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Discussion Questions
C:10-1 A liquidating distribution. A current distribution is a distribution that does not terminate the
partner’s interest in the partnership, nor is the payment one of a series of payments intended to
terminate the partner’s interest in the partnership. A liquidating distribution is made with the
intention of terminating the partner’s entire interest in the partnership either with this payment or
with a planned series of payments including this one. The January distribution to Javier is the first in
a series of distributions that will terminate his interest in the partnership and, therefore, is a
liquidating distribution. p. C:10-2.
C:10-2 The basis of a single asset received in a liquidating distribution is determined by two factors:
the basis of the distributed property in the partnership’s hands and the distributee partner’s basis in
his or her partnership interest prior to the distribution. However, the total basis to the distributee
partner of the assets received generally will equal the partner’s basis in the partnership interest
immediately prior to the distribution. Because Mariel received a single asset that was not money,
accounts receivable, or inventory, her basis will be $60,000 in the land regardless of what the
partnership’s basis in the land was prior to its distribution. pp. C:10-12 through C:10-14.
C:10-3 Cindy’s basis for the property she receives will be reduced to $4,000 from its $4,500 basis to
the CDE Partnership because it is limited to Cindy’s basis in her partnership interest before the
distribution. Even though Cindy will hold the property as an investment, the sale of the inventory
would generate ordinary income for five years from the date of the distribution. The sale of the
capital asset would generate long-term capital gain that is taxed at the applicable capital gains rate.
pp. C:10-4 through C:10-7.
C:10-4 Sec. 1245 depreciation recapture potential. The partnership’s accounts receivable probably are
not unrealized receivables because the partnership uses the accrual method of accounting. However,
depreciation recapture potential under Secs. 1245 is treated as an unrealized receivable. The
partnership has Sec. 1245 recapture potential on the machines used to produce the inventory (and
presumably also from other machinery, furniture, and equipment the partnership owns). The building
has no Sec. 1250 recapture potential, and therefore does not produce an additional unrealized
receivable because it was depreciated under MACRS, which requires straight-line depreciation. The
building, however, does have unrecaptured Sec. 1250 gain potential, but unrecaptured Sec. 1250 gain
is not an unrealized receivable. p. C:10-8.
C:10-5 a, b, c, e. In essence, any property that is not a capital asset or Sec. 1231 property (to the
extent exceeding Sec. 1245 and Sec. 1250 elements). p. C:10-8.
C:10-6 For Sec. 751 to come into play in a current distribution, the distributing partnership must
have both Sec. 751 assets (unrealized receivables and/or substantially appreciated inventory) and
non-Sec. 751 assets. In addition, the distributee partner must have given up some of his or her
C:10-7 Under Sec. 731, a partner can recognize a loss on a distribution only if the distribution is a
liquidating distribution that consists only of money, unrealized receivables, and/or 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. p. C:10-
12.
C:10-8 Yes. In determining the character of gain and/or loss on the sale of a partnership interest, the
partnership is deemed to sell all its assets in a hypothetical sale for their FMV. The selling partner is
then allocated his or her share of the ordinary income or loss from the sale of Sec. 751 assets. The
partner’s residual gain or loss on the sale is capital gain or loss. If the partnership owns loss assets in
addition to Sec. 751 assets, the allocable ordinary income could exceed the partner’s total gain, in
which case the residual amount would be a capital loss. This result occurs in Example C:10-20 in
the text. pp. C:10-16 through C:10-19.
C:10-9 a. When Tyra’s interest in the partnership terminates, she will be deemed to have received
a money distribution in the amount of her interest in partnership liabilities. Because she has a zero
basis, she must report gain equal to the money distribution. Any other property she receives in the
distribution will have a zero basis.
b. The amount realized will equal the sum of the money received and any liabilities
assumed by the purchaser. Because her basis is zero she will report a large gain. pp. C:10-12 and
C:10-16 through C:10-18.
C:10-10 If the entire partnership terminates, the Sec. 736 provisions do not apply at all. Rather each
partner is taxed under the liquidating distribution rules. Section 736 applies if one or more partners
(but fewer than all the partners) dies or retires. Accordingly, Sec. 736 applies to the payments to
Tom. pp. C:10-19 and C:10-20.
C:10-11 Section 736 divides payments into two categories. Section 736(b) payments are for a
partner’s interest in partnership property, and these payments are taxed under the rules for
liquidating distributions. The partner recognizes capital gain if she receives money exceeding basis
in her partnership interest, so Lucia will report a capital gain of $3,000 ($23,000 - $20,000) on the
payment she receives for partnership assets.
Section 736(a) payments will be taxed as a guaranteed payment (ordinary income) if the
distribution is not based on partnership income. If the payment is based on partnership income, the
partner will be taxed on a distributive share of partnership income with the character of the income
determined at the partnership level. Accordingly, Lucia will report her share of partnership income
as a distributive share. pp. C:10-19 and C:10-20.
C:10-12 No. The Tax Cuts and Jobs Act of 2017 repealed the technical termination rule of Sec.
708(b)(1)(B) for partnership tax years beginning after 2017. Therefore, the partnership will not
terminate if Jason sells his 55% interest in the partnership. p. C:10-23.
C:10-14 From a legal standpoint, all the owners of a limited liability company (LLC) have limited
liability for the firms 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 treated as a
partnership or taxed as a corporation. If the LLC chooses partnership treatment, the LLC and the
limited partnership are treated similarly except the limited partnership must have at least one general
partner. pp. C:10-29 and C:10-30.
C:10-15 Yes. Even though the partnership’s total basis in assets does not exceed their FMV by
more than $250,000, the new partner would be allocated a loss of $600,000 ($2,400,000 x 0.25) if
the partnership were to sell its assets. This allocated loss exceeds $250,000, so a substantial built-in
loss exists, which in turn makes a mandatory downward basis adjustment of $600,000 necessary. pp.
C:10-26 and C:10-27.
Kayla recognizes no gain or loss on the distribution. Her basis for the equipment would be a
carryover basis from the partnership ($35,000) if that were possible, but it is limited to her basis in
her partnership interest prior to the distribution ($30,000). Kayla’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. The depreciation recapture potential is an
unrealized receivable that will generate ordinary income under Sec. 735 (a)(1) when Kayla sells the
property. pp. C:10-2 through C:10-7.
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 one-third to one-fourth. The partnership
probably has Sec. 751 assets because the partnership inventory is substantially appreciated.
Furthermore, the cash basis partnership probably has unrealized accounts receivable, and the
partnership may have recapture potential if it has any depreciable personality. Again, an exchange of
Sec. 751 assets for cash probably occurred because Joel received only cash and probably gave up a
portion of his interest (from one-third to one-fourth) in each Sec. 751 asset. The amount of ordinary
income is the difference between the amount of cash Joel is deemed to have received for the Sec.
751 assets and the adjusted basis that Joel would have had in the Sec. 751 assets had the Sec. 751
assets been distributed to Joel 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 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, Joel will recognize gain because he receives cash exceeding his
basis.
Note: The discussion in this chapter pertaining to disproportionate distributions conforms to existing
Treasury Regulations under Sec. 751(b). The Treasury Department has issued proposed regulations
that would alter the method for calculating disproportionate distributions and their tax consequences.
When this textbook went to press, those regulations were still only proposed. Therefore, this
textbook continues to apply the methods contained in existing Treasury Regulations.
The partnership has no unrealized receivables, but the partnership does have inventory. The
results of the sale are determined as follows:
Application of step 1 yields the following gain on Scott’s sale of his partnership interest:
Amount realized on sale $43,000
Minus: Adjusted basis of partnership interest ( 33,000)
Total gain realized $10,000
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C:10-4
Application of step 2 yields the following allocation to Sec. 751 property:
Thus, on the sale of his partnership interest, Scott recognizes $3,000 of ordinary income and
$1,800 of unrecaptured Sec. 1250 gain.
In summary, on the sale of his partnership interest, Scott recognizes $3,000 of ordinary income,
$1,800 of unrecaptured Sec. 1250 gain, and a $5,200 capital gain.
If the partnership made a Sec. 754 election, Sally’s optional basis adjustment would be
calculated as follows:
Cash purchase price $43,000
Minus: Sally’s share of partnership’s
basis in assets (1/3 x $99,000) ( 33,000)
Optional basis adjustment $ 10,000
The optional basis adjustment would be allocated $3,000 to the inventory, $5,000 to the building,
and $2,000 to the land.
C:10-19 • Is this gift going to make Haley a partner in the HotWheels LLC for tax purposes?
• If Alex restructures the gift so that Haley has true control over the interest, how will
the LLC’s income be allocated between Alex and Haley?
Haley probably will not be a partner. For Haley to be considered a partner, she must
have control of the interest. For a minor, control includes the situation where the interest is
placed in trust for the benefit of the minor but only if the trustee is someone who will act in
the best interest of the trust beneficiary. It is not clear that Alex is giving up any control
over this interest since he will continue to control the 15% share he placed into Haley’s
trust. Thus, Haley is unlikely to be considered a partner. A two-step allocation process will
be used to allocate partnership income. First, Alex must be allocated a FMV salary. His
C:10-21 What method should XYZ 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 the partnership is
no longer publicly traded?
• Incorporate the entity and be taxed as a regular C corporation?
• If the XYZ Limited Partnership chooses to continue as a partnership, should it elect
to come under the electing large partnership rules?
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.
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.
Lisa recognizes no gain. Her basis in the land is limited to $21,000, which is the basis of
her partnership interest reduced by the cash distributed.
Lisa recognizes a $3,000 gain, the amount by which cash distributed exceeds her partnership
basis before the cash distribution. Her basis in the land is limited to zero, which is the basis of her
partnership interest reduced by the cash distributed.
Lisa recognizes no gain. Her basis in the receivables is zero, and her basis in the inventory
is $10,000. Her basis in the land is limited to $11,000, which is the basis of her partnership interest
reduced by the cash distributed and by the basis of receivables and inventory distributed.
In addition, the corporation increases its E&P by the E&P gain (which also is $16,000),
decreases E&P by taxes on the tax gain, and decreases E&P by the $34,000 ($4,000 cash + $30,000
FMV of land) dividend distribution to Lisa (Sec. 312).
Lisa recognizes a $34,000 ($4,000 cash + $30,000 FMV of land) dividend (Sec. 301(c) and
Sec. 316). Her basis in the land is its $30,000 FMV (Sec. 301(d)), and her basis in her corporate
stock remains at $25,000.
f. FMV of land distributed $ 30,000
Minus: Basis of land distributed ( 14,000)
Gain recognized by the corporation (Sec. 311(b)) $ 16,000
Lisa received a $34,000 ($4,000 cash + $30,000 FMV of land) distribution, which exceeded
her stock basis before the distribution. Thus, in addition to the $8,000 pass-through gain, Lisa
recognizes a $1,000 capital gain on the excess distribution (Sec. 1368(b)(2)). Her basis in the land is
its $30,000 FMV (Sec. 301(d)).
pp. C:10-2 through C:10-7, C:4-2 through C:4-11, and C:11-25 through C:11-29.
C:10-23
Partner’s
Postdistribution Basis
Gain/Loss Basis Property to Partner
a. -0- $7,000 Land $4,000
Machinery 3,000
b. -0- $4,000 Land 6,000
Inventory 7,000
c. $9,000 -0- Land - Parcel 1 -0-
Land - Parcel 2 -0-
d. -0- $14,000 Land - Parcel 1 4,000
Land - Parcel 2 6,000
Land - Parcel 3 4,000
Because Mario recognized gain under Sec. 737, he must increase the basis of his partnership
interest by the $3,000 amount of the Sec. 737 gain. His basis is increased before reducing the basis
for the distribution.
c. $13,000 basis. Because Mario recognizes $3,000 of gain under Sec. 737, the
partnership must increase its basis in the property related to the precontribution gain that Mario
recognized. The partnership’s basis in the land is increased to $13,000 ($10,000 carryover basis from
Mario at the time of the contribution + $3,000 Sec. 737 gain recognized on this distribution).
Students may note that $5,000 of precontribution gain related to this land remains, which
could be recognized under Sec. 737 if Mario receives other distributions that trigger the recognition
of this gain within seven years of the original contribution of the land to the partnership. pp. C:10-2
through C:10-7.
C:10-25 a. $3,000 gain by Andrew. Andrew must recognize the gain that would have been
allocated to him had the partnership sold the land for its FMV instead of distributing it to Bob.
Amount deemed realized $21,000
Minus: Adjusted basis ( 18,000)
Capital gain on deemed sale $ 3,000
b. and c. Basis in partnership interest: $24,000 for Andrew; $9,000 for Bob. Basis in land to
Bob is $21,000. All $3,000 of the gain would have been allocated to Andrew because his
pre-contribution gain was $4,000, so Andrew must recognize a $3,000 gain. He increases his basis
in the partnership interest by the $3,000 gain he recognizes to $24,000. Bob’s basis in his
partnership interest is not affected by the gain recognition. The partnership’s basis in the land is
deemed increased by the $3,000 gain to $21,000 immediately before the land is distributed.
Accordingly, the basis of the land to Bob is $21,000, and Bob’s basis in his partnership interest is
reduced to $9,000 ($30,000 - $21,000) by the distribution. Andrew’s basis in his partnership interest
is not affected by the distribution. pp. C:10-2 through C:10-7.
The precontribution gain allocated to Beth on the deemed sale is $4,000 ($8,000 FMV - $4,000 basis
at contribution). Beth’s basis in her partnership interest after the deemed sale is $19,000 ($15,000 +
$4,000 gain recognized). The land’s basis to the partnership immediately before the distribution is
$8,000 ($4,000 basis + $4,000 gain recognized).
The precontribution gain allocated to Cathy on the deemed sale is $3,000 ($4,000 FMV - $1,000
basis at contribution). Cathy’s basis in the partnership interest after the deemed sale is $21,000
($18,000 + $3,000 gain recognized). The inventory’s basis to the partnership immediately before the
distribution is $4,000 ($1,000 + $3,000 gain recognized).
Then, the current distributions must be analyzed using the normal rules.
Alonzo’s distribution:
Basis in partnership interest before distribution $19,000
Minus: Carryover basis in land (see 1 above) ( 8,000)
Basis in partnership interest after distribution $11,000
Beth’s distribution:
Basis in partnership interest before distribution
(see 1 above) $19,000
Minus: Carryover basis in inventory (see 2 above) ( 4,000)
Basis in partnership interest after distribution $15,000
Cathy’s distribution:
Basis in partnership interest before distribution
(see 2 above) $21,000
Minus: Cash received in distribution ( 10,000)
Basis in partnership interest after distribution $11,000
Other Assets:
Cash $ 30,000 $10,000 $ 2,500 $ 7,500 $20,000 $12,500
Equipment 9,000 3,000 2,250 750 -0- ( 750)
Land 65,000 21,667 16,250 5,417 -0- ( 5,417)
Total $104,000 $34,667 $21,000 $13,667 $20,000 $ 6,333
Kay’s sale:
Amount realized $ 6,333
Minus: Adjusted basis ( 4,666)a
Recognized gain (ordinary income) $ 1,667
Kay’s basis in partnership interest:
Beginning basis $33,750
Minus: Sec. 751 transaction:
Inventory ($50,000/$52,000 x $4,333) ( 4,166)
Supplies ($6,000/$6,500 x $542) ( 500)
Basis after Sec. 751 transaction $29,084
Minus: Non-Sec. 751 distribution (13,667)b
Ending partnership interest basis $15,417
a
$0 receivables + $4,166 inventory + $500 supplies + $0 depreciation recapture.
b
$20,000 total - $6,333 Sec. 751 exchange.
Note: The discussion in this chapter pertaining to disproportionate distributions conforms to existing
Treasury Regulations under Sec. 751(b). The Treasury Department has issued proposed regulations
that would alter the method for calculating disproportionate distributions and their tax consequences.
When this textbook went to press, those regulations were still only proposed. Therefore, this
textbook continues to apply the methods contained in existing Treasury Regulations.
pp. C:10-7 through C:10-11.
Copyright © 2019 Pearson Education, Inc.
C:10-11
C:10-28 a. Sec. 1245 recapture on machinery. The receivables are not included because they
have been realized.
b. Yes. The inventory’s $86,000 FMV ($12,000 + $24,000 + $50,000 machinery
depreciation recapture) exceeds 120% of its adjusted basis [1.20 x ($12,000 + $21,000 + $0) = $39,600].
Realized as well as unrealized receivables are included in the Sec. 751(d) definition of inventory.
c.
(1) (2) (3) (4) (5)
Jack’s Jack’s Interest Hypothetical
Beginning Interest Before After Proportionate
Partnership Distribution Distribution Distribution Actual Difference
Amount (1/4) (1/5) (3)=(1)-(2) Distribution (5)=(4)-(3)
Other Assets:
Cash $ 48,000 $12,000 $ 4,600 $ 7,400 $25,000 $17,600
Machinery 190,000 47,500 38,000 9,500 -0- ( 9,500)
Land 76,000 19,000 15,200 3,800 -0- ( 3,800)
Total $314,000 $78,500 $57,800 $20,700 $25,000 $ 4,300
Jack’s sale:
Amount realized $ 4,300
Minus: Adjusted basis ( 1,650)a
Recognized gain (ordinary income) $ 2,650
Jack’s basis in partnership interest:
Beginning basis $76,875
Minus: Sec. 751 transaction
Accounts receivable ( 600)
Inventory ($21,000/$24,000 x $1,200) ( 1,050)
Basis after Sec. 751 transaction $75,225
Minus: Non-Sec. 751 distribution (20,700)b
Ending basis $54,525
a
$600 receivables + $1,050 inventory + $0 recapture.
b
$25,000 total - $4,300 Sec. 751 exchange.
Note: The discussion in this chapter pertaining to disproportionate distributions conforms to existing
Treasury Regulations under Sec. 751(b). The Treasury Department has issued proposed regulations
that would alter the method for calculating disproportionate distributions and their tax consequences.
When this textbook went to press, those regulations were still only proposed. Therefore, this
textbook continues to apply the methods contained in existing Treasury Regulations.
Other Assets:
Cash $ 20,000 $ 5,000 $ 4,000 $1,000 $ -0- $(1,000) ($1,000)
Note: The discussion in this chapter pertaining to disproportionate distributions conforms to existing
Treasury Regulations under Sec. 751(b). The Treasury Department has issued proposed regulations
that would alter the method for calculating disproportionate distributions and their tax consequences.
When this textbook went to press, those regulations were still only proposed. Therefore, this
textbook continues to apply the methods contained in existing Treasury Regulations.
pp. C:10-7 through C:10-11.
Copyright © 2019 Pearson Education, Inc.
C:10-13
C:10-30 The results of the two types of distributions are compared as follows:
Cleo Leo
Part a
Gain (loss) recognized $2,000 $ -0-
Basis in partnership interest -0- 2,000
Part b
Gain (loss) recognized 2,000 (2,000)
A partner recognizes gain on either type of distribution to the extent cash distributed exceeds the
partner’s basis in his or her partnership interest before the distribution. A partner recognizes a loss
only with liquidating distributions and then only where the partnership distributes no assets other
than cash, inventory, and/or unrealized receivables. The loss equals the excess of the partner’s basis
in the partnership interest over the amount of these assets distributed (in this case, cash). pp. C:10-2,
C:10-4, and C:10-12.
C:10-31 Partner’s
Postdistribution Basis
Gain/Loss Basis Property to Partner
C:10-32 Marinda: $30,000 capital gain; Partnership: No gain recognized. Even though Marinda
does not receive her proportionate share of each partnership asset in the liquidating distribution, the
transaction has no Sec. 751 implications because the partnership has no Sec. 751 assets. Marinda is
deemed to have received $110,000 in cash or deemed cash ($100,000 cash + $10,000 release from
liability). Accordingly, she must recognize capital gain of $30,000 ($110,000 received - $80,000
basis). The partnership recognizes no gain. pp. C:10-12 through C:10-16.
C:10-33
Alison Bob
Basis before liability reduction $ 110,000 $ 180,000
Minus: Liability reduction (deemed distribution) ( 50,000) ( 50,000)
Basis before distributions $ 60,000 $ 130,000
Minus: Cash distributions ( 20,000) ( 20,000)
Basis to be allocated $ 40,000 $110,000
Minus: Basis allocable to inventory ( 32,195)a ( 33,000)
Basis allocable to receivables ( 7,805)a ( 10,000)
Amount allocable to other property $ -0- $ 67,000
Minus: Basis allocable to land ( -0-) ( 15,000)b
Basis allocable to building ( -0-) ( 52,000)b
Ending basis in partnership interest $ -0- $ -0-
b
Bob’s allocation:
Land Building Total
FMV of asset $10,000 $60,000 $70,000
Minus: Partnership’s basis for the asset ( 15,000) ( 40,000) ( 55,000)
Difference ($ 5,000) $20,000 $15,000
Step 1: Give each asset the partnership’s basis
for the asset $15,000 $40,000 $55,000
Minus: Bob’s basis to be allocated ( 67,000)
Increase to allocate $12,000
Step 2: Allocate the $12,000 increase first to
assets that have appreciated in value -0- 12,000 12,000
Bob’s basis in the asset $15,000 $52,000 $67,000
The basis in each asset received is the number used to reduce the partner’s basis in the partnership
interest. Note that Alison’s basis in the inventory and receivables is smaller than a carryover basis
from the partnership while Bob’s basis in the building is larger than a carryover basis. Neither the
partners nor the partnership recognize any gain or loss. pp. C:10-12 through C:10-14.
b.
Capital Asset 1 Capital Asset 2 Total
FMV of asset $ 15,000 $ 17,500 $32,500
Minus: Partnership’s basis for the asset ( 10,000) ( 15,000) ( 25,000)
Difference $ 5,000 $ 2,500 $ 7,500
Step 1: Give each asset the partnership’s basis
for the asset $10,000 $15,000 $25,000
Minus: Larry’s basis to be allocated ( 36,000)
Increase to allocate $11,000
Step 2: Basis after Step 1 $10,000 $15,000 $25,000
Allocate the increase to assets
that have increased in valuea 5,000 2,500 7,500
Basis after Step 2 $15,000 $17,500 $32,500
Step 3: Allocate the remaining $3,500
increaseb 1,615 1,885 3,500
Larry’s basis in the capital assets $16,615 $19,385 $36,000
c.
Capital Asset 1 Capital Asset 2 Total
FMV of asset $15,000 $17,500 $32,500
Minus: Partnership’s basis for the asset ( 10,000) ( 20,000) (30,000)
Difference $ 5,000 ($ 2,500) $ 2,500
Step 1: Give each asset the partnership’s basis
for the asset $10,000 $20,000 $30,000
Minus: Larry’s basis to be allocated ( 36,000)
Increase to allocate $ 6,000
Step 2: Basis after Step 1 $10,000 $20,000 $30,000
Allocate the increase to assets
that have increased in valuea 5,000 -0- 5,000
Basis after Step 2 $15,000 $20,000 $35,000
Step 3: Allocate the remaining $1,000
increaseb 462 538 1,000
Larry’s basis in the capital assets $15,462 $20,538 $36,000
a
But not more than the unrealized appreciation.
b
Based on relative FMV: Capital Asset 1, $15,000/$32,500 x $1,000;
Capital Asset 2, $17,500/$32,500 x $1,000
d.
Capital Asset 1 Capital Asset 2 Total
FMV of asset $15,000 $17,500 $32,500
Minus: Partnership’s basis for the asset ( 10,000) ( 20,000) ( 30,000)
Difference $ 5,000 ($ 2,500) $ 2,500
Step 1: Give each asset the partnership’s basis
for the asset $10,000 $20,000 $30,000
Minus: Larry’s basis to be allocated ( 24,000)
Decrease to allocate ($ 6,000)
Step 2: Basis after Step 1 $10,000 $ 20,000 $30,000
Allocate the decrease to assets
that have decreased in valuea -0- ( 2,500) ( 2,500)
Basis after Step 2 $10,000 $ 17,500 $27,500
Step 3: Allocate the remaining $3,500
decreaseb ( 1,273) ( 2,227) ( 3,500)
Larry’s basis in the capital assets $ 8,727 $ 15,273 $24,000
b. Kelly recognizes $20,000 of ordinary income, $1,333 of unrecaptured Sec. 1250 gain,
and a $1,667 capital gain. The partnership has inventory and Sec. 1250 property . Accordingly, the
sales transaction must be analyzed as follows:
Application of step 1 yields the following gain on Kelly’s sale of her partnership interest:
Deemed Sale
of Assets Partnership Gain Kelly’s Share (1/3)
Thus, on the sale of her partnership interest, Kelly recognizes ordinary income of
$20,000 and an unrecaptured Sec. 1250 gain of $1,333.
C:10-36 a. Clay recognizes $9,000 of ordinary income and a $3,000 capital loss. The results of
the sale are determined as follows:
Application of step 1 yields the following gain on Clay’s sale of his partnership
interest:
Amount realized on sale
($75,000 cash + $15,000 liabilities) $ 90,000
Minus: Adjusted basis of partnership interest
($168,000 x 0.50) ( 84,000)
Total gain realized $ 6,000
Partnership
Deemed Sale of Assets Gain (Loss) Clay’s Share (60% x 0.50)
b. Steve’s basis is $90,000, his purchase price of $75,000 cash paid plus $15,000 in
liabilities assumed.
c. The partnership’s basis will not be affected. However, Steve may have a special basis
adjustment in the assets if a Sec. 754 election is in effect.
C:10-37 a. Alice recognizes $24,000 of ordinary income, $10,000 of unrecaptured Sec. 1250
gain, and a $16,000 capital gain. The result of the sale is determined as follows:
Application of step 1 yields the following gain on Alice’s sale of her partnership
interest:
Partnership Alice’s
Deemed Sale of Assets Gain (Loss) Share (⅓)
Thus, on the sale of her partnership interest, Alice recognizes ordinary income of
$24,000 ($7,000 + $5,000 + $12,000 recapture). In addition, Alice’s unrecaptured Sec. 1250 gain is
$10,000.
C:10-38 a. $30,000 capital gain and $15,000 ordinary income. Suzanne’s share of partnership
assets is $135,000 (1/3 x $405,000). Therefore, $135,000 of the $150,000 she receives ($130,000
cash + $20,000 release from liabilities) is a Sec. 736(b) payment. The Sec. 736(b) payment is
treated as a distribution, so Suzanne must recognize a $30,000 gain (cash distribution of $135,000
exceeding $105,000 basis). The gain is capital gain if Suzanne held the partnership interest as a
capital asset. The remaining $15,000 payment does not represent a payment for property. Because
the payment is not determined based on partnership income, it is a guaranteed payment. Thus, the
$15,000 payment is ordinary income to Suzanne. Note: Because of Suzanne’s recognized gain, the
partnership could adjust the basis of the land upward by $30,000 if a Sec. 754. election is in effect.
b. Suzanne’s capital account will be removed because she is no longer a partner. The
partnership gets no deduction for the payments taxed as Sec. 736(b) payments, but the partnership
can deduct the guaranteed payment of $15,000. The remaining partners’ bases in the partnership
must be increased to reflect the additional amount of liability each is allocated when Suzanne is no
longer a partner. pp. C:10-19, C:10-20, C:10-27, and C:10-28.
Brian is taxed on the Sec. 736(a) payment as a guaranteed payment, and the partnership
deducts the payment. The guaranteed payment, however, will not be eligible for the qualified business
income deduction. (Note: The capital gains recognized in Parts a and b could create a basis adjustment
to the land if a Sec. 754 election is in effect.) pp. C:10-19, C:10-20, C:10-27, and C:10-28.
The character of the gain is capital because the partnership has no unrealized receivables or
substantially appreciated inventory.
The character of the gain is capital gain because the partnership has no Sec. 751 assets. The
Sec. 736(a) payment is treated as a guaranteed payment because it is determined without reference to
partnership income. It is ordinary income to Kim (but not eligible for the qualified business income
deduction) and deductible by the partnership. (Note: The recognized gains in Parts a and b could
create basis adjustment to the land if a Sec. 754 election is in effect.) pp. C:10-19, C:10-20, C:10-
27, and C:10-28.
C:10-41 a. $90,000 of ordinary income. The FMV of Jerry’s partnership interest at the date of his
death plus his share of partnership liabilities is $160,000 ($130,000 + $30,000). His estate will receive
payments totaling $250,000 ($220,000 cash + $30,000 release from liabilities) during the two-year
period following death. The payments are Sec. 736(b) payments up to the FMV of his partnership
interest plus his share of liabilities for a total of $160,000. See Reg. Sec. 1.736-1(b) (1). The basis of
his partnership interest to his successor-in-interest is $160,000 ($130,000 FMV on the date of Jerry’s
death + $30,000 share of liabilities). Accordingly, the first $160,000 of payments is treated as liquidating
distributions and will generate no gain. The remaining payments ($90,000) are Sec. 736(a) payments,
which are not tied to partnership income and therefore are taxed as guaranteed payments to the
successor-in-interest. These payments will be taxed as ordinary income to the successor-in-interest and
are not eligible for the qualified business income deduction.
b. The partnership gets no deduction for the Sec. 736(b) payments, but it can deduct the
Sec. 736(a) payments. Because this was a two-person partnership, the partnership will continue only
until the partnership makes the last payment to Jerry’s successor-in-interest. At the time the
partnership makes the last payment, the partnership will terminate unless a new partner(s) is
admitted. pp. C:10-19 and C:10-20.
C:10-43 a. Because the accounts receivable have a basis equal to their FMV and because the
building has no depreciation recapture potential, the partnership holds no unrealized receivables.
However, the building does have unrecaptured Sec. 1250 gain potential.
John’s sales: Each of the two sales (one to Stephen and one to Andrew) is as follows:
Total
Amount realized $222,000a
Minus: Adjusted basis ( 166,800)b
Recognized gain $ 55,200
a
$186,000 + $36,000 release from liabilities
b
($261,600 x 0.50) + $36,000 share of liabilities
John’s total gain from the two sales is $110,400, of which $60,000 is an unrecaptured Sec. 1250 gain
subject to the 25% capital gains tax rate, and $50,400 is a capital gain.
The sale of a 60% interest does not terminate the JAS Partnership, and the partnership remains intact
if Andrew and Stephen continue to operate as a partnership.
b. John’s distributions are Sec. 736(b) distributions. For distribution purposes, the
partnership holds no Sec. 751 assets. Thus, no Sec. 751 exchange occurs, and John will recognize
no gain or loss on the distribution. His basis in each asset is determined as follows:
Beginning basis in partnership interest
($261,600 + $72,000 share of liabilities) $333,600
Minus: Actual cash ( 24,000)
Deemed cash (liability relief) ( 72,000)
Receivables ( 60,000)
Basis allocable to land and building $177,600
Minus: Building (120,000)
Land ( 57,600)
Ending basis in partnership interest $ -0-
Notice that the built-in gain on these assets is $110,400 ($372,000 - $261,600). Thus, John’s total
gain is the same as in Part a, except here the gain is deferred rather than recognized immediately.
The partnership does not terminate and has the following postdistribution balance sheet:
Partnership’s Basis FMV
Assets:
Cash $136,000 $136,000
Receivables 40,000 40,000
Building 80,000 120,000
Land 38,400 72,400
Total $294,400 $368,000
Liabilities and Capital:
Liabilities $120,000 $120,000
Capital - Andrew 87,200 124,000
- Stephen 87,200 124,000
Total $294,400 $368,000
Andrew and Stephen each will have an outside basis of $147,200 ($87,200 + $60,000 share of
liabilities). pp. C:10-12 through C:10-19 and C:10-22 through C:10-24.
The amount realized equals $160,000 cash + $20,000 release from liabilities, which is
allocated all to the Sec. 736(b) property.
The character of the gain is capital gain because the partnership has no Sec. 751 assets or
Sec. 1250 property.
The character of the gain is capital because the partnership has no Sec. 751 assets or Sec. 1250
property. Thus, in total, the results are the same as in Part a. pp. C:10-12 through C:10-19.
C:10-45 a. A taxable transaction occurs. The recognized gains for Josh and Diana are determined
as follows:
All or part of the gains might be unrecaptured Sec. 1250 gain if the underlying real property was
subject to depreciation.
C:10-46 a. No. Sale of the partnership interest does not terminate the partnership.
b. No. Liquidating distributions do not terminate a partnership.
c. Yes. Only one member of the partnership continues as owner.
d. No. The the technical termination rule of Sec. 708(b)(1)(B) has been repealed.
e. The ABC Partnership terminates on December 30 of the current year. The WXY
Partnership is treated as having continued.
f. The WXY Partnership terminates on January 1 of the current year.
c. Patty’s share of the gain is $20,000. However, she recognizes none of this gain
because of her $20,000 basis adjustment. pp. C:10-24 through C:10-27.
C:10-50 $110,000 loss to Latisha, made up of $90,000 of ordinary income and a $200,000 capital
loss. $110,000 downward mandatory basis adjustment to Larry. These results are determined as
follows:
Partnership Latisha’s
Assets Basis FMV Gain (Loss) Share
Summary of loss:
Ordinary income $ 90,000
Capital loss (200,000)
Total loss $(110,000)
Although beyond the scope of the textbook, the allocation of the basis adjustment is as
follows:
Partnership Allocation to
Gain (Loss) Larry (1/3)
C:10-51 a. The ABC Company (an LLC) will be treated as a partnership. Alex will report his
one-third share of each income item reported by the LLC.
The distribution is not taxable because it does not exceed Alex’s basis in his ABC Company
interest.
b.Beginning basis $40,000
Plus: Share of ordinary income 14,000
Minus: Capital loss ( 2,000)
Distribution (12,000)
Ending basis $40,000
pp. C:10-29 and C:10-30.
Comprehensive Problems
Able, Baker, and Lifecycle Partnership recognize no gain or loss on the transfer of
land to the partnership. Lifecycle Partnership takes the following tax basis and book values in the
land:
Tax Basis Book Value
The partnership’s tax holding period for the land includes Able’s and Baker’s holding periods prior
to the transfers. Able’s beginning basis in his partnership interest is $16,000, and Baker’s beginning
basis is $22,000.
Copyright © 2019 Pearson Education, Inc.
C:10-28
b. (1) Partnership ordinary and separately stated items:
2018 2019 2020
Sales $964,000 $990,000 $500,000
Minus: Cost of goods sold (450,000) (500,000) (280,000)
Gross profit $514,000 $490,000 $220,000
Minus:
Depreciation ( 94,000) (150,000) (115,000)
Interest expense (140,000) (130,000) (125,000)
Salary expense (guaranteed payment) -0- ( 12,000) -0-
Operating expenses ( 30,000) ( 40,000) ( 60,000)
Partnership ordinary income (loss) $250,000 $158,000 $( 80,000)
Separately stated items:
Dividend income $ -0- $ 2,000 $ -0-
STCG; LTCG -0- 1,000 3,000
Tax-exempt interest -0- 1,500 -0-
Charitable contribution -0- ( 500) -0-
C:10-53
a. Anne must recognize a guaranteed payment of $28,640, other ordinary income of
$33,280, and capital gain of $69,280, determined as follows:
This Sec. 736(a) payment of $28,640 is a guaranteed payment (ordinary income) to Anne, but
it does not qualify for the business income deduction.
Deduct the guaranteed payment of $28,640 paid to Anne. (In addition, the partnership
would increase its basis in its accounts receivable to reflect the fact that some receivables were
deemed purchased from Anne for $33,280.)
Application of step 1 yields the following gain on Anne’s sale of her partnership interest:
Amount realized on sale
($220,000 cash + $31,200 liabilities) $251,200
Minus: Adjusted basis of partnership interest ( 120,000)
Total gain realized $131,200
The ABC Partnership does not terminate because of the repeal of the technical termination
rule. Thus, the partnership remains intact.
Sec. 751
Assets:
Receivables $ 60,000 $20,000 $ -0- $20,000 $ -0- ($20,000)
Other
Assets:
Cash $ 60,000 $20,000 $ -0- $20,000 $60,000 $40,000
Land 60,000 20,000 -0- 20,000 -0- (20,000)
Total $120,000 $40,000 $ -0- $40,000 $60,000 $20,000
Because Daniel’s partnership basis exceeds the amount of cash distributed, he recognizes
no gain on the distribution. His partnership basis is $10,000 after reduction for the cash
distribution. He takes a zero basis in the receivables and a $10,000 basis in Land A. Daniel
recognizes gain or income when he sells the assets.
Summary of results:
Application of step 1 yields the following gain on Daniel’s sale of his partnership interest:
Partnership
Deemed Sale of Assets Gain (Loss) Daniel’s Share (1/3)
b. Options 1 and 3 yield the same results: current gain recognition, a disadvantage, and
current receipt of cash, an advantage. Conversely, Option 2 defers gain recognition and cash
collection until Daniel collects on the receivables and sells the land. Thus, if Daniel has immediate
need for cash, he should select Option 1 or Option 3. If he does not have immediate cash needs, he
should consider Option 2.
Because the sale is an installment sale, Mark would recognize his gain on an installment
basis. In the first year, he would recognize gain of $93,333, calculated as follows:
Assuming an 18.8% capital gains tax rate (including the 3.8% net investment tax), the gain
would result in taxes of $17,547, leaving Mark $102,453 ($120,000 - $17,547) of after-tax proceeds
for the first year. In each of the following three years, he would recognize gain of $85,556,
calculated as follows:
Assuming an 18.8% tax rate on the capital gains each year, the gain would result in taxes of
$16,085, leaving Mark $93,915 ($110,000 - $16,085) of after-tax proceeds each year. Total
proceeds for Mark for the four years are $450,000, and total taxes are $65,800 ($350,000 x 0.188).
Thus, Mark’s total undiscounted after-tax proceeds are $384,200 ($450,000 - $65,800).
Note that Michael is using after-tax dollars to pay Mark each year. Because this transaction
is an installment sale between related parties, Mark would have to recognize any unrecognized gain
if Michael later resold this partnership interest to another partner.
Notice that this basis adjustment has greatly decreased the potential capital gain that Michael will
recognize on the subsequent sale of the land investment.
Option 2A: Retirement from the partnership for $150,000 plus 50% of partnership profits for the
next three years.
Assuming the brothers correctly project income to be approximately $200,000 for each of the
next three years, Mark will receive a total of $450,000 over the four years. His gain will be
$350,000, calculated as follows:
In the initial year, Mark will receive $150,000 cash that he will treat as a normal partnership
distribution that reduces his basis. In future years, he will be allocated a 50% share of the
partnership earnings (with the character they have at the partnership level), which will increase his
basis. He also will receive a distribution from the partnership equal to the amount of income he
recognizes, and this distribution will reduce his basis by the same amount the income recognition
increases it. Accordingly, he will not be taxed on the distribution. After the final payment, Mark no
longer will be a partner, so his final payment will include the deemed cash from the release of his
liability share. Mark will report approximately $300,000 of income under this method, and the
character of the income is determined at the partnership level. Because the main source of
partnership income is the sale of investment land, most of the gain Mark will recognize also will be
capital gain.
Assuming all partnership income is capital gain for the three years, each year Mark will be
allocated $100,000 in capital gains and will pay taxes of $18,800 so that he has after-tax income of
$81,200. The first year’s payment is nontaxable so he has after-tax receipts of $150,000 for the first
year. Cash received over the four years is $450,000, and he will pay taxes of $56,400 ($18,800 x 3),
leaving undiscounted after-tax receipts of $393,600 ($450,000 - $56,400).
Option 2B: Retirement from the partnership for $150,000 cash plus $100,000 guaranteed
payment for three years.
In this option, as in the preceding one, Mark’s first year payment is simply a distribution
from the partnership, which reduces his basis in the partnership interest. Likewise, in the final year
Mark will be deemed to receive cash equal to the share of liabilities that he no longer will be liable
for. Assuming the liabilities do not change, these two distributions will have the following results:
Mark will recognize a $50,000 long-term capital gain in year four. At an 18.8% capital gains
tax rate, he will owe taxes of $9,400. Because this gain is caused by the deemed cash distribution from
the liability release, Mark is not receiving any cash to pay these taxes. The $100,000 guaranteed
payment will be taxed as ordinary income in each of the next three years, but it will not qualify for the
business income deduction. Assuming Mark’s ordinary tax rate is 35% each year, he will pay $35,000
in taxes for an after-tax amount of $65,000. Over the four years, Mark will receive cash of $450,000
and will pay taxes of $114,400 [($35,000 x 3) + $9,400] for undiscounted after-tax receipts of
$335,600 ($450,000 - $114,400).
Under this option, Mark will report a $350,000 long-term capital gain determined as follows:
Assuming an 18.8% tax rate on capital gains, the gain would result in taxes of $65,800,
leaving Mark $384,200 ($450,000 cash - $65,800 taxes) of after-tax proceeds. (Mark receives the
same after-tax benefit that he receives if Michael is the purchaser, ignoring discounting.)
With this option, the partnership continues to remain in existence. This results contrasts with
Option 1, where the partnership goes out of existence. If Michael wants to continue the partnership
form of conducting the investment, he should consider this option. Also, unless the partnership has
made a Sec. 754 election, no increased basis for the investment land occurs under this option.
Accordingly, students may want to recommend the sale to John or the sale to Michael
depending on whether or not Michael wants to continue as a sole proprietor or as John Watson’s
partner.
C:10-56
Tax Results:
Revenue Ruling 84-111, 1984-2 C.B. 88, requires that the tax results for incorporating a
partnership must follow the results generated by the form of the transaction. Accordingly, the
formation of the corporation is nontaxable to the transferor partnership under Sec. 351 and is
nontaxable to the transferee corporation under Sec. 1032. The liquidation of the partnership is
subject to the rules of Sec. 731, and the ex-partner’s basis in the new corporation’s stock is governed
by Sec. 732.
Each asset will take a carryover basis from the partnership transferor under Sec. 362, so the
total basis of corporate assets will be $360,000. Under Sec. 358, the partnership, as the sole
shareholder, has a basis in its corporate stock equal to the carryover basis of its assets ($360,000)
reduced by the partnership’s liability assumed by the corporation ($100,000), or $260,000.
Partnership Liquidation:
Upon liquidation of the partnership, neither the partners nor the partnership recognize gain or
loss under Secs. 731(a) and (b). The partnership terminates under Sec. 708(b)(1). Under Sec.
732(b), the partners’ bases in the corporate stock distributed equals their basis in the partnership as
shown in the following table, and, under Sec. 1223(1), the holding period for the stock includes the
holding period of the partners’ interest in the partnership.
Generally, when a business combination occurs, the acquiring entity records the assets
received at fair value. If the fair value differs from the tax basis, deferred tax assets and liabilities
may have to be recorded. However, Accounting Standard Codification (ASC) 805-50 provides
special rules for transactions between entities under common control. These rules lead to a different
recording measure than fair value.
ASC 805-50-15-6 provides several examples of common control transactions, one of which
includes an entity that “charters a newly formed entity and then transfers some or all of its net assets
to that newly chartered entity.” The incorporation of the ABC General Partnership falls into this
classification. ASC 805-50-30-5 provides the following:
In the current situation, the assets transferred to ABC Corporation have carrying amounts
(book value) that are the same as their tax bases. Therefore, the corporation records the assets for
financial accounting purposes in the same amount as the tax bases, thereby negating the need for
deferred assets or liabilities.
If the assets had carrying amounts that differed from their tax basis, presumably, the entity
would record deferred tax assets and/or liabilities for the difference between the carrying amounts
and the tax bases. However, because of the common control transaction rule, the new entity still
would not record assets at their fair value.
All payments based on partnership income also will be Sec. 736(a) payments taxed as distributive shares.
Taxation of the partnership is not affected by the payments made for Della’s interest in
property. It takes no deduction and does not reduce the continuing partners’ distributive share of the
payments made for the interest in property. The small guaranteed payment each year is deductible
by the partnership, but it does not qualify for the business income deduction for Della. The $5,000
distributive share results in a smaller distributive share for each of the remaining partners.
C:10-58 Transfer of an interest in a partnership by gift does not terminate the partnership tax year for
the donor. However, the donor must recognize income from the partnership up to the date of the gift.
Because the partnership tax year does not close on the date of the gift, the income is included in the
partner’s tax year that includes the normal partnership year-end (Reg. Sec. 1.706-1(c)(5)). On his tax
return for the tax year ending June 30 of the current year, Pedro will report partnership income from the
tax year that ended on December 31 of last year. He will report partnership income earned between
January 1 of the current year and his June 15 gift on his tax return for the tax year that ends on the next
June 30. Juan and the American Red Cross must report all partnership income earned after June 14 of
the current year.
Transfer of a majority interest by gift does not constitute a sale or exchange that can
terminate a partnership (Reg. Sec. 1.708-1(b)(1)(ii)). Although part-sale, part-gift transactions like
this one are not clearly covered by the Treasury Regulation, the sale portion of the transaction does
not appear to be a majority interest. This issue is probably moot now that the technical termination
rule has been repealed.
The transfer to Juan is a part-sale and part-gift. See Victor P. Diedrich v. CIR, 47 AFTR 2d
81-977, 81-1 USTC ¶9249 (8th Cir., 1981). The 30% interest transferred to Juan is considered sold
to him because the liability is one-half of the FMV ($50,000 liability $100,000 FMV of partnership
interest transferred). Pedro must recognize gain on the sale of a 15% interest of $30,000 ($50,000
liabilities transferred - $20,000 basis). The remaining 15% interest is a gift to Juan. Pedro must
report the gift portion for gift tax purposes at its FMV of $50,000.
The transfer to the American Red Cross also is a part-sale and part-gift but the allocation of
basis to the sale and gift differ from the allocation above (Rev. Rul. 75-194, 1975-1 C.B. 80). Only a
pro rata portion of the basis is allocated to the sale transaction, so basis of $10,000 ([$50,000 liability
$100,000 FMV] x $20,000 basis) is allocated to the sale, and the remaining $10,000 of basis is
On the sale of her partnership interest, Helen recognizes $32,540 of ordinary income and
an $8,400 capital loss, determined as follows:
Application of step 1 yields the following gain on Helen’s sale of her partnership interest:
Application of step 2 yields the following allocation to Sec. 751 property under Reg. Sec.
1.751-1(a)(2):
All the gain on Asset 1 is ordinary income under the Sec. 1245 recapture rules and is
therefore an unrealized receivable as defined in Sec. 751(c). Thus, Helen recognizes $32,540 of
ordinary income.
Hank’s optional basis adjustment under Sec. 743(b)(1) is $24,140, calculated as follows:
Under Reg. Sec. 1.751-1(a), the Sec. 1245 recapture attributable to Asset 1 is ordinary
income property, and Asset 2 is capital gain property because it meets the definition of Sec. 1231
property. For purposes of allocating the Sec. 743(b) adjustment, Reg. Sec. 1.751-1(b)(1)(ii) requires
Under Reg. Sec. 1.743-1(j)(2), a partnership first determines its items of income, deduction,
gain, or loss and allocates them among the partners in accordance with Sec. 704. The partnership
then adjusts a partner’s distributive share to reflect any Sec. 743(b) adjustments.
Under Reg. Sec. 1.743-1(j)(4)(i), the increased basis to depreciable property is treated as
newly purchased property while the unadjusted basis, or the partnership’s common basis, continues
to be depreciated as before the sale of the partnership interest. Accordingly, Hank’s share of 2018
depreciation on Asset 1 is as follows:
Under Reg. Sec. 1.743-1(j)(4)(ii), the negative Sec. 743(b) adjustment to depreciable
property decreases the partner’s allocable partnership depreciation according to the following
formula:
You probably should tell Betty and Thelma that the transaction will not be tax-free. First,
Sec. 704 requires that the contributing partner recognize any remaining precontribution gain (up to
the amount of precontribution gain that would be recognized if the property were sold on the
distribution date) when contributed property is distributed to another partner within five years of the
contribution. Therefore, both Betty and Thelma would recognize gain when the properties were
distributed unless the partnership held the property for more than five years.
Second, Treasury Regulations might prevent tax-free treatment even if the partnership held the
property for more than five years. Several years ago, the Treasury Department issued regulations to
stop the abusive use of the partnership form to get tax treatment that is not available otherwise.
These regulations require that all transactions be entered into for a substantial business purpose, and
Thelma and Betty have no apparent business purpose for contributing these properties to the
partnership or for distributing the properties from the partnership. Further, the regulations provide
that if the partnership is used to frustrate any IRC provision, the IRS can treat the partnership as an
aggregate of the partners. Because the exchange contemplated by Thelma and Betty clearly does not
qualify as a nontaxable like-kind exchange if the exchange were made directly between the two
women, it is unlikely that they can make it nontaxable by routing the exchange through their
partnership.