Irving Aster, Dennis Brill, and Robert Clark were partners
who shared profits and losses equally. On February 28, 2012,
Aster sold his interest to Phil Dexter. On March 31, 2012, Brill
died, and his estate held his interest for the remainder of the year.
The partnership continued to operate and for the fiscal year
ending June 30, 2012, it had a profit of $45,000. Assuming that
partnership income was earned on a pro rata monthly basis and
that all partners were calendar-year taxpayers, the distributive
shares to be included in 2012 gross income should be
(b) The requirement is to determine the distributive
shares of partnership income for the partnership fiscal year ended
June 30, 2012, to be included in gross income by Aster, Brill,
Estate of Brill, Clark, and Dexter. Clark was a partner for the
entire year and is taxed on his distributive 1/3 share ($45,000 ×
1/3 = $15,000). Since Aster sold his entire partnership interest
to Dexter, the partnership tax year closes with respect to Aster on
February 28. As a result, Aster’s distributive share is $45,000 ×
1/3 × 8/12 = $10,000. Dexter’s distributive share is $45,000 ×
1/3 / 4/12 = $5,000.
Additionally, a partnership tax year closes with respect to a
deceased partner as of date of death. Since Brill died on March
31, the distributive share to be included in Brill’s 2012 Form
1040 would be $45,000 × 1/3 × 9/12 = $11,250. Since Brill’s
estate held his partnership interest for the remainder of the year,
the estate’s distributive share of income is $45,000 × 1/3 × 3/12
Curry’s sale of her partnership interest causes a partnership
termination. The partnership’s business and financial operations
are continued by the other members. What is (are) the effect(s)
of the termination?
I. There is a deemed distribution of assets to the remaining
partners and the purchaser.
II. There is a hypothetical recontribution of assets to a new
(c) The requirement is to determine which statements
are correct concerning the termination of a partnership. A partnership
will terminate when there is a sale of 50% or more of the
total interests in partnership capital and profits within any twelvemonth
period. When this occurs, there is a deemed distribution
of assets to the remaining partners and the purchaser, and a hypothetical
recontribution of these same assets to a new partnership.
Cobb, Danver, and Evans each owned a one-third interest in
the capital and profits of their calendar-year partnership. On
September 18, 2012, Cobb and Danver sold their partnership
interests to Frank, and immediately withdrew from all participation
in the partnership. On March 15, 2013, Cobb and Danver
received full payment from Frank for the sale of their partnership
interests. For tax purposes, the partnership
(a) The requirement is to determine the date on which
the partnership terminated for tax purposes. The partnership was
terminated on September 18, 2012, the date on which Cobb and
Danver sold their partnership interests to Frank, since on that
date there was a sale of 50% or more of the total interests in partnership
capital and profit.
Partnership Abel, Benz, Clark & Day is in the real estate and
insurance business. Abel owns a 40% interest in the capital and
profits of the partnership, while Benz, Clark, and Day each owns
a 20% interest. All use a calendar year. At November 1, 2012, the
real estate and insurance business is separated, and two partnerships
are formed: Partnership Abel & Benz takes over the real
estate business, and Partnership Clark & Day takes over the insurance
business. Which one of the following statements is correct
for tax purposes?
(a) The requirement is to determine the correct statement
concerning the division of Partnership Abel, Benz, Clark, &
Day into two partnerships. Following the division of a partnership,
a resulting partnership is deemed to be a continuation of the
prior partnership if the resulting partnership’s partners had a
more than 50% interest in the prior partnership. Here, as a result
of the division, Partnership Abel & Benz is considered to be a
continuation of the prior partnership because its partners (Abel
and Benz) owned more than 50% of the interests in the prior
partnership (i.e., Abel 40% and Benz 20%).
Under which of the following circumstances is a partnership
that is not an electing large partnership considered terminated for
income tax purposes?
I. Fifty-five percent of the total interest in partnership capital
and profits is sold within a twelve-month period.
II. The partnership’s business and financial operations are
(c) The requirement is to determine under which
circumstances a partnership, other than an electing large partnership,
is considered terminated for income tax purposes. A partnership
will be terminated when (1) there are no longer at least
two partners, (2) no part of any business, financial operation, or
venture of the partnership continues to be carried on by any of its
partners in a partnership, or (3) within a twelve-month period
there is a sale or exchange of 50% or more of the total interest in
partnership capital and profits.
David Beck and Walter Crocker were equal partners in the
calendar-year partnership of Beck & Crocker. On July 1, 2013,
Beck died. Beck’s estate became the successor in interest and
continued to share in Beck & Crocker’s profits until Beck’s entire
partnership interest was liquidated on April 30, 2013. At what
date was the partnership considered terminated for tax purposes?
(a) The requirement is to determine the date on which
the partnership was terminated. A partnership generally does not
terminate for tax purposes upon the death of a partner, since the
deceased partner’s estate or successor in interest continues to
share in partnership profits and losses. However, the Beck and
Crocker Partnership was terminated when Beck’s entire partnership
interest was liquidated on April 30, 2013, since there no
longer were at least two partners and the business ceased to exist
as a partnership.
On December 31, 2012, after receipt of his share of partnership
income, Clark sold his interest in a limited partnership for
$30,000 cash and relief of all liabilities. On that date, the adjusted
basis of Clark’s partnership interest was $40,000, consisting of his
capital account of $15,000 and his share of the partnership liabilities
of $25,000. The partnership has no unrealized receivables or
appreciated inventory. What is Clark’s gain or loss on the sale of
his partnership interest?
(d) The requirement is to determine the amount and
character of gain or loss recognized on the sale of Clark’s partnership
interest. A partnership interest is a capital asset and a sale
generally results in capital gain or loss, except that ordinary income
must be reported to the extent of the selling partner’s share
of unrealized receivables and appreciated inventory. Here, Clark
realized $55,000 from the sale of his partnership interest
($30,000 cash + relief from his $25,000 share of partnership liabilities).
Since the partnership had no unrealized receivables or
appreciated inventory and the basis of Clark’s interest was
$40,000, Clark realized a capital gain of $55,000 – $40,000 =
$15,000 from the sale.
On April 1, 2012, George Hart, Jr. acquired a 25% interest in
the Wilson, Hart, and Company partnership by gift from his father.
The partnership interest had been acquired by a $50,000
cash investment by Hart, Sr. on July 1, 2006. The tax basis of
Hart, Sr.’s partnership interest was $60,000 at the time of the gift.
Hart, Jr. sold the 25% partnership interest for $85,000 on December
17, 2012. What type and amount of capital gain should
Hart, Jr. report on his 2012 tax return?
(a) The requirement is to determine the amount and
type of capital gain to be reported by Hart, Jr. from the sale of his
partnership interest. Since the partnership interest was acquired
by gift from Hart, Sr., Jr.’s basis would be the same as Sr.’s basis at
date of gift, $60,000. Since Jr.’s basis is determined from Sr.’s
basis, Jr.’s holding period includes the period the partnership
interest was held by Sr. Thus, Hart, Jr. will report a LTCG of
$85,000 – $60,000 = $25,000.
On June 30, 2012, James Roe sold his interest in the
calendar-year partnership of Roe & Doe for $30,000. Roe’s adjusted
basis in Roe & Doe at June 30, 2012, was $7,500 before
apportionment of any 2012 partnership income. Roe’s distributive
share of partnership income up to June 30, 2012, was
$22,500. Roe acquired his interest in the partnership in 2007.
How much long-term capital gain should Roe report in 2012 on
the sale of his partnership interest?
(a) The requirement is to determine the amount of
LTCG to be reported by Roe on the sale of his partnership interest.
Roe’s basis for his partnership interest of $7,500 must first be
increased by his $22,500 distributive share of partnership income,
to $30,000. Since the selling price also was $30,000, Roe
will report no gain or loss on the sale of his partnership interest.
Stone and Frazier decided to terminate the Woodwest Partnership
as of December 31. On that date, Woodwest’s balance
sheet was as follows:
Land (adjusted basis) 2,000
The fair market value of the land was $3,000. Frazier’s outside
basis in the partnership was $1,200. Upon liquidation, Frazier
received $1,500 in cash. What gain should Frazier recognize?
(c) The requirement is to determine Frazier’s recognized
gain resulting from the cash received in liquidation of his
partnership interest. A distributee partner will recognize any
realized gain or loss resulting from the complete liquidation of
the partner’s interest if only cash is received. Since Frazier’s basis
for his partnership interest was $1,200 and he received $1,500
cash, Frazier must recognize a $300 capital gain.