary income.

 $10,000 capital gain.

 $10,000 ordinary income.

 $20,000 ordinary income; $10,000 capital gain.

 $10,000 capital loss; $20,000 ordinary income.

37. Award: 1.00 point

Which of SSC's assets are considered hot assets under §751(a)?

 Cash and accounts receivable.

 Cash and land.

 Accounts receivable and land.

 Accounts receivable and inherent recapture in the equipment under §1245.

 $30,000 ordinary income and $15,000 capital loss.

 $45,000 capital gain.

 $15,000 capital loss.

 $15,000 ordinary income and $30,000 capital gain.

 A partner will never recognize a gain from an operating distribution.

41. Award: 1.00 point

 A partner will never recognize a loss from an operating distribution.