South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition Hoffman Solutions Manual

South Western Federal Taxation 2013
Corporations Partnerships Estates and

Trusts 36th Edition Hoffman Solutions
Manual
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CHAPTER 11
PARTNERSHIPS: DISTRIBUTIONS, TRANSFER

OF INTERESTS, AND TERMINATIONS
SOLUTIONS TO PROBLEM MATERIALS
Status: Q/P
Question/ Learning Present in Prior
Problem Objective Topic Edition Edition
1 LO 1, 8 Proportionate nonliquidating distributions: New

treatment to partner and partnership
2 LO 1 Proportionate nonliquidating distributions: Unchanged 2
partner’s basis
3 LO 1 Proportionate nonliquidating distributions: New
compared to corporate treatment
4 LO 2 Proportionate liquidating distributions: Unchanged 4
treatment to partner
partner’s basis
effect on partnership
7 LO 1, 2 Current distributions Unchanged 7
8 LO 1, 2 Conceptual: tax results of distributions Unchanged 9
9 LO 3 Distribution of precontribution gain property Unchanged 10
10 LO 4 Disproportionate distributions Unchanged 12
11 LO 5 Section 736 income and property payments Unchanged 13
12 LO 1, 4, 6 Hot assets; sale of interest New
13 LO 6, 8 Ramifications of sale of a partnership interest Unchanged 14
14 LO 7 Incorporation of a partnership New
15 LO 7 Death of a partner New
16 LO 8 Section 754 election rationale New
17 LO 8 Section 754 election Unchanged 17
18 LO 9 Partnership terminations Unchanged 18
19 LO 1, 2, 3, Comprehensive issues New
4, 5, 6, 8,
10, 12
20 LO 11 Partner/owner liability for obligations of Unchanged 20
partnership, LLP or LLC
21 LO 1 Nonliquidating distribution; basis of assets Unchanged 21
distributed (limited); partner’s outside
basis
22 LO 1 Nonliquidating distribution; basis of assets New
distributed (limited); partner’s outside
basis
11-1
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2 2013 Corporations Volume/Solutions Manual
Status: Q/P
*23 LO 1 Nonliquidating distributions; amount and New

nature of gain or loss; basis of assets
distributed; partner’s outside basis
*24 LO 8 Continuation of Problem 23; partnership New
adjustment to basis on distribution of
assets
*25 LO 1 Allocation of basis to multiple assets Unchanged 25
distributed
26 LO 1 Nonliquidating distribution; basis New
of assets distributed; partner’s
outside basis; communications
27 LO 1, 2 Effect of change in partner’s share of Unchanged 27
liabilities; nonliquidating versus
liquidating distributions
28 LO 1, 3, 4 Current distribution concepts Unchanged 28
31 LO 2, 3, 4, Liquidating distributions Unchanged 31
12
32 LO 2 Results of various liquidating distributions New
33 LO 2, 12 Proportionate liquidating distributions Unchanged 33
*34 LO 2 Proportionate liquidating distributions Unchanged 34
35 LO 2, 12 Proportionate liquidating distributions New
*36 LO 2 Proportionate distribution which liquidates Unchanged 36
partner’s interest; amount and nature of
gain or loss; basis of land parcels to
partner; effect of liquidating distribution
if land parcels were inventory to
partnership
*37 LO 2, 12 Same facts as Problem 36, except that cash Unchanged 37
and a desk are distributed; amount and
nature of gain or loss; basis to partner of
desk
38 LO 3 Distribution of precontribution gain Unchanged 38
property; gain or loss to contributing
partner; gain or loss to distributee partner;
effect on basis of distributed property;
effect on basis of contributing partner’s
interest in partnership
39 LO 3 Distribution to partner previously Unchanged 39
contributing precontribution gain partner;
gain or loss to distributee partner; effect on
basis of partnership interest; effect on basis
of partnership property
40 LO 3, 5 Distribution of marketable securities; § 736 Unchanged 40
issues
41 LO 5, 12 Classification and treatment of § 736 New
payments
Partnerships: Distributions, Transfer of Interests, and Terminations 11-3
Status: Q/P
*42 LO 6 Sale of partnership interest; amount and Unchanged 42

nature of gain or loss; basis of new
partner’s interest; election to adjust basis
of partnership property
*43 LO 5 Based on data in Problem 42; proportionate Unchanged 43
distribution which liquidates partner’s
entire interest; distribution consists of
cash, unrealized receivables, and a
§ 1231 asset
*44 LO 6, 8 Sale of interest with unrealized receivables Unchanged 44
present; amount and nature of gain or
loss; subsequent collection of unrealized
receivables when election to adjust basis
of partnership property was not in effect;
optional adjustments to basis of
partnership property
45 LO 6, 7, 9 General partner dies and brother becomes New
successor in interest; amount and nature
of gain or loss
46 LO 6, 7, 9 Same as Problem 45 except that partnership New
had more unrealized receivables present
47 LO 9 Termination of a partnership Unchanged 47
48 LO 10 Family partnership where capital is a Unchanged 48
material income-producing factor;
allocation of partnership profits between
parent and child; child under 19 years of age
*The solution to this problem is available on a transparency master.
Status: Q/P
Research Present in Prior
Problem Topic Edition Edition
1 Section 736 series of payments Unchanged 1

2 Allocation of step-up adjustment Unchanged 2
3 IRS examination of a partnership New
4 Internet activity Unchanged 4
CHECK FIGURES
21.a. $0. 33.c. $20,000 of § 1231 gain or capital gain.

21.b. $0. 33.d. No gain or loss.
21.c. Inventory $160,000; land $80,000; 33.e. No § 754 election.
partnership interest $60,000. 33.f. No.
22.a. $0. 34.a. $0.
22.b. $0. 34.b. $20,000 inventory; $70,000 land.
22.c. Account receivable $0; land $160,000; 34.c. $0.
partnership interest $0. 34.d. $50,000 land; $20,000 remaining
23.a. $17,000 gain and basis in partnership partnership interest basis.
interest $0; partnership $0 gain. 35.a. $35,000 loss.
23.b. Land $30,000 basis and basis in 35.b. $5,000.
partnership $10,000; partnership $0 35.c. None.
gain. 35.d. Distribute non-inventory/receivable
23.c. No gain or loss; land basis $20,000; also.
basis in partnership interest $0. 35.e. No loss; Paula’s basis is $35,000.
23.d. $0 gain; $30,000 basis in inventory; 36.a. $0.
$10,000 basis in partnership interest. 36.b. $22,000 parcel 1 and $36,000 parcel 2.
24.a. $17,000 step up. 36.c. Recognizes $18,000 capital loss; basis
24.b. No § 754 election. in inventory items of $20,000 each.
24.c. $10,000 step up. 37.a. $0.
24.d. No § 754 election. 37.b. $58,000.
25.a. No gain or loss. 37.c. $0. Use desk in business.
25.b. $6,000 in item 1 and $3,000 in item 2. 38.a. $9,000 gain; $49,000 basis.
26.a. $0. 38.b. $25,000 basis.
26.b. $0 gain. 38.c. $0 gain; $15,000 basis.
26.c. $40,000 basis in inventory. 38.d. $5,000 gain; equitable.
26.d. $0. 38.e. Yes. No gain to contributing partner.
26.e. Make § 754 election. 39.a. $40,000 gain.
27.a. Inventory basis $10,000; basis in 39.b. $70,000 basis in interest.
partnership interest $20,000. 39.c. $30,000 basis in property.
27.b. Recognized loss $20,000; Inventory 39.d. $60,000 partnership basis in property.
basis $10,000. 39.e. Yes. No gain to contributing partner.
28. Precontribution gain property and 40.a. Property payment under § 736(b).
disproportionate distribution. 40.b. $17,500 cash distribution.
29. Disproportionate distribution, 40.c. $12,500 capital gain.
precontribution gain, and marketable 40.d. $17,500 basis in security.
securities treated as cash. 41.a. $20,000 § 736(a), $40,000 § 736(b).
30. Proportionate distribution. 41.b. $20,000 ordinary income; $10,000
31. Design distribution so proportionate, capital gain.
with precontribution gain property 41.c. Partnership deducts $20,000
returned to contributor; watch guaranteed payment.
marketable securities to minimize gain. 41.d. Election under § 754.
32.a. $10,000 capital gain. 42.a. $100,000 realized.
32.b. No gain or loss; $30,000 basis. 42.b. $30,000 ordinary income.
32.c. No gain or loss; inventory $30,000; 42.c. $20,000 capital gain.
capital asset $30,000. 42.d. $100,000 basis.
32.d. $0 basis in accounts receivable; 43. $35,000 ordinary income; $15,000
$30,000 capital loss. capital gain.
33.a. None. 44.a. $80,000 ordinary income; $80,000
33.b. $20,000 in inventory and $40,000 in capital gain.
land.
44.b. $80,000 ordinary income. 47.a. No.

44.c. $0 from receivables; $10,000 possible 47.b. No.
§ 1231 gain from land sale. 47.c. Yes.
45.a. $105,000 gain (capital gain $65,000; 47.d. No.
ordinary income $40,000). 47.e. Yes.
45.b. No gain or loss. 47.f. No.
46.a. $108,000 ordinary income; $3,000 48.a. $90,000.
capital loss. 48.b. $30,000.
46.b. Successor treats collection as gross 48.c. “Kiddie tax” rules apply.
income under § 691.
DISCUSSION QUESTIONS
1. In a proportionate nonliquidating distribution of cash, Bell will not recognize a loss. A gain
will only be recognized to the extent the cash distributed exceeds Bell’s basis in the
partnership interest. Bell’s basis in the partnership interest is reduced (but not below zero) by
the amount of the distributed cash.
The appreciated land is deemed to be distributed after the cash distribution is taken into
account. The land distribution would not result in a gain or loss to Bell. Instead, Bell takes a
basis in the land equal to the lesser of ABC’s basis in the land or Bell’s remaining basis in the
partnership interest.
ABC would recognize no gain or loss on the distribution, but might have an adjustment under
§ 754 if Bell recognizes gain and/or takes a basis in the land that differs from the partnership’s
basis.
Examples 9, 40 and 42
2. A partner’s basis in property received from a partnership is generally the same as the basis the
partnership held in the property (carryover basis). However, if the partner’s basis in the
partnership interest is less than the partnership’s basis in the asset, the lower basis-in-interest
is assigned to the property (substituted basis).
Each category of assets (in the order inventory, then land) is assigned a basis equal to the
lesser of the partnership’s basis in the asset or the partner’s remaining outside basis in the
partnership interest.
Examples 8 and 9
3. A proportionate nonliquidating distribution of cash from a partnership results in a taxable
capital gain to the partner only to the extent the distribution exceeds the partner’s basis in the
partnership interest. If the distribution does not exceed the partner’s basis, no gain or income
is recognized. The partner’s basis is reduced (but not below zero) by the amount of cash
received.
A distribution of cash from a subchapter C corporation is treated as a dividend to the extent it
is made from the corporation’s current or accumulated earnings and profits. A dividend is
treated as ordinary income to the shareholder (although a favorable tax rate may be available
for “qualified dividends”).
A cash distribution to a shareholder that is not from current or accumulated earnings and
profits is treated similarly to a proportionate nonliquidating distribution from a partnership:
the amount first reduces the shareholder’s basis in the stock; then any excess results in a
capital gain.
Example 9 and Chapter 5
4. As with a nonliquidating distribution, in a proportionate liquidating distribution, the property
is distributed in the following order: cash, unrealized receivables and inventory, and other
assets. Gain is generally only recognized by the partner if the cash received exceeds the
partner’s basis in the partnership interest. (Exceptions might require gain recognition on a
distribution of marketable securities or in situations involving precontribution gain property.)
Loss is recognized only if 1) the distribution consists only of items in the first two tiers (cash,
then unrealized receivables and inventory), and 2) the partnership’s basis in the distributed
assets is less than the partner’s basis in the partnership interest before the distribution.
Examples 12, 14, and 15
5. Unlike a proportionate nonliquidating distribution, in a proportionate liquidating distribution,
the partner’s entire basis in the partnership interest is generally allocated among all the assets
distributed. Assets are distributed in three tiers – cash, unrealized receivables and inventory,
then land. Each tier is assigned a basis equal to the lesser of the partnership’s basis in the asset
or the partner’s remaining outside basis in the partnership interest.
If the partner’s basis is not fully assigned, and if no third tier assets are distributed, the partner
can recognize a loss. If the partnership’s basis in assets in a given tier exceeds the partner’s
remaining basis in the partnership interest, the partner steps down the basis in that tier’s assets
to absorb the partner’s remaining partnership basis.
Concept Summary 11.2
6. In a proportionate liquidating distribution in which the partnership also liquidates, the
partnership recognizes no gain or loss. This contrasts with the treatment for corporate
distributions of appreciated property, where the corporation recognizes (and pays tax on) the
built-in gain. Concept Summary 11.2 and Chapter 6
7. The following issues must be addressed:
• Is this a current or a liquidating distribution? No loss can be recognized on a current
distribution. In addition, current vs. liquidating status may impact Liz’s basis in the assets
she receives. pp. 11-4 to 11-11
• Is the cash distribution greater than Liz’s basis in the partnership interest? If so, Liz will
recognize gain on the distribution. pp. 11-4, 11-5, 11-8, and 11-9
• Is the distribution disproportionate with respect to the inventory? If so, Liz or the
partnership may be required to recognize ordinary income on the distribution. pp. 11-14
and 11-15
• What is Liz’s basis in the land and inventory she receives in the distribution? If this is a
liquidating distribution, the assets are allocated a substituted basis equal to Liz’s basis in
her partnership interest. If this is a current distribution, the assets are allocated the lesser
of (1) a carryover basis or (2) a substituted basis. In either case, ordering rules must be
followed in determining Liz’s basis. pp. 11-6 to 11-11
8. The partnership distribution rules reflect the aggregate theory of taxation. With respect to
property ownership, the partner can be seen as an extension of the partnership. Ownership of
property by the partner generally produces the same result as ownership by the partnership
(and vice versa). The result is a carryover basis in distributed property with a preservation of
the character of distributed property.
The distribution rules operate with the goal of deferring tax on the distribution, while
preserving the ordinary income potential. No gain or loss is recognized if an adjustment can
be made to the basis of the distributed property, without reducing the amount of ordinary
income the partner will eventually recognize. So, gain is recognized if cash distributions
exceed basis, because there is no asset for which the basis can be reduced. The basis of hot
assets can be decreased, but not increased, in a distribution because the inherent ordinary
income cannot be decreased. Similarly, loss can be recognized if only cash and “hot” assets
are received in a liquidating distribution, because the basis in these types of assets cannot be
increased to absorb the partner’s remaining basis. p. 11-4
9. If appreciated property is contributed to the partnership and later distributed to another

partner, the distribution of that property may trigger gain recognition to the contributing
partner. Gain is recognized if the contributed property is distributed to another partner within
seven years following the time the property is contributed to the partnership. The contributing
partner’s basis in the partnership interest is increased by the gain recognized. Similarly, the
distributee partner’s basis in the property is increased by the gain recognized by the
contributing partner. p. 11-13 and Example 18
10. A disproportionate distribution is any distribution that changes a partner’s interest in certain
of the partnership’s ordinary income-producing assets. For example, if a partnership
contributes cash to one partner and substantially appreciated inventory to another partner,
both partners’ shares of the partnership’s ordinary income-producing property are altered.
These rules are based on the aggregate theory of partnership taxation, under which each
partner is deemed to own a proportionate share of partnership assets and to be responsible for
reporting gain or loss on their eventual dispositions. pp. 11-14, 11-15, and Example 21
11. Section 736(a) payments are treated as a distribution of income if they are determined by
reference to partnership income or as guaranteed payments if they are not. Section 736(a)
payments are either deductible by the partnership (guaranteed payment) or result in a
reduction of partnership income allocated to the continuing partners (distributive share).
Guaranteed payments are taxed as ordinary income to the partner. Distributive shares are
taxed according to the character of the income allocated to the partner.
Liquidating cash payments paid for an interest in partnership property under § 736(b) are
considered a return of capital to the extent of a partner’s basis in his or her partnership
interest. Gain is recognized to the extent of any excess received over the partner’s basis and is
considered a gain from the sale of a capital asset unless the disproportionate distribution rules
of § 751 apply.
Examples 22 to 27 and Concept Summary 11.3
12. Hot assets are assets owned by the partnership that, if sold or otherwise liquidated, would
produce ordinary income at the partnership level. There are two main categories of hot assets:
unrealized receivables and inventory. Unrealized receivables include any rights (contractual
or otherwise) to receive payments (1) from the sale of partnership property (other than a
capital asset) held for sale to customers or (2) from the rendering of services that have not
previously been included in income under the partnership’s method of accounting. The most
common example of an unrealized receivable is a trade account receivable of a cash basis
taxpayer.
Inventory items, as defined in § 751(d)(2), include virtually all partnership property except
money, capital assets, and § 1231 property. Reg. § 1.751-1(d)(2)(B) defines inventory items
as any partnership property which, on sale or exchange, would be considered property other
than a capital or § 1231 asset. This includes “stock in trade” or property held for sale to
customers in the ordinary course of business, as well as any other property which is not a
capital asset or a § 1231 asset. The definition is broad enough to include all items considered
to be unrealized receivables.
If a partnership has hot assets at the time of sale or exchange of a partnership interest, the
selling partner’s resulting gain or loss is allocated between capital gain (or loss) and ordinary
income (or deductions).
pp. 11-6, 11-23, 11-24, and Example 31
13. Jody must determine her gain or loss on the sale of the partnership interest. If the partnership
owns “hot assets,” she must recognize ordinary income or loss to the extent of her
proportionate share of the built-in appreciation or depreciation on these assets. Her remaining
gain or loss is adjusted by the ordinary income or loss recognized.
If the partnership’s assets are substantially appreciated, Bill may wish to ask the partnership to
make a § 754 election so he can be allocated a step-up in basis. If the partnership has a
substantial built-in loss (assets are depreciated by more than $250,000), the partnership may
be required to make a step-down adjustment with respect to Bill’s acquired interest.
If Jody sells more than a 50% interest in the partnership, or Bill is the sole remaining member
of a two-owner partnership, the entity will terminate on the date the purchase is finalized. This
may result in a loss of a favorable tax year or accounting method by the partnership.
pp. 11-21 to 11-25, 11-29, and 11-30
14. A partnership can incorporate in one of three ways. First, each partner’s interest can be
transferred in exchange for corporate stock under § 351. The partnership is liquidated, with
the new corporation owning partnership assets.
Second, the partnership could transfer its assets to the corporation in exchange for corporate
stock. The stock would be distributed to the partners in a liquidating distribution.
Third, the partnership can distribute its assets to the partners in a liquidating distribution. The
partners would then contribute partnership assets to the corporation in an exchange under
§ 351.
Generally, none of these methods will be a taxable event. However, the order in which the
transactions are deemed to occur could result in differences in either the basis of the assets
involved or the basis of a partner’s ownership interest in the corporation.
p. 11-27
15. If a partner dies, the partnership closes its books with respect to that partner. The partner’s
share of pre-death income is allocated to the deceased partner and is reported on his or her
final tax return. Post-death income is allocated to the estate or successor in interest. The basis
to the successor in interest is determined according to the treatment of the partnership interest
in the decedent’s estate return. pp. 11-27
16. A partner might want the partnership to make a § 754 election if the partner purchased the
interest and the basis in the partnership’s assets is substantially less than the amount paid.
The resulting “step up” in asset basis could result in depreciation or other deductions to the
partner.
Also, in a situation where a distibution to a partner (such as liquidation of a partner’s interest
under § 736) results in recognition of gain or a decrease in basis to the distributee partner, a
§ 754 adjustment results in basis increase to the remaining partners.
From the partnership’s standpoint, if there are several partners in the partnership and transfers
of partnership interests (or certain types of distributions) are common, an election under § 754
could be troublesome for the partnership. Once the election is made, it can only be revoked
with the permission of the IRS, regardless of the number of adjustments under § 754 that must
be made.
Examples 39 and 40
17. The partnership must make the optional adjustment election by attaching a statement to its
timely filed tax return for the taxable year in which the step-up transaction occurs. A partner
cannot make the election, even if the partner is the only taxpayer affected by the election. All
transactions in that taxable year and all future taxable years are subject to the election. The
partnership can revoke the election but only with IRS permission. pp. 11-28 and 11-29
18. A partnership is terminated when no part of any business, financial operation, or venture of
the partnership continues to be carried on by any of its partners. This can occur when an
existing partnership incorporates; when one party purchases the interest of the other party in a
two-party partnership; when one party in a two-party partnership is liquidated from the
partnership under § 736; or if the partnership simply liquidates and distributes all its assets to
its partners. A partnership also terminates if, within a 12-month period, there is a sale or
exchange of 50% or more of the total interest in partnership capital and profits. A “technical”
termination occurs when the business, financial operation, or venture continues in a new
partnership after the old partnership terminates because of the 50%, 12-month rule. pp. 11-32
and 11-33
19. a. True. In general, a capital gain is recognized on a proportionate nonliquidating
distribution of cash in excess of the partner’s basis in the partnership interest.
Example 5
b. False. Loss is not recognized on a liquidating distribution if assets other than cash,
unrealized receivables, and inventory are distributed. Example 9
c. True. The cash distribution reduces the partner’s basis in the partnership interest to $0,
and the remaining assets will be required to take a $0 basis. Example 12
d. True. If a precontribution gain property is distributed to another partner, the
contributing partner recognizes any previously unrecognized precontribution gain,
provided the distribution is within seven years of the original contribution. p. 11-13
e. True. A disproportionate distribution changes the partners’ ownership interest in
ordinary-income-producing property. The ordinary income must be recognized by the
partner or partnership whose interest in these assets is reduced. pp. 11-14 and 11-15
f. True. A payment for goodwill that is provided for in the partnership agreement is
treated as a property payment under § 736(b) whether the partner is a general or
limited partner and whether or not capital is a material income-producing factor.
p. 11-17
g. True. In general, the parties have some discretion in deciding whether an amount is an
income or property payment, but specific rules apply to certain types of payments.
pp. 11-16 and 11-17
h. False. The partner will recognize ordinary income to the extent of any ordinary
income inherent in the underlying assets of the partnership. Example 33
i. True. The partnership (not the distributee partner) would make an election under
§ 754. pp. 11-30 and 11-31
j. False. A partnership might make an election under § 754 if a new partner paid more
for a partnership interest than the partner’s share of the underlying basis in the
partnership assets. p. 11-29
k. True. A family member cannot be a partner in a family-owned service-providing

partnership unless services are provided to the partnership. pp. 11-33 and 11-34
l. False. Even though the partner might receive the same amount of cash in a sale or a
redemption of the partnership interest, the tax results could differ substantially.
pp. 11-37 to 11-39
20. The following matrix can be used in answering this question.
Contractual Liability Malpractice Liability

General Partner in a Unlimited—trade creditors Unlimited—malpractice
General Partnership can collect amounts claims can be satisfied
from any assets of the from any assets of the
general partner general partner
General Partner in a Same as general partnership Same as general partnership
Limited Partnership
Limited Partner in a Personal assets of the limited partner are not subject to
Limited Partnership creditor claims, whether arising from a contractual
obligation or a malpractice action
General Partner in an LLP Unlimited in many states— Malpractice claims can only
(There are no limited trade creditors can collect be satisfied from personal
partners in an LLP.) amounts from any assets assets of the general
of the general partner. partner if that partner or a
Some states, however, party the partner
limit an LLP partner’s supervises committed the
contractual liability to malpractice action
amounts owed by the
partner to the LLP.
Member of a nonpro- Limited to amounts owed by Malpractice claims against
fessional LLC the member to the LLC the entity cannot be
satisfied by member
assets
pp. 11-34 to 11-36 and Chapter 10
PROBLEMS
21. a. The partnership recognizes no gain or loss as a result of the distribution due to
§ 731(b).
b. Because this is a proportionate nonliquidating distribution, Greg would only recognize
gain if the cash received exceeded his outside basis. He would only recognize loss
under limited conditions, and only if his interest in the partnership terminated.
Therefore, he has no recognized gain or loss.
c. Greg takes a basis in the inventory equal to the partnership’s basis in the inventory, or
$160,000. His $360,000 basis in the partnership is reduced first by the $60,000 cash
distribution, then by the $160,000 inventory distribution. He takes a basis in the land
equal to the partnership’s basis in the land, or $80,000. The land distribution reduces
his basis in the partnership interest to $60,000.
Example 9
22. a. A partnership recognizes no gain or loss on a distribution that does not alter the
partner’s proportionate ownership of hot assets.
b. Melanie recognizes no gain or loss on the distribution. Gain is recognized on a

nonliquidating distribution if the amount of cash or certain marketable securities
received exceeds the partner’s outside basis immediately before the distribution.
c. The cash is deemed distributed first and reduces Melanie’s outside basis to $160,000.
The account receivable is distributed next, and takes a substituted and carryover basis
of $0. The land is distributed last and takes a substituted basis of $160,000. The
receivable distribution does not change Melanie’s outside basis. The value she
received was $320,000 (compared to her basis of $200,000), but she recognizes no
gain or loss because of the basis allocation and ordering rules.
Examples 8 and 9
23. a. Kim recognizes a $17,000 gain on the distribution. Her outside basis for her
partnership interest is reduced to $0. The partnership does not recognize any gain or
loss on the transaction.
b. The $40,000 cash is deemed distributed first and reduces Kourtni’s’s outside basis to
$40,000. The land takes a $30,000 carryover basis to Kourtni, and her outside basis for
her partnership interest is reduced to $10,000. The partnership recognizes no gain or
loss on the transaction.
c. Kourtni recognizes no gain or loss on the cash distribution, the land takes a substituted
basis to Kourtni of $20,000, and her outside basis for the partnership interest is
reduced to $0.
d. The cash is deemed distributed first and reduces Klois’s basis to $40,000. The
inventory is distributed next, but because this is a nonliquidating distribution, Klois
cannot claim a loss. The inventory takes a carryover basis of $30,000 and Klois’s basis
is reduced to $10,000. The partnership recognizes no gain or loss on the distribution.
Examples 3 to 9
24. In some of these situations, the partnership making the distribution may wish to make an
election under § 754 to adjust the basis of partnership assets. If a § 754 election is made as a
result of a distribution, the basis increase is allocated to partnership assets, and all the partners
share in the increase and any resulting deductions.
a. If a § 754 election is made, the partnership would increase its basis in remaining
partnership assets by $17,000 ($17,000 gain recognized by Kim).
b. A § 754 election would not be made in this case because the land’s basis carried over
to Kourtni in the distribution.
c. If a § 754 election is made, the partnership would increase its basis in partnership
assets by $10,000 (the $10,000 decrease in the land basis) to reflect the reduction of
the asset’s basis in the hands of the partner.
d. No § 754 election is warranted, as no gain or loss was recognized, and there is no
change in the basis of assets distributed to the partner.
pp. 11-30 and 11-31
25. a. Mark does not recognize a gain or loss on the distribution, because this is a
nonliquidating distribution. Gains are only recognized in a nonliquidating distribution
if distributed cash exceeds the partner’s basis in the partnership, which did not happen
in this case. Losses are not recognized in nonliquidating distributions.
b. Mark’s basis in the two inventory items is limited to the basis in his partnership
interest, less the amount of cash received, or $9,000. Because the partnership’s basis in
the two inventory items ($20,000) exceeds the amount Mark can allocate to these
assets, his basis in each item is determined in three steps as follows:
1. The inventory items both are initially allocated a basis equal to the
partnership’s basis in the assets, or $10,000 each.
2. Because the second inventory item is depreciated in value, Mark’s basis is

reduced to the amount of its fair market value, or $5,000. The first inventory
item is appreciated, so its basis is not further reduced in this step.
3. Mark now has inventory with bases totaling $15,000 and a capital account that
can absorb $9,000 of basis. Therefore, he must reduce the bases in the
inventory items an additional $6,000. This reduction is applied proportionately
to the two inventory items, based on their respective bases after Step 2:
$6,000  $10,000
$15,000 = $4,000
$5,000 = $2,000
$6,000  $15,000
The basis in the first inventory item is reduced to $6,000 ($10,000 – $4,000) and the
basis in the second inventory item is reduced to $3,000 ($5,000 – $2,000).
Example 10
26. Hoffman, Raabe, Smith, and Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
January 16, 2013
Ms. Cari Hawkins
Hawkins-Henry Partnership
1622 East Henry Street
St. Paul, MN 55118
Dear Cari:
You have asked our advice regarding the effect of 2012 operating results and distributions
from the Hawkins-Henry Partnership on your personal 2012 tax situation.
Facts: The partnership reported no income or loss for the year. You received a distribution in
December of $120,000 cash, and inventory which had a basis of $50,000 to the partnership
and a fair market value of $60,000. Your basis in the partnership interest on January 1, 2012,
was $160,000.
Issues:
a. Does the partnership recognize gain or loss in 2012?
b. How much gain or loss must you report for the current year?
c. What is your basis in the inventory received from the partnership?
d. What is your basis in your partnership interest at the end of the year?
e. Are there other considerations you or the partnership should address?
Conclusion and Analysis:
a. The partnership will recognize no gain or loss on either the cash or inventory
distribution.
b. You will recognize no gain or loss on the cash distribution. This distribution did not
exceed your $160,000 basis in your partnership interest, so there is no taxable gain.
c. Your basis in the inventory you received is $40,000. The basis in inventory distributed
from a partnership is the lesser of the partnership’s basis in the property before the
distribution ($50,000) or your basis in the partnership interest after considering the
cash distributions ($40,000).
d. Your basis in the partnership interest is $0 at the end of the year. The cash
distributions reduced your basis to $40,000 ($160,000 – $120,000). The inventory
takes a substituted basis of $40,000 and reduces your basis to $0.
e. Because your basis in the inventory is $10,000 less than the partnership’s basis, the
partnership may wish to elect, under § 754, to increase the basis of its remaining assets
by $10,000. Also (not discussed in the text), you will realize ordinary income on later
sale of the inventory unless you convert it to use as a capital asset and sell it more than
5 years after the distribution. (See § 735.)
If you have any questions, please do not hesitate to call us.
Sincerely,
Amy Grey
Accountant
Examples 8, 9, 40, and Chapter 10
27. a. Monica is treated as receiving cash distributions of $70,000 ($20,000 cash plus
$50,000 relief of liabilities). The distributions reduce Monica’s basis to $30,000. The
inventory takes a carryover basis to Monica of $10,000, and reduces her basis in MIP
to $20,000.
b. If this is a proportionate liquidating distribution, Monica recognizes a loss of $20,000,

and her basis in the inventory will be $10,000. The inventory cannot be “stepped up”
to absorb the $30,000 of basis remaining after the distribution. Because Monica has
received only cash and inventory, she may claim the loss.
28. Section 751(b) must be considered when there is a disproportionate distribution of “hot
assets.” In this case, both Tyler’s and Anita’s share of unrealized receivables is reduced from
a value of $50,000 ($200,000 × 25%) before the distribution to $25,000 ($100,000 × 25%)
following the distribution. This will result in ordinary income recognition to Tyler and Anita.
In addition, a distribution of precontribution gain property less than seven years after it was
contributed can result in a taxable gain to the contributing partner if the distribution is to a
partner other than the contributing partner. In this case, Vincent would be taxed on built-in
gain when the land is distributed to Tyler and Anita.
29. The disproportionate distribution of accounts receivable to Anita will result in ordinary
income to Tyler and Vincent, as described in Problem 28.
Gain will arise on a current distribution of cash that exceeds the partner’s outside basis.
However, the distribution of cash does not exceed Vincent’s basis. Per the last paragraph,
there is a disproportionate distribution of accounts receivable, so Vincent will recognize
ordinary income.
A distribution of marketable securities is treated as a distribution of cash, but the amount of
the distribution treated as cash is the fair value of the security reduced by the partner’s share
of appreciation which attaches to these securities. In this case, the partnership has realized
substantial appreciation, so after the reduction, the distribution is not likely to result in an
amount in excess of Tyler’s $75,000 basis.
In addition, some of the securities are deemed a payment in exchange for Vincent’s share of
(distributed) unrealized receivables, so the result is ordinary income to Vincent.
30. This distribution is proportionate with respect to “hot assets,” so the receivables do not trigger
ordinary income recognition by any of the partners. For Tyler and Anita, the cash is
distributed first. Because the cash does not exceed their outside basis, no gain is recognized.
The receivables are distributed second and the partners take a carryover basis of $0 in the
receivables.
For Vincent, the receivables are deemed distributed first and take a carryover basis. The land
is distributed next. Because he is merely receiving a return of precontribution gain property he
contributed, he will not recognize any gain or loss. Note that there is no requirement for cash
and capital gain property distributions to be proportionate for each specific property.
Examples 5 and 9
31. If accounts receivable are distributed disproportionately to the partners, the nondistributee
partners will be required to recognize ordinary income currently, and the distributee partner
will be able to defer the ordinary income until such time as the receivables are collected.
Because Vincent contributed the appreciated land less than seven years ago, if any of the land
is distributed to any of the other partners, Vincent will be required to recognize part or all of
the $30,000 precontribution gain. The post contribution gain will be deferred until the land is
sold. If the land is distributed to Vincent, though, he will not be required to recognize gain
until he later sells the property. The Code does not require the gain to be reported merely
because a partner contributes a property and later receives it in a distribution.
The cash and marketable security distributions may result in capital gains to the partners if the
distribution exceeds a partner’s outside basis. The potential gain from the securities is
deferred to the extent it relates to appreciation earned by the partnership.
Examples 12, 16, 18, and 21
32. a. Landon recognizes a $10,000 capital gain.
b. No gain or loss is recognized by Mark. The $30,000 basis in the partnership interest
remaining after the reduction for the $20,000 cash is allocated to the capital asset.
c. Neil does not recognize any gain or loss as a result of the distribution. The inventory
has a basis to Neil of $30,000, and the capital asset is allocated the $30,000 basis of
Neil’s partnership interest remaining after the reduction for the cash and the amount
allocated to the inventory.
d. Oscar recognizes a $30,000 capital loss on the distribution. He received only cash and
unrealized receivables in the distribution, and his basis in the assets received ($10,000
basis in cash + $0 carryover basis in the account receivable) is less than his $40,000
basis in the partnership interest before the distribution.
Examples 12 and 14 and Concept Summary 11.2
33. a. None. Because the $30,000 cash received did not exceed Jesse’s basis in his
partnership interest, no gain is recognized. After reducing Jesse’s basis in his
partnership interest by the cash received, the inventory is distributed next and takes a
carryover basis of $20,000. Finally, the land is distributed and absorbs the remaining
$40,000 (basis of $90,000 – $30,000 cash – $20,000 inventory).
b. $20,000 and $40,000. See explanation in a. Although the partnership’s basis in the
distributed land was $50,000, Jesse cannot assign a basis greater than $40,000.
c. Jesse will recognize a gain of $20,000 which will be either a capital gain or a § 1231
gain, depending on Jesse’s use of the land.
d. Section 731(b) provides that no gain or loss is recognized to a partnership on a

distribution to a partner of property, including money. Because Jesse received a pro
rata distribution, no gain or loss is recognized by the partnership; however, the land
distributed to Jesse had a basis to the partnership of $50,000 and was limited to a basis
of $40,000 to Jesse. It appears that $10,000 of the land’s original basis has been lost!
e. Students might answer “make a § 754 election.” However, as the partnership is

liquidating, this is not viable. The “lost basis” likely arose because at some point in the
past, inside and outside bases were not in balance, and the partnership would have had
to step down the basis of its assets to achieve balance—which it wisely opted not to
do. By not making the § 754 election previously, the partnership deferred the
disappearance of basis to the last possible moment, liquidation of the partnership.
f. No. Jesse would have the same $20,000 basis for the inventory, $40,000 basis in the
land, and a remaining outside basis of $0 for the partnership interest.
Examples 9, 12, and Concept Summary 11.2

34. a. No gain or loss. The cash is distributed first, followed by the inventory. The land is
distributed last and absorbs Jesse’s remaining basis of $70,000 ($120,000 basis –
$30,000 cash – $20,000 inventory).
b. Jesse’s basis in the inventory is a carryover basis of $20,000. His basis in the land is
$70,000 (see calculation in a.).
c. The partnership has no gain or loss.
d. If this had been a nonliquidating distribution, Jesse’s basis in the land would have
been limited to the partnership’s $50,000 basis. Jesse would have a remaining basis in
the partnership interest of $20,000.
Examples 9, 12, and Concept Summary 11.2
35. a. $35,000 loss. Paula cannot allocate to the inventory more than $5,000. Her remaining
basis is $35,000 after the reduction for the $20,000 cash distribution and the $5,000 of
inventory. She recognizes a $35,000 capital loss on the liquidation, and the basis of the
inventory is $5,000.
b. $5,000 basis in inventory. See explanation in a. above.

c. None.
d. A non-inventory, non-unrealized receivable asset, such as a § 1231 asset, could be
distributed with the other property to absorb the remaining basis and possibly provide
an ordinary loss later.
e. Yes. No loss would be recognized, and Paula would have a $35,000 outside basis
remaining for the partnership interest.
§ 731(a)(2) and Examples 7, 14, and 15
36. a. No gain or loss. Instead, the $58,000 basis of Julie’s partnership interest remaining
after the reduction for the $50,000 cash received is allocated to the land parcels.
b. Julie’s remaining $58,000 basis in the partnership interest, after the distribution of
cash, is allocated to the two land parcels as described in Example 13.
1. The land parcels are both initially allocated a basis equal to the partnership’s
basis in the assets, or $20,000 each.
2. Because the second land parcel is appreciated in value, Julie’s basis is
increased to the amount of its fair market value, $30,000.
3. Julie now has land parcels with bases totaling $50,000 ($30,000 + $20,000)
and a capital account that must absorb $58,000 of basis. Therefore, she must
increase the bases in the parcels an additional $8,000. This increase is applied
to the two land parcels in proportion to the fair market values of the respective
properties.
$8,000  $10,000
$40,000 = $2,000
$8,000  $30,000
$40,000 = $6,000
The basis in the first property is increased, then, to $22,000 ($20,000 + $2,000) and
the basis in the second property is increased to $36,000 ($30,000 + $6,000).
c. If the land had been held as inventory, Julie could not increase its basis above the
partnership’s basis in the assets. Therefore, she would have allocated bases of $20,000
to each parcel, and she would have realized and recognized a capital loss of $18,000.
Examples 13 and 14
37. a. None. After reducing the basis of Julie’s partnership interest by the $50,000 cash
received, Julie allocates the remaining $58,000 of basis to the desk received in the
liquidating distribution. Under § 731(a)(2), loss is recognized only if the sum of cash
received plus the basis of any unrealized receivables or inventory distributed is less
than the adjusted basis of the partnership interest prior to the liquidating distribution,
and no other property is distributed.
b. $58,000. Example 15 and § 732(b)
c. If Julie’s child uses the desk for any period of time, it is converted to a personal-use
asset. None of the loss is recognized as it results from the sale or exchange of a
personal-use asset. Julie could have preserved the deductible loss in several ways.
First, Julie could have insisted that the partnership sell the desk and distribute $52,000
cash in liquidation of her interest. If this were done, Julie would recognize a capital
loss of $56,000 (basis of $108,000 – $52,000 cash) as a result of the liquidation.
Another alternative would be for Julie to place the desk in use in another trade or
business. The basis of the desk is $58,000 for depreciation purposes. Julie would be
converting a $58,000 capital loss into an ordinary deduction. Although a depreciable
desk with a $58,000 basis probably will arouse the interest of any examining IRS
agent, there is no apparent limitation or restriction on such tax planning.
pp. 11-10, 11-11, and Example 15
38. a. Under § 704(c)(1)(B), Adrianna recognizes gain on the distribution to Isabel in the
amount of the original precontribution gain on the contributed property, $9,000. Her
basis in her partnership interest is increased accordingly, to $49,000.
b. Isabel’s basis in the property received equals the predistribution basis in the property
received, $16,000, plus the gain recognized by Adrianna, $9,000, for a total basis in
the property of $25,000.
c. Isabel recognizes no gain or loss on the distribution of the property. Her basis in her
partnership interest is reduced by her basis in the distributed property of $25,000, to
$15,000.
d. If Isabel sold the land immediately after the distribution, she would recognize a $5,000
gain: $30,000 (fair market value) – $25,000 (basis in property). The overall result is
equitable: Isabel pays tax on post contribution gain, and Adrianna pays tax on
precontribution gain.
e. If the precontribution gain property had been contributed to the partnership more than
seven years prior to the distribution of the property to Isabel, Adrianna would not be
required to recognize gain on the distribution, and Isabel’s basis in the property would
be $16,000.
Example 18
39. a. $40,000. Under § 737(a), Derek recognizes gain of the lesser of (1) the excess of the
value of the property over his basis in his partnership interest (as of the date of the
distribution), or (2) precontribution gain on the property contributed by Derek in 2009.
The excess value of the distributed property is $40,000 ($100,000 value – $60,000
basis). The precontribution gain on the property contributed in 2009 was $50,000.
Therefore, Derek will recognize gain of the lesser of these amounts, or $40,000.
b. Derek’s $60,000 basis in his partnership interest is increased by the $40,000 gain
recognized. His basis is then reduced by the partnership’s $30,000 basis in the
distributed property. His basis after the distribution is $70,000.
c. Under the nonliquidating distribution rules, Derek will take a carryover basis of
$30,000 in the property distributed by the partnership.
d. The partnership increases its basis in the precontribution gain property by the amount
of gain Derek recognizes, $40,000. The partnership’s basis, in this situation, is
increased to $60,000. This is less than the $70,000 value at the contribution date
because $10,000 of precontribution gain still exists.
e. If the precontribution gain property were contributed to the partnership more than
seven years before the property was distributed to Derek, § 737 would not apply to the
distribution. Derek would recognize no gain and would have no increase in his basis in
his partnership interest. The partnership would have no increase in its basis in
precontribution gain property.
Examples 19 and 20
40. a. The security is treated as a property payment under § 736(b). The fact that Fred is a
general partner does not matter in this case, because capital is a material income-
producing factor for the partnership.
b. The normal distribution rules for a § 736(b) payment are used to determine whether
the partner must recognize gain or loss and to calculate the partner’s basis in property
received in the distribution. The security is treated as a $20,000 distribution of cash.
However, this amount is reduced by Fred’s share of the appreciation in the security
prior to the distribution, or $2,500 [25% × $20,000 – $10,000)]. The “cash”
distribution, then, is $17,500 ($20,000 – $2,500).
c. The $17,500 cash exceeds Fred’s basis by $12,500, so Fred must report a $12,500
capital gain.
d. Fred’s basis in the security is first determined under the normal distribution rules as a
substituted basis of $5,000 (the lesser of Fred’s outside basis or the partnership’s
inside basis). The $12,500 capital gain is added to this basis, for a total basis in the
security of $17,500.
pp. 11-12, 11-13, 11-16 to 11-20, and Examples 16 and 17
41. a. The $20,000 payment for Damon’s share of the unrealized receivables is treated as an
income payment under § 736(a), because Damon is a general partner in a service-
providing partnership. The remaining $40,000 cash payment is treated as a § 736(b)
property payment because no portion of the payment represents partnership goodwill.
b. The $20,000 cash payment for Damon’s share of receivables is taxed to Damon as
ordinary income. The remaining $40,000 cash payment is treated as a return of capital
and is offset by his $30,000 basis in his interest, for a net $10,000 capital gain.
c. The partnership may deduct the $20,000 cash payment for Damon’s share of
receivables because it is classified as a guaranteed payment (not determined by
reference to partnership profits). The partnership cannot deduct the remaining $40,000
cash payment.
d. The partnership may wish to make an election under § 754 to step up the inside basis
of its assets to reflect the $10,000 gain recognized by Damon.
Examples 22 to 24, 26, and Concept Summary 11.3
42. a. Cash received $ 90,000

Add: Liabilities assumed by Dale 10,000
Total amount realized $100,000
b. $30,000 (Barry’s one-third share of unrealized accounts receivable.)
c. $20,000
Total realized $100,000
Less: Basis of Barry’s interest:
Capital $40,000
Debt share 10,000 (50,000)
Gain to Barry $ 50,000
Less: Ordinary income (30,000)
Capital gain $ 20,000
d. Cash paid $ 90,000
Add: Liabilities assumed by Dale 10,000
Dale’s basis in partnership interest acquired $100,000
Example 28 and Concept Summary 11.4
43. $50,000. The gain would be treated as $35,000 ordinary income and $15,000 capital gain.
Cash received $ 90,000

Add: Liabilities assumed by remaining partners 10,000
Total amount realized $100,000
Less: Basis of Barry’s interest
Capital $40,000
Debt share 10,000 (50,000)
Total gain recognized $ 50,000
Barry is treated under § 736(a) as having received an income payment of $30,000 for the
unrealized receivables, thereby creating ordinary income. (The $30,000 amount represents
Barry’s 1/3 portion of the partnership’s $90,000 unrealized receivables.) The $5,000 payment
for partnership goodwill ($90,000 payment – $85,000 stated value of assets) is not provided
for in the partnership agreement. Therefore, the partnership may deduct this amount as a
§ 736(a) payment and Barry will report the amount as additional ordinary income. The
remaining portion of the liquidating distribution, $65,000 ($100,000 – $30,000 accounts
receivable – $5,000 goodwill), is treated under § 736(b) as being in exchange for Barry’s
interest in the remaining partnership property. The recognized gain on this part of the
distribution is $15,000 (i.e., $65,000 – $50,000) and is treated as a capital gain.

44. a. $80,000 of ordinary income and $80,000 of capital gain. Diana’s total gain is
$160,000 ($250,000 selling price less her interest basis of $90,000). However, she has
a one-third profits interest in the unrealized receivable of $80,000 ($240,000 × 1/3)
which must be taxed as ordinary income. The remainder of the gain is a capital gain
from the sale of a partnership interest. Example 33
b. $80,000 ordinary income. As a § 754 election was not made or in effect, Kenneth
stands in the same position as Diana relative to the partnership and must recognize the
full $80,000 of ordinary income when the receivables are collected ($240,000 × 1/3).
pp. 11-29, 11-30, and Example 37
c. $0 from the receivables and $10,000 of possible § 1231 gain from the land sale.
Because a § 754 election was made, Kenneth is entitled to a special adjustment under
§ 743(b) of $160,000, based on the difference between his $250,000 interest basis in
the partnership and his share of the partnership’s basis in its assets of $90,000. Of this
adjustment, $80,000 is allocated to the receivables and $80,000 to the land.
Reg. § 1.755-1(b)(2) and Example 39
45. a. June’s total gain is $105,000, consisting of a capital gain of $65,000 and ordinary
income of $40,000. In calculating the gain, June’s amount realized is $180,000 (the
sum of cash received and liabilities transferred). While the overall gain is $105,000
[($120,000 cash + $60,000 debt share) – $75,000 interest basis], $40,000 of this
amount relates to a § 751 asset (unrealized receivable) with a zero basis, which
generates ordinary income. Examples 32 and 33
b. The transfer of a partnership interest as a result of death is not considered a sale or

exchange. Thus, no gain or loss results. June’s share of the partnership’s taxable
income or loss would be allocated between June and her successor in interest (her
brother). p. 11-32
46. a. June’s share of unrealized receivables is $108,000 (30% of $360,000). Therefore, the
gain on the sale of June’s partnership interest is fragmented into $108,000 ordinary
income and $3,000 capital loss. Example 34
b. Even though § 751 assets are present, the death of a partner does not trigger income
recognition. However, the successor treats the collection of the unrealized receivables
as gross income under § 691. p. 11-32
47. a. No termination. A termination only occurs if Paige sells a 50% or more interest in
both the partnership capital and profits.
b. No termination. A termination does not occur because of the death of a partner. The
transfer of the interest to Ryan’s estate is not a sale or exchange within the meaning of
the termination provisions.
c. Termination. This is a sale of 50% of the interests in partnership capital and profits.
Also, by buying out Ryan’s interest, Rob now will operate a sole proprietorship.
d. No termination. A gift of a partnership interest is not normally considered to be a sale
or exchange for purposes of the termination provisions.
e. Termination. A technical termination occurs when 50% or more of partnership capital
and profits interests are sold within a 12-month period.
f. No termination. All the sales are counted for the 50%, 12-month rule. However,
because the first and last transactions occur more than one year apart, no 12-month
period exists during which sales are made of 50% or more of the interests in
partnership capital and profits.
pp. 11-32 and 11-33
48. a. $90,000 ($60,000 as compensation, plus 50% of the remaining partnership income).
b. $30,000 (50% of the partnership income, after payment to Fred of $60,000 for services
performed). Reasonable income is allocated to Fred as compensation first; then, any
remaining partnership income is allocated in accordance with the profit and loss
sharing agreement.
c. Because the child is under age 19 and has at least one living parent, the “kiddie tax”
rules apply. The first portion of partnership income is offset by the child’s standard
deduction, the next portion is taxed at the child’s marginal rate (which is the lowest
rate available), and the remainder is taxed at the parent’s rate.
§§ 1(g) and 63(c)(5), pp. 11-33, 11-34, and Examples 46 and 47
Proposed solutions to the Research Problems and the Tax Return Problems are found at the
Instructor Companion Site for the textbook (www.cengage.com/taxation/swft). Previously, these
items were a part of the Instructor’s Guide for the text, but now they are available online at this site as
free-standing documents, as well as on the Instructor’s Resource CD.

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South Western Federal Taxation 2013

Corporations Partnerships Estates and

PARTNERSHIPS: DISTRIBUTIONS, TRANSFER

SOLUTIONS TO PROBLEM MATERIALS

1 LO 1, 8 Proportionate nonliquidating distributions: New

*23 LO 1 Nonliquidating distributions; amount and New

*42 LO 6 Sale of partnership interest; amount and Unchanged 42

*The solution to this problem is available on a transparency master.

1 Section 736 series of payments Unchanged 1

21.a. $0. 33.c. $20,000 of § 1231 gain or capital gain.

44.b. $80,000 ordinary income. 47.a. No.

9. If appreciated property is contributed to the partnership and later distributed to another

Examples 22 to 27 and Concept Summary 11.3

k. True. A family member cannot be a partner in a family-owned service-providing

Contractual Liability Malpractice Liability

b. Melanie recognizes no gain or loss on the distribution. Gain is recognized on a

2. Because the second inventory item is depreciated in value, Mark’s basis is

b. If this is a proportionate liquidating distribution, Monica recognizes a loss of $20,000,

d. Section 731(b) provides that no gain or loss is recognized to a partnership on a

e. Students might answer “make a § 754 election.” However, as the partnership is

Examples 9, 12, and Concept Summary 11.2

c. The partnership has no gain or loss.

b. $5,000 basis in inventory. See explanation in a. above.

42. a. Cash received $ 90,000

Cash received $ 90,000

Examples 23, 24, and 26

b. The transfer of a partnership interest as a result of death is not considered a sale or

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