Chapter 21 Homework

Solutions
30. [LO 1] Jerry is a 30% partner in the JJM Partnership when he sells his entire interest to
Lucia for $56,000 cash. At the time of the sale, Jerrys basis in JJM is $32,000. JJM does
not have any debt or hot assets. What is Jerrys gain or loss on the sale of his interest?
Answer:
Jerry will determine his gain or loss as the difference between the amount realized on
the sale and his basis in the partnership interest.
Amount realized
$ 56,000
Less: Adjusted basis
(32,000)
Gain recognized on the sale
$24,000

31. [LO 1] Joy is a 30% partner in the JOM Partnership when she sells her entire interest to
Hope for $72,000 cash. At the time of the sale, Joys basis in JOM is $44,000 (which
includes her $6,000 share of JOM liabilities). JOM does not have any hot assets. What is
Joys gain or loss on the sale of her interest?
Answer:
Joy determines her gain or loss as follows:
Amount realized
Cash
$72,000
Debt relief
6,000
Less: Outside basis in JOM
Gain recognized on the sale

$78,000
(44,000)
$34,000

34. [LO 1] At the end of last year, Lisa, a 35% partner in the five-person LAMEC
partnership, has an outside basis of $60,000 including her $30,000 share of LAMEC debt.
On January 1 of the current year, Lisa sells her partnership interest to MaryLynn for a
cash payment of $45,000 and the assumption of her share of LAMECs debt.
a. What is the amount and character of Lisas recognized gain or loss on the sale?
b. If LAMEC has $100,000 of unrealized receivables as of the sale date, what is the
amount and character of Lisas recognized gain or loss?
c. What is MaryLynns basis in the partnership interest?
Answer:

a.

b.

Amount realized:
Cash
Debt relief
Less: basis in partnership interest
Lisas recognized capital gain

$75,000
(60,000)
$ 15,000

Lisas share of unrealized receivables is $35,000 ($100,000 unrealized receivables

35% interest). Lisa will recognize $35,000 of ordinary income and a $20,000 capital
loss determined as:
Total gain
Less: Ordinary income
Lisas recognized capital loss

c.

$ 45,000
30,000

$ 15,000
(35,000)
$ (20,000)

MaryLynns basis in her partnership interest is $75,000 (cash of $45,000 plus her
$30,000 share of LAMECs debt).
46. [LO 4] The Taurin Partnership (calendar-year-end) has the following assets as of
December 31 of the current year:

Cash
Accounts receivable
Inventory
Totals

Tax Basis
$ 45,000
15,000
81,000
$ 141,000

FMV
$ 45,000
30,000
120,000
$ 195,000

On December 31, Taurin distributes $15,000 of cash, $10,000 (FMV) of accounts

receivable, and $40,000 (FMV) of inventory to Emma (a 1/3 partner) in termination of
her partnership interest. Emmas basis in her partnership interest immediately prior to the
distribution is $40,000.
a. What is the amount and character of Emmas recognized gain or loss on the
distribution?
b. What is Emmas basis in the distributed assets?
c. If Emmas basis before the distribution was $55,000 rather than $40,000, what is
Emmas recognized gain or loss and what is her basis in the distributed assets?
Answer:
a.

Emma does not recognize any gain or loss on the distribution.

b.

Because Taurin distributes only cash, accounts receivable, and inventory, and the
adjusted bases of the property distributed is greater than her basis in the
partnership, Emma will simply reduce the bases of the hot assets. Emma uses a
three step process to allocate her basis to the distributed property.

1. Emma assigns a basis of $15,000 (1/3 of $45,000) to the cash, $5,000 to the
accounts receivable (1/3 of 15,000) and $27,000 (1/3 of $81,000) to the inventory.
Since the sum ($47,000) exceeds her basis in Taurin, she has a required decrease
of $7,000 ($47,000 40,000).
2. Emma allocates the required decrease to the assets with unrealized depreciation.
Since there are no distributed assets with unrealized depreciation, Emma skips
this step.
3. Emma decreases the basis of the assets in proportion to their relative adjusted
bases.
Accounts receivable: Basis allocation = $7,000 ($5,000/$32,000) = $1,094
Inventory: Basis allocation = $7,000 ($27,000/$32,000) = $5,906
After completing the allocation Emmas basis in the distributed assets are:
Cash
$15,000
Accounts receivable ($5,000 - $1,094) 3,906
Inventory ($27,000 - $5,906)
21,094
c.

If Emmas basis in Taurin were $55,000 rather than $40,000, she recognizes a
capital loss on the distribution. Emma calculates her loss of $8,000 as the difference
between her basis in her partnership interest ($55,000) and the sum of the adjusted
bases of the distributed assets ($47,000).
Her basis in the distributed assets is equal to the partnerships basis in the assets.
Cash
Accounts receivable
Inventory

$15,000
5,000
27,000

The carryover bases allow Emma to retain the character of the inherent gains in the
accounts receivable and inventory she receives in the liquidating distribution.
47. [LO 4] Melissa, Nicole, and Ben are equal partners in the Opto partnership (calendar
year-end). Melissa decides she wants to exit the partnership and receives a proportionate
distribution to liquidate her partnership interest on January 1. The partnership has no
liabilities and holds the following assets as of January 1:

Cash
Accounts receivable
Stock investment
Land
Totals

Tax Basis
$ 18,000
-07,500
30,000
$ 55,500

FMV
$ 18,000
24,000
12,000
36,000
$ 90,000

Melissa receives one-third of each of the partnership assets. She has a basis in her
partnership interest of $25,000.

a. What is the amount and character of any recognized gain or loss to Melissa?
b. What is Melissas basis in the distributed assets?
c. What are the tax implications (amount and character of gain or loss and basis of assets)
to Melissa if her outside basis is $11,000 rather than $25,000?
d. What is the amount and character of any recognized gain or loss from the distribution
to Opto?
Answer:
a.

Melissa does not recognize any gain or loss on the distribution. Rather, she will
adjust the basis of the distributed assets.

b.

Melissa uses a three step process to determine her basis in the distributed property.
1. Melissa assigns a basis of $6,000 (1/3 of $18,000) to the cash, $-0- to the accounts
receivable, $2,500 (1/3 of $7,500) to the stock investment, and $10,000 (1/3 of
$30,000) to the land. The sum ($18,500) of the inside basis is less than her outside
basis so she will need to allocate the excess basis to the basis in the distributed
assets other than 751(a) property. Melissa has a remaining basis of $6,500 to
allocate ($25,000 - $18,500) among the distributed capital assets.
2. Melissa allocates the required increase to the capital assets with unrealized
appreciation to the extent of the appreciation. Melissa allocates $1,500 ($4,000
{1/3 x $12,000} - $2,500 {1/3 x $7,500}) to the stock investment and $2,000
($12,000 {1/3 x $36,000} - $10,000 {1/3 x $10,000}) to the land to bring the bases
of these assets to their fair market value. This leaves $3,000 remaining to be
allocated.
3. Melissa increases the basis of the capital assets in proportion to their relative fair
market values.
Stock investment: Basis allocation = $3,000 ($4,000/$16,000) = $750
Land: Basis allocation = $3,000 ($12,000/$16,000) = $2,250
After completing the allocation Melissas basis in the distributed assets are:
Cash
Accounts receivable
Stock investment ($2,500 + $1,500 + $750)
Land ($10,000 + $2,000 + $2,250)

c.

$6,000
-04,750
14,250

If Melissas basis in Opto were $11,000 rather than $25,000, she will need to
decrease the basis in the stock investment and land she receives in liquidation of her
partnership interest. She will calculate her basis in the distributed assets as follows:
1. First she assigns a carryover basis to the distributed assets.
Cash
Accounts receivable
Stock investment

$6,000
-02,500

Land

10,000

Since the sum of the adjusted bases of the distributed assets ($18,500) is greater
than her basis in Opto ($11,000), she has a required decrease of $7,500.
2. Melissa allocates her required decrease to the other property with unrealized
depreciation. Since none of the distributed assets have any unrealized
depreciation, Melissa skips this step.
3. In the final step, Melissa allocates the required decrease to the capital assets in
proportion to their adjusted bases.
Stock investment: Basis allocation = $7,500 ($2,500/$12,500) = $1,500
Land: Basis allocation = $7,500 ($10,000/$12,500) = $6,000
After completing the allocation Melissas basis in the distributed assets are:
Cash
Accounts receivable
Stock investment ($2,500 - $1,500)
Land ($10,000 - $6,000)
d.

$6,000
-01,000
4,000

Opto does not recognize any gain or loss on the liquidating distribution.