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2) If a partnership asset with a deferred precontribution gain is distributed within seven years of
acquisition in a nonliquidating distribution to a partner who did not contribute the asset, the
precontribution gain must be recognized by the contributing partner.
Answer: TRUE
Page Ref.: C:10-2
Objective: 1
3) In a current distribution, the partner's basis in the partnership interest is reduced by the amount
of money received and by the partnership's bases in the distributed property.
Answer: TRUE
Page Ref.: C:10-4
Objective: 1
4) A partner's holding period for property distributed as a current distribution begins on the date
of distribution.
Answer: FALSE
Page Ref.: C:10-7
Objective: 1
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5) A new partner, Gary, contributes cash and assumes a share of partnership liabilities. Diane's
capital, profits, and loss interest in the partnership is reduced by 5% due to the admission of
Gary. The Sec. 751 rules do not apply. Partnership liabilities at the time Gary is admitted are
$200,000, and all of the liabilities are recourse debts for which the partners share the economic
risk of loss in the same way they share partnership profits. Diane's basis in the partnership
interest prior to Gary's admission is $5,000. Due to the admission of Gary, partner Diane has
A) no recognized gain or loss and a partnership interest basis of $10,000.
B) no recognized gain or loss.
C) a recognized gain of $5,000 and a partnership interest basis of zero.
D) a recognized gain of $5,000 and a partnership interest basis of $5,000.
Answer: C
Explanation: C) Diane's reduction in partnership liabilities by the addition of Gary is $10,000
(0.05 × $200,000 = $10,000). Because the $10,000 reduction is deemed cash distributed, Diane
has a gain equal to the excess of the cash deemed distributed over her basis:
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7) Mirabelle contributed land with a $5,000 basis and a $9,000 FMV to MS Partnership four
years ago. This year the land is distributed to Sergio, another partner in the partnership. At the
time of distribution, the land had a $12,000 FMV. How much gain should Mirabelle and Sergio
recognize?
A)
Mirabelle Sergio
0 0
B)
Mirabelle Sergio
$4,000 0
C)
Mirabelle Sergio
$4,000 $3,000
D)
Mirabelle Sergio
$5,500 $1,500
Answer: B
Page Ref.: C:10-3; Example C:10-2
Objective: 1
8) Mirabelle contributed land with a $5,000 basis and a $9,000 FMV to MS Partnership four
years ago. This year the land is distributed to Sergio, another partner in the partnership. At the
time of distribution, the land had a $12,000 FMV. What is the impact of the distribution on
Mirabelle's partnership basis?
A) 0
B) $4,000 increase
C) $4,000 decrease
D) $7,000 increase
Answer: B
Page Ref.: C:10-3; Example C:10-2
Objective: 1
9) Susan contributed land with a basis of $6,000 and an FMV of $10,000 to the SH Partnership
two years ago to acquire her partnership interest. This year, the land is distributed to Harry when
its FMV is $11,000. No other distributions have been made since Susan became a partner. When
the land is distributed, the partnership's basis in the land immediately before distribution is
increased by
A) $0.
B) $1,000.
C) $4,000.
D) $5,000.
Answer: C
Page Ref.: C:10-3; Example C:10-2
Objective: 1
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10) Helmut contributed land with a basis of $5,000 and an FMV of $10,000 to the HG
Partnership five years ago to acquire a 50% partnership interest. This year the land is distributed
to another partner, Gail, when its FMV is $11,000. No other distributions have been made since
Helmut became a partner. When the land is distributed to Gail, Helmut recognizes a gain of
A) $0.
B) $2,500.
C) $3,000.
D) $5,000.
Answer: D
Page Ref.: C:10-3; Example C:10-2
Objective: 1
11) Becky has a $24,000 basis in her partnership interest. She receives a current distribution of
$4,000 cash, unrealized receivables with a basis of $12,000 and an FMV of $16,000, and land
held as an investment with a basis of $3,000 and an FMV of $8,000. The partners' relative
interests in the Sec. 751 assets do not change as a result of the current distribution. The basis of
her partnership interest following the distribution is
A) $5,000.
B) $1,000.
C) $0.
D) ($4,000).
Answer: A
Explanation: A)
Predistribution basis $24,000
Minus: cash ( 4,000)
unrealized receivables (12,000)
land ( 3,000)
Postdistribution basis $ 5,000
Page Ref.: C:10-4; Example C:10-6
Objective: 1
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12) John has a basis in his partnership interest of $30,000. He receives a current distribution of
$6,000 cash, unrealized receivables (FMV $11,000, basis $10,000), inventory (FMV $8,000,
basis $4,000), and investment land (FMV $7,000, basis $6,000). The partners' relative interest in
the Sec. 751 assets do not change as a result of the current distribution. His basis in the land is
A) $5,000.
B) $6,000.
C) $7,000.
D) $10,000.
Answer: B
Explanation: B)
Predistribution basis $30,000
Minus: cash ( 6,000)
unrealized receivables ( 10,000)
inventory ( 4,000)
Basis available for land $10,000
Carryover basis of land $ 6,000
Page Ref.: C:10-4
Objective: 1
13) Danielle has a basis in her partnership interest of $12,000. She receives a current distribution
of $8,000 cash and equipment with a basis of $7,000. There is no potential gain under Sec. 737.
What is her basis in the equipment?
A) $0
B) $4,000
C) $7,000
D) none of the above
Answer: B
Page Ref.: C:10-4
Objective: 1
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15) Tenika has a $10,000 basis in her interest in the TF Partnership and no remaining
precontribution gain immediately before receiving a current distribution that consisted of $4,000
in money, plastic tubes held in inventory with a $3,000 basis to the partnership and an FMV of
$3,375, and drip irrigation pipe held as inventory with a $6,000 basis to the partnership and an
FMV of $5,000. What is the basis in Tenika's hands of the distributed property?
A) $10,000
B) $6,000
C) $9,000
D) $10,125
Answer: B
Explanation: B)
Predistribution basis in partnership
interest $10,000
Minus: money received ( 4,000)
Plus: Sec. 737 gain 0
Amount to be allocated $ 6,000
Page Ref.: C:10-5; Example C:10-7
Objective: 1
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16) Tenika has a $10,000 basis in her interest in the TF Partnership and no remaining
precontribution gain immediately before receiving a current distribution that consisted of $4,000
in money, plastic tubes held in inventory with a $3,000 basis to the partnership and an FMV of
$3,375, and drip irrigation pipe held as inventory with a $6,000 basis to the partnership and an
FMV of $5,000. What is Tenika's basis for the plastic tubes and drip irrigation pipe?
A)
Plastic Tubes Drip Pipe
3,375 $5,000
B)
Plastic Tubes Drip Pipe
$3,000 $6,000
C)
Plastic Tubes Drip Pipe
$3,000 $5,000
D)
Plastic Tubes Drip Pipe
$2,250 $3,750
Answer: D
Explanation: D)
Plastic Tube Drip Pipe Total
FMV of Asset $3,375 $5,000 $8,375
- Partner basis 3,000 6,000 9,000
Difference 375 ( 1,000) ( 625)
Step 1: Basis $3,000 $6,000 $9,000
- Toby basis 6,000
Increase to allocate $3,000
Step 2: Basis $3,000 $6,000 $9,000
Allocate decline in value (1,000) ( 1,000)
$3,000 $5,000 $8,000
Step 3: Allocate ( 750)* ( 1,250)** ( 2,000)
$2,250 $3,750 $6,000
17) The total bases of all distributed property in the partner's hands following a nonliquidating
distribution is limited to
A) the partner's predistribution basis in his partnership interest.
B) the FMV of the property distributed.
C) the partnership's bases in the distributed property.
D) the predistribution FMV of the partner's partnership interest.
Answer: A
Page Ref.: C:10-6
Objective: 1
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18) Carlos has a basis in his partnership interest of $30,000. He receives a current distribution of
$6,000 cash, unrealized receivables (FMV $11,000, basis $10,000), inventory (FMV $8,000,
basis $4,000), land held as an investment (FMV $7,000, basis, $6,000), and building (FMV
$21,000, basis $9,000). The partners' relative interests in the Sec. 751 assets do not change as a
result of the current distribution. Carlos's basis in the building is
A) $2,500.
B) $6,000.
C) $7,500.
D) $9,000.
Answer: B
Explanation: B)
Basis $30,000
Minus: cash ( 6,000)
$24,000
Minus: unrealized receivables ( 10,000)
inventory ( 4,000)
Basis to be allocated to land and building $10,000
19) Bart has a partnership interest with a $32,000 basis. He receives a current distribution of
$6,000 cash, unrealized receivables (FMV $9,000, basis $10,000), inventory (FMV $8,000, basis
$4,000), investment land (FMV $7,000, basis $4,000), and building (FMV $20,000, basis
$8,000). No depreciation recapture applies with respect to the building. The partners' relative
interests in the Sec. 751 assets do not change as a result of the current distribution. Bart's basis in
the building is
A) $3,000.
B) $4,000.
C) $6,000.
D) $8,000.
Answer: D
Explanation: D)
Predistribution basis $32,000
Minus: cash ( 6,000)
receivables (10,000)
inventory ( 4,000)
Basis available for land and building* $12,000
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20) Identify which of the following statements is true.
A) The basis for property distributed by a partnership cannot be increased above the carryover
basis amount when it is received by a partner in a nonliquidating distribution.
B) A partner's partnership capital account balance cannot be less than zero.
C) The length of time a partner owns a partnership interest is relevant when determining the
holding period for distributed property.
D) All of the above are false.
Answer: A
Page Ref.: C:10-7
Objective: 1
21) Two years ago, Tom contributed investment land with a basis of $50,000 and an FMV of
$62,000 to the RST Partnership. This year, Tom has a basis in his partnership interest of $53,000
when he receives a current distribution of $14,000 cash and inventory with a basis of $35,000
and an FMV of $52,000. (There is no Sec. 751 exchange in connection with the inventory
distribution.) The partnership continues to hold the land Tom contributed. How much gain (if
any) must Tom recognize as a result of this distribution?
Answer: Precontribution gain = $62,000 - $50,000 = $12,000
Recognized gain = $12,000 [the smaller of precontribution gain ($12,000) or tentative Sec. 737
gain ($13,000)].
Page Ref.: C:10-3; Example C:10-3
Objective: 1
22) On November 30, Teri received a current distribution of cash of $4,000, marketable
securities with a basis of $24,000 and an FMV of $30,000, and inventory with a basis of $2,000
and an FMV of $6,000. Prior to the distribution, Teri's basis in her interest in the partnership was
$30,000. (There is no Sec. 751 exchange as a result of the distribution.) How much gain (if any)
must Teri recognize as a result of the distribution?
Answer: Predistribution basis $30,000
Minus: money received (cash and FMV of marketable securities) (34,000)
Gain recognized $ 4,000
Page Ref.: C:10-3
Objective: 1
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23) Jerry has a $50,000 basis for his interest in JJ Partnership before receiving a current
distribution consisting of $8,000 in money, accounts receivable having a zero basis to the
partnership, and land having a $28,000 basis to the partnership. What will Jerry's basis be in
these assets?
Answer: Generally, the partner's basis for property distributed by the partnership carries over
from the partnership. Jerry will take the carryover basis in the land and receivables.
Page Ref.: C:10-4; Example C:10-6
Objective: 1
24) Jerry has a $50,000 basis for his interest in JJ Partnership before receiving a current
distribution consisting of $8,000 in money, accounts receivable having a zero basis to the
partnership, and land having a $28,000 basis to the partnership. What is Jerry's basis in his
partnership interest after the distribution?
Answer: Predistribution basis in JJ $50,000
Minus: money received ( 8,000)
carry over basis in A/R (0)
carry over basis in land (28,000)
Postdistribution basis in JJ $14,000
Page Ref.: C:10-4; Example C:10-6
Objective: 1
25) When Rachel's basis in her interest in the RST Partnership is $40,000, she receives a current
distribution of office equipment. The equipment has an FMV of $60,000 and a basis of $50,000.
Rachel will not use the office equipment in a business activity. What tax issues should Rachel
consider with respect to the distribution?
Answer:
• Does Rachel recognize a gain or loss on the current distribution?
• What is Rachel's basis in the office equipment?
• When does Rachel's holding period begin for the property?
• Does any depreciation recapture carry over to Rachel from the partnership?
• What is Rachel's basis in her partnership interest following the distribution?
Rachel recognizes no gain or loss on the distribution. Her basis for the equipment would be a
carryover basis from the partnership ($50,000) if that were possible, but it is limited to her basis
in her partnership interest prior to the distribution ($40,000). Rachel's holding period for the
office equipment includes the holding period the partnership had for the property. Her basis in
the partnership interest is zero following the distribution.
Page Ref.: C:10-2 through C:10-7
Objective: 1
1) Under Sec. 751, unrealized receivables include potential Section 1245 or 1250 recapture on
the partnership's depreciable property.
Answer: TRUE
Page Ref.: C:10-8
Objective: 2
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2) For Sec. 751 purposes, "substantially appreciated inventory" means property held for sale to
customers whose market value exceeds its adjusted basis.
Answer: FALSE
Page Ref.: C:10-8
Objective: 2
5) For purposes of Sec. 751, inventory includes all of the following except
A) capital assets or 1231 property.
B) items held for sale in the ordinary course of business.
C) accounts receivable.
D) All of the above are inventory per Sec. 751.
Answer: A
Page Ref.: C:10-8
Objective: 2
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6) The AB Partnership has a machine with an FMV of $25,000 and a basis of $20,000. The
partnership has taken an $8,000 depreciation on the machine. The unrealized receivable related
to the machine is
A) $0.
B) $5,000.
C) $8,000.
D) $20,000.
Answer: B
Page Ref.: C:10-8; Example C:10-10
Objective: 2
7) The Internal Revenue Code includes which of the following assets in the definition of Sec.
751 properties?
A) inventory, which is substantially appreciated
B) cash
C) capital assets
D) Sec. 1231 assets
Answer: A
Page Ref.: C:10-8
Objective: 2
Basis FMV
Cash $20,000 $20,000
Unrealized
receivables 0 40,000
Inventory $20,000 30,000
Land (Sec. 1231
asset) 50,000 90,000
12) The XYZ Partnership owns the following assets on December 31:
Basis FMV
Cash $20,000 $20,000
Unrealized
receivables 0 15,000
Inventory $30,000 35,000
Land (Sec. 1231
asset) 40,000 70,000
By how much must XYZ reduce its unrealized receivables to avoid meeting the substantially
appreciated inventory test?
A) $10,000
B) $14,000
C) $15,000
D) No amount of reduction of unrealized receivables will affect meeting the substantially
appreciated inventory test.
Answer: B
Explanation: B) ($15,000 + $35,000) - (120% × $30,000) = $14,000
Page Ref.: C:10-8 and C:10-9; Example C:10-11
Objective: 2
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13) The XYZ Partnership owns the following assets on December 31:
Basis FMV
Cash $10,000 $10,000
Unrealized
receivables 0 10,000
Inventory $25,000 30,000
A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating
distribution of $10,000 cash. XYZ Partnership has no liabilities. His recognized gain is
A) $4,000 capital gain.
B) $3,000 capital gain and $1,000 ordinary income.
C) $3,000 ordinary income.
D) $3,000 ordinary income and $1,000 capital gain.
Answer: D
Explanation: D) The partner's recognized gain is made up of two components: (1) the amount by
which the proceeds of the deemed sale of the Sec. 751 assets (receivables and inventory) exceeds
the basis for such property when received by the partner in a current distribution, and (2) the
amount by which the remainder of the distribution exceeds the remainder of the partner's basis in
the partnership interest.
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14) Last year, Cara contributed investment land with an FMV of $24,000 and basis of $18,000 to
the CDE Partnership. CDE made no distributions during last year, and Cara's basis in her
partnership interest on December 31 of last year was $28,000. On January 1 of this year, the
partnership distributed cash of $30,000 to Cara and distributed the land contributed by Cara to
another partner, David. On the distribution date, the land had a $27,000 FMV. Assume the CDE
Partnership reported no profit or loss this year. How much gain (if any) must Cara recognize as a
result of the distributions? What is her basis in the partnership after the distributions?
Answer: Cara must recognize a $6,000 capital gain ($24,000 FMV at contribution - $18,000
basis at contribution) on the distribution of the land to David. The gain recognized increases
Cara's basis in her partnership interest.
15) The TK Partnership has two assets: $20,000 cash and a machine having a $28,000 basis and
a $40,000 FMV. The partnership has claimed $16,000 in depreciation on the machine since its
purchase. If the machine is sold for its FMV, would TK Partnership have an unrealized
receivable item?
Answer: Yes. All of the $12,000 gain would be an unrealized receivable, since it is recaptured
under Sec. 1245. Primary examples of unrealized receivables are the potential ordinary income
recapture items like Sec. 1245 or Sec. 1250.
Page Ref.: C:10-8 and C:10-9; Example C:10-11
Objective: 2
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16) The Tandy Partnership owns the following assets on December 31:
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19) Ed receives a $20,000 cash distribution from the EV Partnership, which reduces his
partnership interest from one-third to one-fourth. The EV Partnership is a general partnership
that uses the cash method of accounting and has substantial liabilities. EV's inventory has
appreciated substantially since it was purchased. What issues should Ed consider with regard to
the distribution?
Answer: Ed must determine:
• How much is his distribution?
• Does the partnership have Sec. 751 assets?
• If the partnership has Sec. 751 assets, did Ed exchange any interest in Sec. 751 assets for
cash?
• How much ordinary income must Ed recognize if he exchanges Sec. 751 assets for cash?
• How must Ed treat any cash distribution received that exceeds the amount deemed to be part
of the Sec. 751 exchange?
The amount of the distribution includes both the cash and the relief from liabilities that he
received when his interest in the partnership changed from 1/3 to 1/4. It is likely that the
partnership has Sec. 751 assets, since we know the partnership inventory is substantially
appreciated. Further, it is likely that the cash-basis partnership has unrealized accounts
receivable, and the partnership may have recapture potential if it has any depreciable personalty.
Again, it is likely that an exchange of Sec. 751 assets for cash occurred, since Ed received only
cash and probably gave up a portion of his interest (from 1/3 to 1/4) in each Sec. 751 asset. The
amount of ordinary income is the difference between the amount of cash Ed is deemed to have
received for the Sec. 751 assets and the adjusted basis that Ed would have had in the Sec. 751
assets had the Sec. 751 assets been distributed to Ed immediately before the deemed Sec. 751
sale (usually a carryover from the partnership's basis in these Sec. 751 assets). Any cash or
deemed cash exceeding the amount deemed to be part of the Sec. 751 exchange is simply treated
as a current distribution. The current distribution will reduce his basis in his partnership interest.
If the current distribution is greater than his basis in the partnership interest, Ed will recognize
gain because he receives cash exceeding his basis.
Page Ref.: C:10-7 through C:10-11
Objective: 2
2) A partner's holding period for a partnership interest is never considered when determining the
holding period for property distributed in a liquidating distribution.
Answer: TRUE
Page Ref.: C:10-16 and C:10-17
Objective: 3
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3) The sale of a partnership interest always results in capital gain or loss rather than ordinary
income.
Answer: FALSE
Page Ref.: C:10-16 through C:10-18
Objective: 3
6) Ted King's basis for his interest in the Troy Partnership is $24,000. In complete liquidation of
his interest, King receives cash of $4,000 and real property (not a Sec. 751 asset) having an FMV
of $40,000. Troy's adjusted basis for this realty is $15,000. Section 736 does not apply. King's
basis for this realty is
A) $15,000.
B) $20,000.
C) $36,000.
D) $40,000.
Answer: B
Explanation: B)
Predistribution basis $24,000
Minus: cash received ( 4,000)
Basis to partner $20,000
Page Ref.: C:10-8
Objective: 3
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7) Derrick's interest in the DEF Partnership is liquidated when his basis in the interest is $30,000.
He receives a liquidating distribution of $20,000 cash and inventory with a basis of $8,000 and
an FMV of $30,000. Derrick will recognize
A) no gain or loss.
B) $2,000 capital loss.
C) $2,000 ordinary loss.
D) $10,000 capital loss and $20,000 ordinary loss.
Answer: B
Page Ref.: C:10-12; Example C:10-15
Objective: 3
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8) Before receiving a liquidating distribution, Kathy's basis in her interest in the KLM
Partnership is $30,000. The distribution consists of $5,000 in money, inventory having a $1,000
basis to the partnership and a $2,000 FMV, and two parcels of undeveloped land (not held as
inventory) having basis of $3,000 and $9,000 to the partnership with FMVs of $5,000 and
$12,000, respectively. What is Kathy's basis in each parcel of land?
A)
Parcel One Parcel Two
$5,000 $12,000
B)
Parcel One Parcel Two
$3,000 $9,000
C)
Parcel One Parcel Two
$7,059 $16,941
D)
Parcel One Parcel Two
$6,000 $18,000
Answer: C
Explanation: C) Basis allocated to parcels = $30,000 - $5,000 - $1,000 = $24,000
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9) Ten years ago, Latesha acquired a one-third interest in Dana Associates, a partnership, for
$26,000 cash. This year, Latesha's entire interest in the partnership is liquidated when her basis is
$24,000. Dana's assets consist of the following: cash, $20,000; inventory with a basis of $46,000
and an FMV of $40,000. Dana has no liabilities. Latesha receives the cash of $20,000 in
liquidation of her entire interest. What is Latesha's recognized loss on the liquidation of her
interest in Dana?
A) $0
B) $4,000 long-term capital loss
C) $4,000 short-term capital loss and $2,000 ordinary loss
D) $4,000 long-term capital loss and $2,000 ordinary loss
Answer: B
Explanation: B)
Predistribution basis $24,000
Minus: liquidating
distribution ( 20,000)
Long-term capital loss $ 4,000
Page Ref.: C:10-14
Objective: 3
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11) Identify which of the following statements is false.
A) On June 30 of the current year, James Roe sells his interest in the Roe & Doe Partnership for
$30,000. Roe's adjusted basis in Roe & Doe at June 30 is $7,500 before apportionment of any
partnership income for the current year. The Roe & Doe Partnership uses the calendar year as its
tax year and has no liabilities on June 30. Roe's distributive share of partnership income up to
June 30 is $22,500. Roe acquired his interest in the partnership five years ago. Roe will have a
long-term capital gain on the sale of his interest of $22,500.
B) Section 751 assets include all inventory and all unrealized receivables in a sale or exchange
situation.
C) When a partnership interest is sold, the buyer and seller can allocate the sale price among the
Sec. 751 assets and non-Sec. 751 assets in any reasonable manner.
D) Statements B and C are true.
Answer: A
Page Ref.: C:10-16 and C:10-17
Objective: 3
12) Kenya sells her 20% partnership interest having a $28,000 basis to Ebony for $40,000 cash.
At the time of the sale, the partnership has no liabilities and its assets are as follows:
Basis FMV
Cash $20,000 $20,000
Unrealized receivables 0 40,000
Inventory 10,000 40,000
Land (Sec. 1231) 110,000 100,000
Kenya and Ebony have no agreement concerning the allocation of the sales price. Ordinary
income recognized by Kenya as a result of the sale is
A) $6,000.
B) $12,000.
C) $14,000.
D) $16,000.
Answer: C
Explanation: C)
Non-Sec. 751
Total Sec. 751 Assets Assets
Amount realized $40,000 $16,000 $24,000
Minus: adjusted
basis (28,000) (2,000) (26,000)
Recognized $12,000 $14,000 ($2,000)
gain/loss Ordinary income Capital loss
Page Ref.: C:10-17 and C:10-18; Example C:10-20
Objective: 3
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13) Steve sells his 20% partnership interest having a $28,000 basis to Nancy for $40,000 cash.
At the time of the sale, the partnership has no liabilities and its assets are as follows:
Basis FMV
Cash $20,000 $20,000
Unrealized receivables 0 40,000
Inventory 10,000 40,000
Land (Sec. 1231) 110,000 100,000
The receivables and inventory are Sec. 751 assets. There is no agreement concerning the
allocation of the sales price. Steve must recognize
A) no gain or loss.
B) $12,000 ordinary income.
C) $12,000 capital gain.
D) $14,000 ordinary income and $2,000 capital loss.
Answer: D
Explanation: D)
Non-Sec. 751
Total Sec. 751 Assets Assets
Amount realized $40,000 $16,000 $24,000
Minus: adjusted
basis (28,000) (2,000) (26,000)
Recognized $12,000 $14,000 ($2,000)
gain/loss Ordinary income Capital loss
Page Ref.: C:10-18; Example C:10-21
Objective: 3
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14) The CHS Partnership's balance sheet presented below is prepared on a cash basis at
September 30 of the current year.
Cindy withdraws from the partnership under an agreement whereby she takes one-third of each
of the three assets and assumes $10,000 of the notes payable. Her basis for the partnership
interest before any distribution is $25,000. What gain/loss should she report for tax purposes?
Answer: No gain or loss is recognized by Cindy or the partnership on the distribution of the Sec.
751 properties, since Cindy received only her proportionate share of the partnership's assets and
liabilities and the amount of cash deemed distributed ($14,000 = $4,000 cash + $10,000 release
from liabilities) is less than her $25,000 ($15,000 + $10,000 liabilities) basis for the partnership
interest.
Page Ref.: C:10-8 through C:10-12
Objective: 3
15) Adnan had an adjusted basis of $11,000 for his interest in the Adnan and Donnell Partnership
on December 31. On this date, Adnan received from the partnership, in complete liquidation of
his interest, $10,000 cash and land with a $2,000 basis to the partnership and a $3,000 FMV.
What is Adnan's basis for the land distributed to him?
Answer: $11,000 - $10,000 cash = $1,000 remaining basis. This basis is assigned to the land.
Page Ref.: C:10-8
Objective: 3
16) Eicho's interest in the DPQ Partnership is terminated when her basis in the partnership is
$70,000. She receives a liquidating distribution of $20,000 cash and inventory with a $24,000
basis and a $40,000 FMV. What is her gain or loss, and what is her basis in the inventory
received?
Answer: She has a recognized loss of $26,000 [($20,000 + $24,000) - $70,000]. Her basis in the
inventory she receives is $24,000.
Page Ref.: C:10-12; Example C:10-15
Objective: 3
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17) Eicho's interest in the DPQ Partnership is terminated when her basis in the partnership is
$70,000. She receives a liquidating distribution of $20,000 cash and inventory with a $24,000
basis and a $40,000 FMV. She also receives, as part of the distribution, a desk that has a $100
basis and a $200 FMV to the partnership. What is her gain or loss, and what is her basis in the
items received?
Answer: She does not recognize any loss currently. The bases are computed as follows:
The entire $26,000 is allocated to the desk. This delays the loss recognition until the desk is
either depreciated or sold.
Page Ref.: C:10-12 and C:10-13; Example C:10-16
Objective: 3
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18) On December 31, Kate receives a $28,000 liquidating distribution from the KLM
Partnership. On that date, Kate's basis in her limited partnership interest is $18,000 (which, of
course, includes her share of partnership liabilities). The other partners assume her $6,000 share
of liabilities. Just prior to the distribution, the partnership has the following balance sheet. Kate is
leaving the partnership but the partnership is continuing.
What is the amount and character of the gain that Kate must recognize on the liquidating
distribution?
Answer: Divide the payments between Sec. 736(a) and Sec. 736(b) payments.
The remaining Sec. 736(b) payment of $24,000 ($33,000 - $9,000 deemed paid for the Sec. 751
assets) is analyzed as a liquidating distribution.
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Summary: Kate recognizes a $1,000 guaranteed payment, $6,000 of ordinary income, and a
$9,000 capital gain.
Page Ref.: C:10-12 through C:10-16
Objective: 3
19) The HMS Partnership, a cash method of accounting entity, has the following balance sheet at
December 31 of last year:
Sam, who has a one-third interest in profits, losses, and liabilities, sells his partnership interest to
Beverly, for $77,000 cash on January 1 of this year. Sam's basis in his partnership interest
(which, of course, includes a share of partnership liabilities) at the time of the sale was $17,000.
In addition, Beverly assumes Sam's share of the partnership liabilities. What is the amount and
character of the gain that Sam will recognize from this sale?
Answer: Amount realized = $77,000 +$10,000 liabilities assumed = $87,000.
The recognized gain is all ordinary income, since it equals his share of the unrealized
receivables.
Page Ref.: C:10-16 through C:10-19
Objective: 3
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20) On December 31, Kate sells her 20% interest (with a basis of $18,000 which, of course,
includes a share of partnership liabilities) in the KLM Partnership to Karl for $27,000 cash plus
assumption of her $6,000 share of liabilities. On that date, the partnership has the following
balance sheet:
What are the amount and character of the gain that Kate must recognize on the sale?
Answer:
Total Sec. 751 Assets Other
Amount realized $33,000 $ 9,000 $24,000
Minus: adjusted ( 18,000) ( 3,000) ( 15,000)
basis $15,000 $ 6,000 $ 9,000
Recognized gain Ordinary Capital
Character of gain
Page Ref.: C:10-16 through C:10-18
Objective: 3
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21) Tony sells his one-fourth interest in the WindyCity Partnership to Bill for $100,000 cash
when the partnership's assets are as follows:
The partnership has no liabilities on the sale date. Tony's basis in his partnership interest on the
date of the sale is $60,000. What is the amount of gain realized by Tony on the sale of his
partnership interest?
Answer: Amount realized on sale $100,000
Minus: adjusted basis of partnership interest ( 60,000)
Total gain realized $ 40,000
Page Ref.: C:10-17 and C:10-18; Example C:10-20
Objective: 3
22) Tony sells his one-fourth interest in the WindyCity Partnership to Bill for $100,000 cash
when the partnership's assets are as follows:
The partnership has no liabilities on the sale date. Tony's basis in his partnership interest on the
date of the sale is $60,000. What is the allocation of Tony's gain to the assets received?
Answer:
Deemed sale of Partnership gain
Tony's share (25%)
assets (loss)
Unrealized
72,000 18,000
receivables
104,000 26,000
Inventory
( 16,000) ( 4,000)
Land
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23) Tony sells his one-fourth interest in the WindyCity Partnership to Bill for $100,000 cash
when the partnership's assets are as follows:
The partnership has no liabilities on the sale date. Tony's basis in his partnership interest on the
date of the sale is $60,000. What are the amount and character of Tony's gain?
Answer:
Deemed sale of Partnership gain
Tony's share (25%)
assets (loss)
Unrealized
72,000 18,000
receivables
104,000 26,000
Inventory
( 16,000) ( 4,000)
Land
Since the unrealized receivables and the inventory are Sec. 751 property, Tony recognizes
$44,000 of ordinary income. The remaining $4,000 loss is a capital loss.
Page Ref.: C:10-17 and C:10-18; Example C:10-20
Objective: 3
24) Joshua is a 40% partner in the XY Partnership when he sells his entire interest to Stanley for
$60,000 cash. At the time of the sale, Joshua's basis is $36,000, which includes his $10,000 share
of partnership liabilities. The partnership has no Sec. 751 assets. Calculate Joshua's gain or loss
on the sale.
Answer: Amount realized:
Cash $60,000
Liabilities assumed by purchaser 10,000 $70,000
Minus: adjusted basis 36,000
Gain recognized on sale $34,000
Page Ref.: C:10-17 and C:10-18; Example C:10-20
Objective: 3
25) What conditions are required for a partner to recognize a loss upon receipt of a distribution
from a partnership?
Answer: A partner can recognize a loss on a distribution only if the distribution is a liquidating
distribution that consists of money, unrealized receivables, and inventory. The partner recognizes
a loss if the amount of money and the carryover basis of the receivables and inventory are less
than the partner's predistribution basis in his or her partnership interest.
Page Ref.: C:10-12 and C:10-13
Objective: 3
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26) What is the character of the gain/loss on the sale of a partnership interest?
Answer: Because a partnership interest is generally a capital asset, the sale of a partnership
interest results in a capital gain or loss. However, if a partnership has Sec. 751 assets, the partner
is assumed to sell his or her share of Sec. 751 assets directly with a corresponding ordinary gain
or loss being recognized.
Page Ref.: C:10-16
Objective: 3
27) Can a partner recognize both a gain and a loss on the sale of a partnership interest? If so,
under what conditions?
Answer: A partner must divide the sale of a partnership interest into two transactions if the
partnership has Sec. 751 assets. First, the partner is deemed to sell his or her share of Sec. 751
assets for their FMV with their adjusted bases to the partner, being the basis the Sec. 751 assets
would have had if the partner had received them in a current distribution. The remaining sales
proceeds and the remaining adjusted bases are then considered to be the amounts to be reported
from the sale of the remainder of the partnership interest (non-Sec. 751 assets). Possibly, one part
of the transaction could generate a loss while the other part could generate a gain.
Page Ref.: C:10-16 through C:10-19
Objective: 3
28) David sells his one-third partnership interest to Diana for $60,000 when his basis in the
partnership interest is $48,000. On the date of sale, the partnership has no liabilities and the
following assets:
The building is depreciated on a straight-line basis. What tax issues should David and Diana
consider with respect to the sale transaction?
Answer:
• Does the partnership have Sec. 751 assets?
• What is the amount and character of the gain on the sale of David's partnership interest?
There are no unrealized receivables, but the partnership does have inventory. David's gain is
calculated as follows:
Assets
Total Sec. 751 Other
Amount realized $60,000 $9,000 $51,000
Minus: adjusted basis (48,000) ( 6,000) (42,000)
Recognized gain $12,000 $3,000 $ 9,000
The gain attributable to the Sec. 751 assets is ordinary while the remainder of the gain is capital.
Page Ref.: C:10-16 through C:10-19
Objective: 3
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LO4: Other Partnership Termination Issues
1) When a retiring partner receives payments that exceed the value of that partner's partnership
property, the excess payment is a guaranteed payment.
Answer: FALSE
Page Ref.: C:10-19
Objective: 4
2) Under the check-the-box rules, an LLC with more than one member is taxed as a partnership
unless it elects to be taxed as a corporation.
Answer: TRUE
Page Ref.: C:10-21
Objective: 4
4) For tax purposes, a partner who receives retirement payments ceases to be regarded as a
partner
A) on the last day of the taxable year in which the partner retires.
B) on the last day of the month in which the partner retires.
C) on the day on which the partner retires.
D) only after the partner's last payment is received.
Answer: D
Page Ref.: C:10-20
Objective: 4
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5) If a partnership chooses to form an LLC, under the check-the-box rules, and assuming no
elections are made, the entity will be taxed as
A) a partnership if it has more than one member.
B) an S corporation.
C) a C corporation.
D) Unable to determine from the facts presented.
Answer: A
Page Ref.: C:10-21
Objective: 4
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9) Marc is a calendar-year taxpayer who owns a 30% capital and profits interest in the MN
Partnership. Nancy sells the remaining 70% capital and profits interest to Henry on October 31.
The partnership year-end is March 31 as permitted by the IRS for business purpose reasons. The
MN Partnership
A) terminates on March 31.
B) terminates on October 31.
C) terminates on December 31.
D) does not terminate.
Answer: B
Page Ref.: C:10-22
Objective: 4
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12) Identify which of the following statements is false.
A) A sale or exchange of at least 50% of the capital and profits interest in a partnership within a
12- consecutive-month period will terminate the partnership and end all of the partnership's
elections.
B) When using the 50% rule to terminate a partnership, if an interest is sold more than once
during the 12-month period, each sale is counted separately.
C) A partner's individual income tax return, under some circumstances, may include the results
of partnership operations for a period exceeding 12-months.
D) When several different transfers are made during a 12-month period, the partnership
termination occurs on the date of the transfer that first crosses the 50% threshold.
Answer: B
Page Ref.: C:10-22 and C:10-23
Objective: 4
13) Sally is a calendar-year taxpayer who owns a 30% capital and profits interest in the SEM
Partnership. Eric sells the remaining 70% capital and profits interest to Michelle on October 3.
The partnership year-end is March 31 as permitted by the IRS for business purposes. Which of
the following statements is correct?
A) Sally must conform her tax year with the partnership tax year.
B) The new partnership is a continuation of the old partnership.
C) Sally's tax return will include a partnership distributive share only for the period ending
March 31.
D) Sally's tax return will include partnership distributive shares for periods ending March 31 and
October 3.
Answer: D
Page Ref.: C:10-23 and C:10-24
Objective: 4
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14) The LM Partnership terminates for tax purposes on July 15 when Latasha sells her 60%
capital and profits interest to Zoe for $100,000. The partnership has no liabilities, and its assets at
the time of termination are as follows:
Marika, a 40% partner in the LM Partnership, has a $64,800 basis in her partnership interest
(outside basis) at the time of the termination. She has held her LM Partnership interest for three
years at the time of the termination. The bases of Marika and Zoe in the new LM Partnership is:
A)
Marika Zoe
$64,800 $ 97,200
B)
Marika Zoe
$66,667 $100,000
C)
Marika Zoe
$64,800 $100,000
D)
Marika Zoe
$66,667 $ 97,200
Answer: C
Page Ref.: C:10-24; Example C:10-28
Objective: 4
15) The AB, BC, and CD Partnerships merge into the ABCD Partnership. AB (owned by Austin
and Ben) contributes assets worth $100,000. BC (owned by Ben and Charlie) contributes assets
worth $200,000. CD (owned by Charlie and Dennis) contributes assets worth $300,000. The
capital and profits interest in ABCD is owned by: Austin, 10%; Ben, 30%; Charlie, 25%; and
Dennis, 35%. ABCD Partnership is a continuation of
A) AB.
B) BC.
C) CD.
D) none of the partnerships.
Answer: C
Page Ref.: C:10-25; Example C:10-30
Objective: 4
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16) Rod owns a 65% interest in the RRR Partnership, a general partnership, which he sells to the
two remaining partners - Roger and Regis. The three partners have agreed that Rod will receive
$160,000 in cash from the sale. Rod's basis in the partnership interest before the sale is $125,000,
which includes his $35,000 share of partnership recourse liabilities. The partnership has assets
with a $310,000 FMV and a $210,000 adjusted basis. What issues should Rod, Roger, and Regis
consider before this sale takes place?
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17) Quinn and Pamela are equal partners in the QP Partnership. On December 30 of the current
year, the QP Partnership agrees to liquidate Quinn's partnership interest for a cash payment on
December 30 of each of the next five years. What tax issues should Quinn and Pamela consider
with respect to the liquidation of Quinn's partnership interest?
Answer:
• Does the partnership terminate for tax purposes?
• If so, when does the termination occur?
The partnership terminates since only one partner remains. The partnership terminates when the
final Sec. 736 payment is made.
Page Ref.: C:10-22 and C:10-23
Objective: 4
1) Han purchases a 25% interest in the CHOP Partnership from Huang for $600,000. The
partnership has assets with a basis of $1,600,000. What is the amount of the basis adjustment, if
the partnership has a 754 election in place?
A) $0
B) $150,000 increase in Han's basis in his partnership interest
C) $200,000 increase in Han's share of the basis in partnership assets
D) $1,000,000 increase in partnership assets
Answer: C
Page Ref.: C:10-26
Objective: 5
2) Patrick purchases a one-third interest in the PPP partnership for $600,000. The partnership has
assets with a value of $1,500,000. PPP has a 754 election in effect. What is the amount of the
basis adjustment?
A) $0
B) $300,000 increase in the basis of partnership assets
C) $100,000 increase in Patrick's basis in the partnership assets
D) $100,000 increase in Patrick's share of the basis in the partnership assets
Answer: D
Page Ref.: C:10-26
Objective: 5
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4) When must a partnership make mandatory basis adjustments?
A) on any sale of a 20% or greater partnership interest
B) on any sale of a partnership interest for $250,000 or more
C) on any distribution of assets with a value of $250,000 or more
D) on any sale of a partnership interest where the partnership's adjusted basis in its assets
exceeds their fair market value by $250,000 or more
Answer: D
Page Ref.: C:10-27
Objective: 5
6) Patrick purchased a one-third interest in the PPP partnership for $600,000. At the time of the
purchase, the partnership had a 754 election in effect and its only asset was land with a basis of
$1,500,000. This year, PPP sells the land for $1,800,000. What is Patrick's recognized share of
the gain on the sale of the land?
A) $0
B) $100,000
C) $300,000
D) none of the above
Answer: A
Explanation: A) $1,800,000 - 1,500,000 = 300,000 gain. Patrick's share of the gain is $100,000,
which is offset by the $100,000 754 adjustment. The 754 adjustment is 600,000 purchase price -
(1,500,000/3) = 100,000.
Page Ref.: C:10-27; Example C:10-33
Objective: 5
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7) Sean, Penelope, and Juan formed the SPJ partnership by each contributing assets with a basis
and fair market value of $200,000. In the following year, Penelope sold her one-third interest to
Pedro for $225,000. At the time of the sale, the SPJ partnership had the following balance sheet:
Basis FMV
Cash $200,000 $200,000
Land $400,000 $475,000
$600,000 $675,000
Shortly after Pedro became a partner, SPJ sold the land for $475,000. What are the tax
consequences of the sale to Pedro and the partnership (1) assuming there is no Section 754
election in place, and (2) assuming the partnership has a valid Section 754 election?
Answer: (1) The partnership has a $75,000 gain ($475,000 - $400,000) and $25,000 of this gain
is allocated to Pedro. (2) Pedro's share of the basis of the land is increased by $25,000, the
amount that he paid for the partnership interest in excess of the basis of the partnership assets.
This basis increase is allocated entirely to the land. The partnership still has a $75,000 gain on
the sale of the land, but Pedro's $25,000 share is eliminated by the 754 adjustment to the basis of
the land (1/3 × 475,000) - [(1/3 × 400,000) + 25,000] = 0.
Page Ref.: C:10-27
Objective: 5
8) What are some advantages and disadvantages of making a Section 754 election?
Answer: Advantages: Without a 754 election, if a new partner purchases a partnership interest
when the partnership assets have a fair market value greater than their basis, the partner will be
taxed on his/her proportionate share of any gain on a subsequent sale of these assets in addition
to paying a higher purchase price for the partnership interest due to the assets' appreciation. The
partner will not be able to recover this "double taxation" until the partnership is liquidated, which
may be several years in the future. Sec. 754 prevents this timing problem by adjusting the
partner's basis in partnership assets.
The Sec. 754 election has several disadvantages, including increased recordkeeping. Partners
and/or the partnership must maintain separate records showing the calculation and allocation of
the basis adjustment. Once a 754 election is made, adjustments are required on all subsequent
sales and distributions, even if the adjustment decreases the basis. For distributions, the basis
adjustment belongs to the partnership as a whole. The 754 election can only be revoked with IRS
approval.
Page Ref.: C:10-26 through C:10-28
Objective: 5
1) A limited liability company is a form of business entity that combines the legal benefits of the
corporate form with the tax benefits of the partnership form.
Answer: TRUE
Page Ref.: C:10-30
Objective: 6
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2) Identify which of the following statements is true.
A) When a partnership is divided into two or more new partnerships, all of the resulting
partnerships must be considered new partnerships.
B) A partnership is "publicly traded" only if its interests are traded on an established securities
exchange.
C) A limited liability company is a form of business entity that combines the legal benefits of the
corporate form with the tax benefits of the partnership form.
D) All of the above are false.
Answer: C
Page Ref.: C:10-29 through C:10-32
Objective: 6
3) The STU Partnership, an electing Large Partnership, has no passive activities and reports the
following transactions for the year: net long-term capital losses $50,000, Sec. 1231 gain $60,000,
ordinary income $20,000, charitable contributions $15,000, and tax-exempt income $2,000. How
much will be reported as ordinary income to its partners?
A) $5,000
B) $17,000
C) $20,000
D) $22,000
Answer: B
Explanation: B) [$20,000 - 10% (10,000 + 20,000)] = $17,000
Page Ref.: C:10-32
Objective: 6
4) The STU Partnership, an electing Large Partnership, has no passive activities and reports the
following transactions for the year: net long-term capital losses $50,000, Sec. 1231 gain $60,000,
ordinary income $20,000, charitable contributions $15,000, and tax-exempt income $2,000. How
much will be reported as long-term capital gains to its partners?
A) $0
B) $10,000
C) $50,000
D) $60,000
Answer: B
Page Ref.: C:10-32
Objective: 6
5) What are the advantages of a firm being formed as a limited liability company (LLC) instead
of as a limited partnership?
Answer: From a legal standpoint, all the owners of a limited liability company (LLC) have
limited liability for the firm's debts. In a limited partnership, all general partners have significant
liability for firm debts. Under the check-the-box regulations, an LLC can choose whether to be
taxed as a partnership or as an association taxed as a corporation. If the LLC chooses partnership
taxation, there is virtually no difference between the taxation of the LLC and the limited
partnership.
Page Ref.: C:10-30
Objective: 6
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6) The limited liability company (LLC) has become a popular business form because of its
limited liability protection for its owner. The S corporation also provides limited liability
protection for its owner. What advantages does an LLC provide that are not available with an S
corporation?
Answer:
• The LLC is taxed as a partnership under the check-the-box rules. As such, the basic operating
restrictions that are imposed on an S corporation do not apply to an LLC. These include, but are
not limited to: a 100 shareholder limit; restrictions on the type of eligible shareholders; a single
class of stock; and the limitation on amount of passive income that can be earned by an S
corporation.
• The corporate-level taxes imposed on an S corporation, such as the built-in gains tax and
excess net passive income tax, do not apply to an LLC.
• The loss limitation is larger for an LLC than for an S corporation because of the treatment of
general debts incurred by the LLC under the partnership taxation rules.
• All states have enacted LLC laws, so that the problem with a lack of developed legal
structure for handling general legal problems has disappeared. The application of basic legal
principles to S corporations was no problem since in most cases they followed the basic rules for
corporations.
Page Ref.: C:10-30
Objective: 6
7) What is an electing large partnership? What are the advantages to the partnership of electing
to be taxed under the electing large partnership rules?
Answer: An electing large partnership is a partnership that is not a service partnership, is not
engaged in commodity trading, has at least 100 partners, and files an election to be taxed as an
electing large partnership. The primary advantage to the partnership of electing to be an electing
large partnership is that the reporting of income to the large number of partners is simplified.
Relatively few items are separately stated so that the reporting process is more difficult than a
corporation but easier than a nonelecting partnership.
Page Ref.: C:10-32 through C:10-34
Objective: 6
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8) All states have adopted laws providing for limited liability companies. Describe a limited
liability company (LLC).
Answer: An LLC often combines the legal benefits of a corporation with the tax benefits of a
partnership. Whether an LLC is characterized as a corporation or a partnership for federal tax
purposes depends on the number of corporate characteristics that are present. An LLC should be
treated as a partnership if it has the centralized management and limited liability characteristics
of a corporation, but does not have the free transferability of interest or continuity-of-life
characteristics. If treated as a partnership, they offer more flexibility than an S corporation in that
there is no limit on the number of shareholders, the number of classes of stock that can be
outstanding, or the types of investments in related entities that can be made. The increased
flexibility being written into some of the state LLC laws concerning the various corporate
characteristics has resulted in the LLCs created in certain states being treated as corporations or
partnerships, depending upon the terms of the LLC's organizing document. However, the IRS
implemented a system that allows LLCs to designate via a check-the-box mechanism whether
they wish to be taxed as a partnership or as a corporation. It is anticipated that most new LLCs
will desire to be taxed as a partnership (their default treatment) when they have two or more
owners.
Page Ref.: C:10-30
Objective: 6
9) Brown Company recently has been formed as a limited liability company (LLC). Brown
Company is owned equally by three individuals—Gene, Susan, and Sandra—all of whom have
substantial income from other sources. Brown is a manufacturing firm and expects to earn
approximately $130,000 of ordinary income and $30,000 of long-term capital gain each year for
the next several years. Gene will be a full-time manager and will receive a salary of $60,000
each year. What tax issues should the owners consider regarding the LLC's initial year of
operations?
Answer:
• Should Brown choose to be taxed as a partnership or as a corporation?
• How much will be kept in the business for growth, and how much will be distributed to the
owners each year? The larger the percentage of earnings that will be distributed, the more
advantageous a flow-through entity such as a partnership can be.
• What is the marginal tax rate for Gene, Susan, and Sandra? If Gene, Susan, and Sandra have
lower marginal tax rates than does Brown, partnership status has advantages.
• How should Gene's pay for operating the business be structured? If the business is taxed as a
corporation, a generous but reasonable salary will decrease the amount of income subject to
double taxation. If the business is structured as a partnership, the partners need to decide whether
to structure the payment as distributive share, as an outright guaranteed payment, or whether to
establish a guaranteed minimum that may be some combination of the two.
Page Ref.: C:10-30
Objective: 6
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10) The Principle Limited Partnership has more than 300 partners and is publicly traded. The
Principle was grandfathered under the 1987 Tax Act and has consistently been taxed as a
partnership. In the current year, The Principle Limited Partnership will continue to be very
profitable and will continue to pay out about 30% of its income to its owners each year. The
managing partners of The Principle want to consider the firm's options for taxation in the current
and later years.
Answer: What method should The Principle Limited Partnership choose to use to operate under
the publicly traded partnership rules?
• Pay the annual 3.5% of gross income tax and continue to be taxed as a publicly traded
partnership?
• Buy back enough interests (or restrict opportunities for trading) so that the partnership is no
longer publicly traded?
• Incorporate the entity and be taxed as a regular (C) corporation?
The best alternative will be a function of the amount of gross income, amount of taxable income,
tax rates of the partners, amount of profits the firm wants to retain, and costs of buying back
partnership interests, and/or restricting trading, or incorporating.
If The Principle Limited Partnership chooses to continue as a partnership, should it elect to come
under the electing large partnership rules?
• The election reduces the partnership's annual cost of providing information to partners but
will require some start-up cost to make the change. The election also has the advantage of
making it more difficult to accidentally terminate the partnership because of trades. However, the
election significantly reduces the partners' reporting and audit options.
Page Ref.: C:10-29
Objective: 6
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