1.    

a.     Correct. J's capital account is reduced by her allocable share of partnership losses and expenses, whether or not she can deduct them.

b.     Incorrect. Even though J cannot deduct her share of the partnership's rental real estate loss, it still reduces her capital balance

c.     Incorrect. The ($800) share of partnership nondeductible expenses must be subtracted from J's capital balance.

d.     Incorrect. J's capital account is reduced by her allocable share of charitable contributions and nondeductible expenses.

2.    

a.     Incorrect. The adjustment to L's capital account is based on the value of the property distributed, rather than on the pre-distribution balance in that account.

b.     Correct. L's capital account must be reduced by the fair market value of the property distributed to her.

c.     Incorrect. This is the tax basis of the distributed property.

d.     Incorrect. This is the book gain that is split 50/50 and added to capital accounts. In a nonliquidating distribution, L's capital account must be reduced by the fair market value of the property distributed to her.

3.    

a.     Incorrect. Claire's capital account must be adjusted to reflect her share of partnership income and distributions received since inception of the partnership.

b.     Correct. Under Section 704(b), each partner is entitled to receive the amount in his or her book capital account upon liquidation of the partnership or of their interest therein.

c.     Incorrect. This figure omits Claire's original contribution to partnership capital.

d.     Incorrect. Claire will be entitled to receive the balance in her book capital account upon liquidation of the partnership. Her book capital account must be reduced by the $30,000 of distributions made to Claire.

4.    

a.     Incorrect. Wendy's share of the partnership loss does not reduce the balance in her capital account to zero.

b.     Incorrect. Wendy's share of the partnership's loss is only $90,000 (25 percent).

c.     Correct. Wendy's share of the partnership's losses is only $90,000, reducing her capital account to $110,000.

d.     Incorrect. Wendy will be entitled to receive the balance in her book capital account upon liquidation of the partnership. Her book capital account will be reduced by $90,000, her share of the losses.

5.    

a.     Incorrect. As a limited partner, the balance in K's capital account cannot be reduced below zero. Thus, the total allocation of loss and/or deduction to her cannot exceed $30,000.

b.     Incorrect. The partnership must prorate the $30,000 negative allocation to K between the rental loss and the charitable contributions.

c.     Correct. The total allocation to K is limited to $30,000, consisting of 3/4 of each item allocated to her.

d.     Incorrect. The total allocation to K is limited to $30,000 (her total contributions to the partnership), consisting of 3/4 of each item allocated to her.

6.    

a.     Incorrect. S will be entitled to receive at least the balance in her capital account.

b.     Incorrect. Under a balancing provision, none of the loss on sale of the lease will be allocated to S.

c.     Incorrect. The partnership recognizes a loss on sale of the leasehold. It would have to recognize a gain for S to receive more than the $100,000 pre-sale balance in her capital account.

d.     Correct. Under the balancing allocation provision of the agreement, the entire $50,000 loss on sale of the leasehold can be allocated to G. Thus, S's capital balance will be unaffected by the loss on sale of the leasehold.

7.    

a.     Incorrect. The allocation increases, rather than diminishes, the after-tax economic consequences to partner B.

b.     Correct. The allocation reduces A's tax liability outside the partnership, but reduces her economic interest in the partnership by more than it reduces her tax liability. Thus, the net effect is a reduction in A's after-tax economic consequences. (Note that the regulations assume there will be no future capital gain because the Sec. 704(b) value of the partnership's assets is presumed to equal their fair values).

c.     Incorrect. The regulations assume there will be no future capital gain because the Sec. 704(b) value of the partnership's assets is presumed to equal their fair values. Thus, the allocation does not violate the transitory allocations test.

d.     Incorrect. The allocation does not increase B's tax liability outside the partnership.

8.    

a.     Incorrect. E is entitled to receive the balance in her capital account upon liquidation of the partnership.

b.     Incorrect. H is obligated to pay $250,000 to the partnership so that E can receive the full balance of her capital account upon liquidation of the partnership.

c.     Correct. E will be entitled to receive the balance in her capital account on liquidation of the partnership.

d.     Incorrect. This is the balance in partner H's capital account.

9.    

a.     Incorrect. G's capital balance may fall below zero.

b.     Incorrect. Since L's capital balance may not fall below zero, L's share of the loss in excess of ($50,000) must be reallocated to G.

c.     Correct. G will be allocated 20 percent of the loss, plus that portion of L's share of the loss in excess of ($50,000).

d.     Incorrect. G will be allocated 20 percent of the loss, plus that portion of L's share of the loss in excess of ($50,000). L is allowed allocation of up to $50,000 of the loss.

10.    

a.     Correct. The depreciation allocation to RR does not reduce his capital account below zero and will therefore be recognized in its entirety.

b.     Incorrect. Depreciation will be reallocated to QL, and away from RR, only to the extent that the original allocation creates or increases a deficit in RR's capital balance in excess of his share of partnership minimum gain.

c.     Incorrect. None of the depreciation will be reallocated to QL this year.

d.     Incorrect. No portion of the first year's depreciation will be reallocated to QL. All of the depreciation is allocated to RR, not 80 percent of it.

11.    

a.     Incorrect. Depreciation will constitute a nonrecourse deduction to the extent that it increases the excess of the outstanding balance of the nonrecourse debt over the tax basis of the property.

b.     Correct. The basis of the machinery will be $240,000, which is $30,000 less than the outstanding balance of the nonrecourse loan.

c.     Incorrect. The depreciation is a nonrecourse deduction only to the extent it reduces the basis of the property below the balance of the nonrecourse note.

d.     Incorrect. Depreciation reduces the basis of the machinery to $240,000; the balance of the nonrecourse mortgage is $270,000, and the difference is a nonrecourse deduction. The gross income of the partnership is irrelevant to this calculation.

1.    

a.     Incorrect. Bill cannot shift the built-in gain to his partner(s).

b.     Incorrect. Only the pre-contribution gain is allocable wholly to Bill.

c.     Incorrect. Bill must also share in the gain in excess of the built-in gain.

d.     Correct. Bill will be allocated the entire $17,000 built-in gain inherent at the date of contribution, plus half of the $8,000 in post-contribution appreciation.

2.    

a.     Incorrect. Section 704(c) applies only to the pre-contribution built-in gain inherent in the property contributed by Ellen.

b.     Correct. Ellen's partner will be allocated only his or her one-half share of the gain ($3,000) attributable to post-contribution appreciation in value of the property contributed by Ellen.

c.     Incorrect. Ellen's partner will only be allocated half of the post-contribution gain.

d.     Incorrect. Ellen will be allocated all of the pre-contribution gain and half of the post-contribution gain. The remainder will be allocated to her partner(s).

3.    

a.     Incorrect. The pre-contribution “built-in” gain must be allocated wholly to Clara.

b.     Incorrect. Clara must report all of the pre-contribution gain and one-fourth of the post-contribution gain.

c.     Correct. Clara will be allocated all of the built-in gain inherent in the property at the date of contribution, plus one-fourth of the gain attributable to the post-contribution appreciation in value of the property for a total of $100,000.

d.     Incorrect. The portion of the gain attributable to post-contribution appreciation in value is shared by all the partners, not just the contributor (Clara).

4.    

a.     Incorrect. In addition to the pre-contribution gain, Q must share in the gain attributable to the post-contribution appreciation in the contributed property.

b.     Incorrect. The pre-contribution “built-in” gain must be allocated solely to Q.

c.     Correct. The entire $150 pre-contribution gain, plus ½ of the $200 post-contribution gain must be allocated to Q for a total of $250.

d.     Incorrect. Q will be allocated only half of the gain attributable to post-contribution appreciation in the property.

5.    

a.     Incorrect. This is one-third of book depreciation. Tax depreciation is only $30.

b.     Incorrect. Depreciation allocations are subject to the provisions of Section 704(c).

c.     Correct. Y and Z will be entitled to the same depreciation for tax that they are allocated for book, $12 each. X will be entitled to whatever amount of tax depreciation ($6) is left after the allocations to Y and Z.

d.     Incorrect. The other partners, Y and Z, will be allocated tax depreciation equal to their shares of book depreciation, not the other way around.

6.    

a.     Incorrect. Tax depreciation exceeds the amount of book depreciation allocable to the other partners. Thus, A will receive an allocation of tax depreciation.

b.     Incorrect. Tax depreciation is first allocated to the other partners. A is entitled only to the residual left after the non-contributors have received full shares.

c.     Incorrect. Section 704(c) will limit A's share of tax depreciation.

d.     Correct. Partners B and C will each be entitled to $8,000 of depreciation expense for book and tax. A will be allocated the remaining tax depreciation of $2,000.

7.    

a.     Incorrect. Under the traditional method, total depreciation allocations cannot exceed the aggregate amount of tax depreciation claimed by the partnership.

b.     Correct. After Ann's partner is allocated a share of tax depreciation equal to her share of book depreciation, there will be no tax depreciation left for Ann.

c.     Incorrect. Section 704(c) will limit the allocation of tax depreciation to Ann.

d.     Incorrect. This is Ann's share of book depreciation.

8.    

a.     Incorrect. Book depreciation does not have to equal tax depreciation.

b.     Incorrect. Book depreciation must be computed at the same rate as tax depreciation.

c.     Correct. Tax depreciation in Y3 will equal $15,360, or 40 percent ($15,360/$38,400) of the tax basis of the property at the date of contribution. Thus, book depreciation of $24,000 must equal 40 percent of the value of the property at the date of contribution.

d.     Incorrect. Book depreciation as a percentage of the value of the property at the date of contribution must equal tax depreciation as a percentage of the tax basis of the property at that date. This figure is based on the cost of the property rather than its value at the date of contribution.

9.    

a.     Correct. After allocation of depreciation expense to partner B, no tax depreciation will be left to be allocated to A.

b.     Incorrect. Section 704(c) requires allocation of all the depreciation to partner B.

c.     Incorrect. This is the amount to be allocated to partner B.

d.     Incorrect. This is A's share of book depreciation.

10.    

a.     Correct. All the gain will be allocated to M under Section 704(c).

b.     Incorrect. Section 704(c) will require that all gain be allocated to partner M.

c.     Incorrect. This is the amount of gain that will be allocated to partner M.

d.     Incorrect. This is the built-in gain inherent in the land, and would ordinarily be allocated to partner M, rather than P.

11.    

a.     Incorrect. Under the remedial allocations method, P (as the noncontributing partner) will receive the same allocation for both tax and book purposes.

b.     Incorrect. This allocation ignores Section 704(c).

c.     Correct. The partnership realizes a ($25,000) book loss and a $15,000 tax gain. As the noncontributing partner, P will be allocated a ($12,500) loss for tax purposes, and M will be allocated a $27,500 tax gain.

d.     Incorrect. Under the remedial allocations method, P is entitled to deduct her share of post-contribution loss in the value of the property. P will not recognize any gain.

1.    

a.     Incorrect. R's share of the partnership's debt is treated as a contribution of money to the partnership.

b.     Correct. R's basis in the partnership is $100.

c.     Incorrect. This is the value of the property less the liability. Value is not relevant in a nontaxable transaction.

d.     Incorrect. R must also account for the transfer of debt.

2.    

a.     Incorrect. A's share of partnership liabilities will increase her basis in the partnership interest.

b.     Incorrect. In computing basis in her partnership interest, A must account for both the liabilities she transfers to the partnership, and for her share of the partnership's liabilities.

c.     Correct. A's $250,000 share of partnership debt is treated as a contribution of money to the partnership under Section 752(a). A's basis is $50,000.

d.     Incorrect. Negative basis is not allowed. A's basis in her partnership interest will be equal to the basis of the property she contributed, less the debt encumbering that property, plus her share of partnership debt.

3.    

a.     Incorrect. Under Section 752(b), a decrease in a partner's share of partnership liabilities is treated as a cash distribution from the partnership to the partner.

b.     Correct. The decrease in A's share of partnership liabilities ($83,333) will exceed A's basis in her partnership interest ($50,000), triggering recognition of gain under Section 731(a).

c.     Incorrect. This is the decrease in A's share of partnership liabilities in connection with the admission of C to the partnership. However, her basis in the interest was $50,000 prior to C's admission.

d.     Incorrect. C's cash contribution does not result in a gain to A. A will recognize gain equal to the excess of the deemed Section 752 distribution ($83,333) over the tax basis of her partnership interest.

4.    

a.     Correct. C's assumption of responsibility for the mortgage on property 2 exceeds her pre-liquidation share of partnership liabilities and the distribution will be nontaxable.

b.     Incorrect. The built-in gain inherent in property 2 at the date of the liquidation is not triggered by the distribution.

c.     Incorrect. C's assumption of the partnership's liability (mortgage on property 2) is greater than her relief from her share of the partnership's liabilities, so the net assumption of liabilities is treated as a cash contribution by C to the partnership and the transaction remains nontaxable.

d.     Incorrect. C did not receive cash in excess of basis, so the transaction is nontaxable.

5.    

a.     Incorrect. Nonrecourse indebtedness generally does not increase the amount at risk.

b.     Incorrect. Real estate debt will not always increase the amount at risk. For example, where a partnership purchases real estate using seller-financing the seller-financing will not increase the partners' amounts at risk.

c.     Incorrect. The allocation of non-qualified nonrecourse liabilities to a general partner does not increase such partner's amount at risk under Section 465.

d.     Correct. The amount at risk is increased only by a partner's or LLC member's share of qualified liabilities.

6.    

a.     Correct. A constructive liquidation analyses how the partners would share the partnership's liabilities in a worst-case scenario.

b.     Incorrect. The partners cannot allocate partnership liabilities in the partnership agreement. Liabilities are allocated in accordance with the economic risks borne by the partners.

c.     Incorrect. This process would indicate how much each partner would receive upon liquidation of the partnership, but sheds no light on how partnership liabilities should be allocated.

d.     Incorrect. A constructive liquidation analyzes the consequences in a hypothetical worst-case scenario in order to determine how the partners would share responsibility for the partnership's liabilities.

7.    

a.     Correct. The regulations are based on the theoretical framework established in Section 704(b).

b.     Incorrect. The regulations look to the economic obligations each partner would have (if any) in the hypothetical event that all the partnership's assets become worthless.

c.     Incorrect. The tax capital accounts do not reflect the partners' economic arrangements with the partnership.

d.     Incorrect. The liquidation is hypothetical, but is based on actual capital accounts.

8.    

a.     Incorrect. This is the allocation to the limited partners. Q is the general partner.

b.     Correct. Q, the only general partner, will be allocated 100 percent of the partnership's recourse loan of $1,500,000.

c.     Incorrect. Recourse indebtedness generally cannot be allocated to limited partners.

d.     Incorrect. The limited partners generally cannot share in recourse debts.

9.    

a.     Incorrect. This is the portion of the loan that will be allocated to the limited partners.

b.     Incorrect. S's guarantee of the loan will cause it to be characterized as a recourse loan.

c.     Correct. Due to S's guarantee, the loan is a recourse loan, allocable entirely to S, the only general partner.

d.     Incorrect. This answer assumes that the limited partners will bear risk of loss for the loan to the extent of their capital contributions to the partnership. Under the regulations, no portion of a recourse loan can be allocated to the limited partners.

10.    

a.     Correct. Because of Q's disproportionate share of the risk of partnership losses, she will be allocated all of the partnership's recourse debt.

b.     Incorrect. Recourse debts are not allocated in accordance with the partners' loss-sharing ratios, but in accordance with the results of a hypothetical constructive liquidation.

c.     Incorrect. The partnership's recourse liability will be disproportionately allocated to Q to reflect her greater individual share of the risk of partnership losses.

d.     Incorrect. This would be the reduction in L's capital account in the event of a hypothetical constructive liquidation, but L would still have a positive capital account balance. Since L's hypothetical capital account balance is positive L would not be allocated any of the recourse debt.

11.    

a.     Incorrect. The partnership's recourse liability will be disproportionately allocated to D to reflect her greater individual share of the risk of partnership losses.

b.     Incorrect. Since the partners share in partnership losses differently, they will share responsibility for the partnership's recourse liabilities differently.

c.     Correct. In a hypothetical constructive liquidation, D would be allocated $600,000 of the partnership's $1,000,000 loss on sale of the shopping center. This allocation would leave her with a $450,000 deficit in her capital account, which she would have to restore to enable the partnership to repay its recourse lender.

d.     Incorrect. Although the debt is disproportionately allocated to D, a constructive liquidation would leave E with some personal responsibility for repayment as well.

12.    

a.     Incorrect. A constructive liquidation would leave B with a small amount of personal responsibility for repayment of the partnership's debt.

b.     Incorrect. B's share of the debt will be less than her share of partnership losses.

c.     Incorrect. B's share of partnership recourse liabilities must be determined by reference to the partners' obligations in a hypothetical constructive liquidation.

d.     Correct. In a constructive liquidation, Β would be allocated $150,000 of the partnership's $600,000 loss on the shopping center, reducing her capital account to negative $50,000. Thus, she would bear responsibility for $50,000 of the partnership's recourse debt.

1.    

a.     Incorrect. The guarantee of interest on the note will cause some or all of the note to be recharacterized as a recourse loan.

b.     Incorrect. Only that amount equal to the present value of the interest guaranteed by C will be recharacterized as a recourse loan.

c.     Incorrect. The note is recharacterized to the extent of the present value, rather than the face value, of the interest on the note.

d.     Correct. The lender will have recourse against C in the event that the partnership defaults on the interest due on the loan.

2.    

a.     Incorrect. The pledge is recognized even though it is contingent.

b.     Correct. The regulations look to the value of the pledged property as of the date it was pledged to secure the loan.

c.     Incorrect. The amount of the loan recharacterized as recourse debt will be fixed as of the date the loan is made to the partnership.

d.     Incorrect. Since E has pledged real estate against the loan, she bears personal risk of loss and some or all of the liability will be recharacterized as recourse.

3.    

a.     Incorrect. The de minimis rule focuses on the magnitude of the lender's investment in the partnership, rather than the nature of that interest.

b.     Incorrect. If related to a partner, the lender will be deemed related to the partnership.

c.     Correct. A qualified nonrecourse loan obtained from a partner or related person is not recharacterized as recourse debt if the lender has an interest in “each item of partnership income, gain, loss, deduction, or credit” of 10 percent or less for every taxable year that the partner is a member of the partnership.

d.     Incorrect. The de minimis rule is triggered if the lender has less than a 10 percent interest in each item of partnership income, gain, loss, deduction, and credit.

4.    

a.     Incorrect. Minimum gain is not equal to the excess of FMV over book value.

b.     Correct. The minimum gain is equal to the excess of the debt balance ($850,000) over the basis of the property ($800,000).

c.     Incorrect. The nonrecourse debt exceeds the basis of the property, so the partnership has a minimum gain.

d.     Incorrect. The minimum gain is equal to the excess of the debt balance ($850,000) over the basis of the property ($800,000).

5.    

a.     Correct. The total minimum gain is $150,000, of which $50,000 is tax minimum gain and the remainder is book minimum gain.

b.     Incorrect. The book minimum gain is determined by reference to the principal balance of the outstanding debt, rather than the fair market value of the property.

c.     Incorrect. The total minimum gain must be divided between book and tax.

d.     Incorrect. Minimum gain is based on the difference between tax basis or book value and the outstanding principal balance of the nonrecourse loan.

6.    

a.     Incorrect. The partner's share of partnership book minimum gain is a factor to be considered in allocating partnership nonrecourse liabilities.

b.     Correct. Partner loss-sharing ratios are not relevant in allocating partnership nonrecourse liabilities.

c.     Incorrect. The partner's share of partnership profits is a factor to be considered in allocating partnership nonrecourse liabilities.

d.     Incorrect. The partner's share of partnership tax minimum gain is a factor to be considered in allocating partnership nonrecourse liabilities.

7.    

a.     Incorrect. This is J's capital balance.

b.     Incorrect. The partners' loss sharing ratios are ignored in allocating nonrecourse liabilities.

c.     Incorrect. The nonrecourse liability is allocated in accordance with the partners' interests in partnership profits (that is, minimum gain, Section 704(c) minimum gain, and other gain).

d.     Correct. The partnership has no minimum gain, so the nonrecourse liability will be allocated 50:50 between the two partners, in accordance with their interests in partnership profits.

8.    

a.     Incorrect. This is the minimum gain.

b.     Incorrect. This ignores the allocation of the minimum gain.

c.     Incorrect. The partners will share the partnership's nonrecourse liability in accordance with their shares of partnership minimum gain, to the extent thereof, and then in accordance with their shares of partnership “regular” profits.

d.     Correct. The partnership's minimum gain is $120,000, shared by the partners $24,000 to J and $96,000 to D. J will also be allocated 50 percent of the partnership's remaining $3,280,000 nonrecourse liability.

9.    

a.     Incorrect. This ignores the allocation of the minimum gain.

b.     Incorrect. Walter's share of partnership minimum gain is 25 percent.

c.     Correct. Walter's share of the nonrecourse debt is equal to 25 percent of the minimum gain ($15,000), plus 10 percent of the remaining balance of the mortgage ($85,000).

d.     Incorrect. Walter's share of the debt is determined in two steps, rather than one, and is not equal to 25 percent of the entire amount.

10.    

a.     Incorrect. Interest expense is another significant partnership item.

b.     Incorrect. Gain on sale of property is another significant partnership item.

c.     Incorrect. Cancellation of debt income is another significant partnership item.

d.     Correct. All of the above are other significant partnership items.

11.    

a.     Incorrect. The depreciation reduces the basis of the encumbered property to a level below the outstanding principal balance of the nonrecourse debt.

b.     Correct. Depreciation expense reduces the book value (and tax basis) of the machinery to $400,000, which is $50,000 less than the outstanding balance of the nonrecourse mortgage.

c.     Incorrect. Depreciation is not allocated pro rata between nonrecourse and financing. Instead, it is all presumed to be financed by equity, or recourse debt, until such time as the book value of the encumbered property falls below the outstanding balance of the nonrecourse debt.

d.     Incorrect. Depreciation is a nonrecourse deduction only to the extent that it reduces the basis of the encumbered property below the outstanding balance of the nonrecourse mortgage.

12.    

a.     Incorrect. The liability is a Section 1.752-7 liability and should be ignored until such time as it is paid or G transfers her interest in the partnership.

b.     Correct. Under Regs. Section 1.752-7, the liability will be ignored until such time as it is paid or G transfers her interest in the partnership. Thus, the transfer of cash by G is not offset by the transfer of the contingent liability.

c.     Incorrect. The liability is ignored until the G sells her interest in the partnership or the partnership pays the liability. Thus, G's share does not increase her tax basis in the partnership interest.

d.     Incorrect. The liability is ignored under Section 1.752-7, but the cash transfer increases G's basis in the partnership interest.

13.    

a.     Incorrect. In determining her gain on the sale, G must reduce her tax basis in the partnership interest by the remaining contingent liability, which is presumably $5 million.

b.     Correct. Since the liability has not been satisfied, G must reduce her tax basis in the partnership interest by the remaining amount of the contingent liability in measuring the gain on sale.

c.     Incorrect. G's tax basis in the partnership interest is reduced by the amount of the contingent liability prior to the sale.

d.     Incorrect. G's tax basis is $1 million after subtracting the contingent liability. Sale for $6 million will therefore trigger a $5 million gain.

1.    

a.     Correct. Jamie does not recognize gain on receipt of a distribution other than cash.

b.     Incorrect. Jamie does not recognize gain on receipt of property, and the fair market value of the property received does not impact her basis in the partnership.

c.     Incorrect. Although the fair market value of the property received exceeds Jamie's basis in the partnership interest by $12,000, there is no gain recognized because it is a non-cash distribution.

d.     Incorrect. $4,000 is the difference between Jamie's partnership basis and tax basis of the property received. There would be no recognition of gain to that extent. Answer choice “a”, indicating zero gain on the transaction is correct because no cash was received in the transaction.

2.    

a.     Correct. Lynn's tax basis in property 1 cannot exceed her basis in the partnership interest immediately before receipt of the distribution.

b.     Incorrect. Although the property's tax basis is $30,000, Lynn cannot receive this tax basis. Her tax basis in the property received is limited to her tax basis of her partnership interest.

c.     Incorrect. The fair market value of the property received does not convey to her basis in the property. Lynn's tax basis in the property will be $23,000, the maximum basis she can have in this set of circumstances.

d.     Incorrect. Lynn's tax basis in property 1 is limited to her $23,000 basis in the partnership, regardless of the fact that the partnership's basis in the property is $30,000.

3.    

a.     Incorrect. Perry must first reduce his tax basis in the partnership interest by the cash received before accounting for the property received.

b.     Incorrect. Perry's basis in property 1 cannot exceed his basis in the partnership interest immediately prior to receiving the distribution of property 1.

c.     Incorrect. The fair market value of the property received does not become Perry's basis in the property. His basis in the property will be limited to his basis in the partnership interest, after it is reduced by the cash received.

d.     Correct. The cash distribution reduces Perry's tax basis in his partnership interest to $8,000. This becomes his tax basis in property 1.

4.    

a.     Correct. The reduction of Carlos' share of partnership liabilities is treated as a cash distribution, reducing his basis in the partnership interest to $15,000. This becomes his basis in property 1.

b.     Incorrect. The reduction of Carlos' share of partnership liabilities is treated as a cash distribution, his remaining $15,000 basis in the partnership becomes his tax basis in the property received.

c.     Incorrect. Carlos takes a substitute basis in property 1.

d.     Incorrect. Carlos would not receive the partnership's tax basis in the property. The reduction of Carlos' share of partnership liabilities is treated as a cash distribution, reducing his basis in the partnership interest to $15,000. This becomes his basis in property 1.

5.    

a.     Correct. Since Amy did not receive cash in excess of her basis in the partnership interest, she is not required to recognize gain on the distribution.

b.     Incorrect. This distribution is taxable only to the extent that Amy received cash in excess of her basis in her partnership interest.

c.     Incorrect. This is the aggregate appreciation in the value of the properties. It would be recognized by the partnership, not Amy, if this were a taxable transaction.

d.     Incorrect. The distribution of property to a partner is generally a nontaxable transaction.

6.    

a.     Correct. Amy's basis in the properties is limited to her tax basis in the partnership interest immediately prior to the distribution.

b.     Incorrect. Amy has insufficient basis in her partnership interest to absorb the full tax bases of the properties to the partnership.

c.     Incorrect. Amy's basis in the properties received is determined by reference to their bases in the partnership's hands, rather than their fair market values.

d.     Incorrect. Amy will take a carryover basis in the properties, limited in the aggregate to her tax basis in her partnership interest.

7.    

a.     Incorrect. Amy's basis in the distributed properties is equal to their basis in the partnership's hands, limited to her basis in the partnership interest prior to the distribution. Although she will “step down” the basis of property 2 due to this limitation, it will not be stepped all the way down to FMV in this case.

b.     Correct. Since property 2 is the only property whose basis exceeded its FMV, and since the excess was larger than the total step-down to be taken by Amy, the entire step-down of $6,000 will be allocated to property 2.

c.     Incorrect. The basis of property 2 will be reduced to reflect the step-down in basis required under Section 732.

d.     Incorrect. Amy will allocate the entire step-down in basis to property 2.

8.    

a.     Incorrect. The step-down is not allocated equally between the two properties.

b.     Correct. Since neither property has declined in value (that is, both properties have FMVs in excess of their basis), the basis reduction must be allocated between the two by reference to their relative basis to the partnership. 20/50 of the reduction will therefore be allocated to the second tract.

c.     Incorrect. The step-down is allocated between the two properties by reference to their relative basis to the partnership, rather than their relative fair market values.

d.     Incorrect. Keith will reduce the basis of both properties to reflect the difference between his basis in the partnership interest and the aggregate basis, to the partnership, of the distributed properties.

9.    

a.     Incorrect. R's basis in the partnership interest exceeds the tax basis of the cash and ordinary income property received in the distribution.

b.     Correct. The step-down in basis of $8,000 is allocated entirely to the capital asset in this case.

c.     Incorrect. R will take a reduced tax basis in the capital asset.

d.     Incorrect. The distribution is not taxable, so R will not take a fair market value basis in the capital asset received from the partnership.

10.    

a.     Incorrect. This is Z's realized loss, but he cannot deduct it until he sells or otherwise disposes of the capital asset.

b.     Incorrect. This is the excess of the tax basis of the property received over its FMV. Z cannot deduct this loss.

c.     Correct. Since Z received property other than cash, receivables, or inventory, he cannot recognize a loss under Section 731 (a)(2).

d.     Incorrect. Z recognizes no loss on the distribution.

11.    

a.     Incorrect. Jamie is not required to step down the basis of any of the assets received.

b.     Correct. Jamie cannot increase the basis of ordinary income assets received in a distribution from the partnership.

c.     Incorrect. Jamie must take a carryover basis in ordinary income assets received in a partnership distribution.

d.     Incorrect. Jamie will take a carryover basis in the receivables.

12.    

a.     Incorrect. The basis increase in the capital assets is allocated first to those assets whose FMV exceeds their tax basis.

b.     Incorrect. The entire step-up in basis will be allocated to capital asset 2.

c.     Correct. Because capital asset 1 has a basis equal to its FMV, it will not be allocated any portion of the basis increase.

d.     Incorrect. Because capital asset 1 has a basis equal to its FMV, the entire basis increase will be allocated to capital asset 2.

13.    

a.     Incorrect. The basis increase in the capital assets is allocated first to those assets whose FMV exceeds their tax basis.

b.     Correct. Because capital asset 1 has a basis equal to its FMV, the entire basis increase will be allocated to capital asset 2.

c.     Incorrect. This is the FMV of capital asset 2.

d.     Incorrect. The entire basis increase will be allocated to capital asset 2 and none of the increase will be allocated to capital asset 1.

1.    

a.     Correct. In the absence of a Section 754 election, the LLC will not be able to adjust its basis in its assets. Gary's share of the inside basis of LLC assets will equal 25 percent, or $90,000.

b.     Incorrect. Absent a Section 754 election, the LLC will not be allowed to increase its basis in its assets to reflect the price Gary paid for them.

c.     Incorrect. This is the total basis of the partnership's assets.

d.     Incorrect. This is the value of the partnership's assets.

2.    

a.     Incorrect. Since a Section 754 election is in effect, the LLC must adjust its basis in its remaining assets to reflect the amount paid by the acquiring member for his interest in those assets.

b.     Correct. The amount of the basis adjustment under Section 743(b) is generally equal to the gain recognized by the selling member.

c.     Incorrect. This is the selling partner's tax basis in the partnership interest.

d.     Incorrect. This is the fair market value of the transferred partnership interest.

3.    

a.     Incorrect. The basis of this property must be increased to protect the buyer from recognizing gain that the seller effectively recognized upon sale of the interest.

b.     Correct. The basis of this asset is increased by the amount of gain that would have been recognized by the transferee partner if the asset had been sold for its fair market value immediately after the purchase of the interest in the LLC.

c.     Incorrect. Only the buyer's share of the appreciation in the property is added to the LLC's basis in the property.

d.     Incorrect. The basis of this asset is increased by the buyer's share of the appreciation inherent in the property.

4.    

a.     Incorrect. This is D's basis in the newly acquired interest.

b.     Incorrect. This is the seller's share of the basis of LLC assets.

c.     Correct. D will recognize a $15,000 gain on the distribution. The partnership will be entitled to adjust its basis in its assets by a like amount.

d.     Incorrect. Because D recognizes a gain on the distribution, the partnership—if it has a Section 754 election in effect – must increase its basis in its remaining assets under Section 734(b).

5.    

a.     Incorrect. This is the difference between the basis (zero) and the face value of the receivables.

b.     Incorrect. This is the difference between the value of the assets received and Ben's tax basis in his partnership interest.

c.     Incorrect. Ben will recognize a loss on the transaction, and the partnership will be required to adjust its basis in its assets by the same amount.

d.     Correct. Ben will recognize a ($15,000) loss on receipt of the liquidating distribution, and the partnership will be required to reduce its basis in its remaining assets by this amount.

6.    

a.     Incorrect. Since the property distribution does not trigger gain to Robert, the difference between his basis in the interest and the FMV of the distributed property is not relevant in determining the amount of the basis adjustment.

b.     Incorrect. Robert took a stepped-up basis in property 3, so the partnership will have to make a negative adjustment to the basis of its remaining assets.

c.     Incorrect. Because Robert took a different basis in property 3 from the partnership, it will be required to adjust the basis of its remaining assets.

d.     Correct. The basis adjustment is the inverse of the step-up in basis taken by Robert in property 3.

7.    

a.     Incorrect. The Section 734(b) adjustment is equal to the difference between the partnership's basis in the distributed property and Richard's basis in that property.

b.     Incorrect. This is the difference between the basis and fair market value of the distributed property.

c.     Correct. The Section 734(b) adjustment is $8,000 if the partnership has a Section 754 election in effect.

d.     Incorrect. Robert takes a different basis in the property than the partnership had in that property, so the partnership must adjust the basis of its remaining assets.

8.    

a.     Incorrect. Richard will now take a higher basis in the distributed property than the partnership had, so the partnership must reduce its basis in remaining assets.

b.     Incorrect. The basis adjustment is calculated by comparing Richard's basis in the property with the partnership's basis in such property prior to the distribution.

c.     Incorrect. The partnership must reduce its basis in its remaining assets to reflect the step-up in basis taken by Richard in the distributed property.

d.     Correct. The partnership must reduce its basis in its remaining assets by $12,000.

9.    

a.     Correct. The distributee-partner will take a stepped-down basis in property 3 of only $30,000, entitling the partnership to increase the basis of its other assets by $6,000.

b.     Incorrect. To protect the partners, the partnership must increase its tax basis in its remaining assets.

c.     Incorrect. This is the difference between the basis and FMV of the distributed property.

d.     Incorrect. Because the distributee-partner took a different basis in the asset than the partnership had, and the partnership had a Section 754 election in effect, the partnership is allowed to adjust its basis in its remaining properties.

10.    

a.     Incorrect. The property does not get stepped up all the way to fair market value.

b.     Correct. The total basis adjustment is $14,000. Of this amount, $8,000 will be allocated to the inventory, reflecting the amount W paid for his share of this asset ($24,000 = 72,000 × ⅓) over his pre-adjustment share of the partnership's basis in this asset ($16,000 = 48,000 × ⅓).

c.     Incorrect. The basis adjustment is not allocated in proportion to the pre-adjustment basis of partnership assets.

d.     Incorrect. The basis of the inventory is adjusted upward to reflect the amount paid by the buyer for his share of this asset.

11.    

a.     Incorrect. The basis of ordinary income property is not reduced as a result of a Section 734(b) adjustment.

b.     Correct. The negative Section 734(b) adjustment can be made only to property 1.

c.     Incorrect. The basis adjustment is negative.

d.     Incorrect. The basis of ordinary income property is not reduced as a result of a Section 734(b) adjustment.

12.    

a.     Correct. The negative adjustment is allocated first to the properties whose tax basis exceeds their fair market value.

b.     Incorrect. Only property 1 has a tax basis in excess of its fair market value.

c.     Incorrect. The negative adjustment is allocated first to assets with a tax basis in excess of fair market value.

d.     Incorrect. The decline in value of property 1 is greater than the required basis reduction.

13.    

a.     Incorrect. The basis adjustment will be allocated to property 2.

b.     Incorrect. No portion of the basis adjustment is allocated to property 1.

c.     Correct. Because the basis and fair market value of property 1 are equal, the entire basis adjustment will be allocated to property 2.

d.     Incorrect. The property does not get stepped up all the way to fair market value.

14.    

a.     Incorrect. The partnership does not increase its basis in its assets to their fair market values upon the death of a partner.

b.     Correct. Under Section 732(d), Joe can elect to determine the basis of the distributed assets in his hands as if the basis adjustment under Section 743(b) had been made.

c.     Incorrect. See Section 732(d).

d.     Incorrect. Joe determines his basis in the distributed property as if a Section 754 election had been in effect at the date of his grandmother's death.

1.    

a.     Incorrect. J will recognize gain on sale of her partnership interest to an outside buyer.

b.     Incorrect. D's assumption of J's share of partnership liabilities is included in the selling proceeds.

c.     Correct. The selling price is $185,000. Subtracting the basis of $100,000 leaves an $85,000 gain.

d.     Incorrect. The selling price of the partnership interest is $185,000 and its basis is $100,000.

2.    

a.     Incorrect. The sale is a fully taxable transaction.

b.     Incorrect. Eddie's tax basis in the partnership interest is not equal to the fair market value of the property contributed to the partnership in exchange for that interest.

c.     Correct. Eddie's LLC interest will be divided into two pieces – one piece with a holding period of six months (20 percent) and a second piece with a holding period of five years and six months (80 percent).

d.     Incorrect. One-fifth ($50/250) of Eddie's interest in the LLC will be treated as a short-term capital asset.

3.    

a.     Incorrect. The inventory is a “hot” asset under Section 751 (a).

b.     Correct. Inventory is a “hot” asset under Section 751 (a).

c.     Incorrect. The stock portfolio is not a “hot” asset.

d.     Incorrect. Only the inventory is a “hot” asset.

4.    

a.     Incorrect. The accounts receivable is not the only “hot” asset owned by the partnership.

b.     Incorrect. JD must recognize ordinary income in the amount that would have been allocated to her had the partnership sold all its Section 751 (a) assets for fair market value.

c.     Correct. Both the accounts receivable and equipment are “hot” assets.

d.     Incorrect. JD must be allocated a share of both the value and the basis of the “hot” assets.

5.    

a.     Correct. To the extent Edward's gain is attributable to Section 1245 recapture income, it may not be reported on the installment method.

b.     Incorrect. The portion of the gain attributable to the unrealized receivables may be reported on the installment method.

c.     Incorrect. The portion of the gain attributable to the unrealized receivables may be reported on the installment method.

d.     Incorrect. The installment method may be used to report gain from the sale of an interest in a partnership or an LLC as long as one or more payments are received after the close of the taxable year in which the sale occurred.

6.    

a.     Incorrect. The termination does not trigger a built-in gain being recognized.

b.     Correct. Sale of 50 percent or more of the interests in profits and capital will trigger a technical termination of the partnership.

c.     Incorrect. The termination does not trigger a deemed sale of partnership assets.

d.     Incorrect. Sale of 30 percent of the interest in profits and capital of the partnership will not trigger recognition of 30 percent of built-in gain existing at the time of the sale.

7.    

a.     Incorrect. The new partnership continues to use the old partnership's EIN.

b.     Correct. The new partnership must make new elections.

c.     Incorrect. Section 704(c) gains inherent in partnership assets retain their character in the new partnership.

d.     Incorrect. The book and tax capital accounts of the continuing partners carry over to the new partnership.

8.    

a.     Incorrect. Sale of the same interest twice only counts as one transfer.

b.     Incorrect. These two transfers involve the same interest and therefore only a 30 percent interest in the partnership is deemed to have been sold for purposes of Section 708(b)(1)(B).

c.     Incorrect. It does not matter whether Mario is a related party.

d.     Correct. The sale of the same interest twice only counts as one transfer. Burl's sale will not trigger a technical termination of the partnership.

9.    

a.     Incorrect. Partnership interests cannot be exchanged tax-free under Section 1031.

b.     Correct. The exchange of a 50 percent interest in profits and capital in a taxable transaction will trigger a technical termination under Section 708(b)(1)(B).

c.     Incorrect. The exchange does not constitute a sale of an interest in 50 percent or more of the profits and capital in Edelburgh Partnership.

d.     Incorrect. The exchange of a 50 percent interest in profits and capital in a taxable transaction will trigger a technical termination under Section 708(b)(1)(B).

10.    

a.     Correct. The tax basis of the “old” partnership's assets carries over to the “new” partnership.

b.     Incorrect. Assets are not deemed sold in connection with a technical termination and the partnership's tax basis does not change.

c.     Incorrect. The “new” partnership takes the same basis in its assets as the “old” partnership had.

d.     Incorrect. The “new” partnership does not step-down the basis of its assets.

11.    

a.     Incorrect. Transfer of appreciated assets to the “new” partnership in a Section 708(b)(1)(B) termination is ignored for purposes of Section 704(c).

b.     Correct. Regulations Section 1.704-4(a)(4)(ii) provide that Section 704(c) built-in gains and losses of the “old” partnership carry over to the “new” partnership.

c.     Incorrect. Only that portion of the value of Section 704(c) property that was originally subject to the provisions of Section 704(c) will continue to be subject to those provisions in the “new” partnership.

d.     Incorrect. Regulations Section 1.704-4(a)(4)(ii) provide that Section 704(c) built-in gains and losses of the “old” partnership carry over to the “new” partnership.