Question 1. In a proportionate liquidating distribution, Sara receives a distribution of $40,

1. In a proportionate liquidating distribution, Sara receives a distribution of $40,000 cash, accounts receivable (basis of $0, fair market value of $30,000), and inventory (basis of $50,000, fair market value of $60,000). Sara’s basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sara’s basis in the accounts receivable and inventory, and how much gain or loss does she recognize?

a. $0 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.

b. $0 basis in accounts receivable; $80,000 basis in inventory; $0 gain or loss.

c. $40,000 basis in accounts receivable; $40,000 basis in inventory; $0 gain or loss.

d. $30,000 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.

e. $30,000 basis in accounts receivable; $60,000 basis in inventory; $10,000 gain.

2. Which of the following statements correctly reflects one of the rules regarding proportionate liquidating distributions?

a. Relief of liabilities is treated as a distribution of cash but only to the extent that the cash distribution does not

exceed the partner’s basis in the partnership interest.

b. A partner’s basis in distributed unrealized receivables is the lesser of the partnership’s basis in the

receivables or their fair market value.

c. The basis of unrealized receivables cannot be stepped up to their fair market value unless the partner has adequate unabsorbed basis.

d. Assets are deemed distributed in the following order: cash, unrealized receivables and inventory and finally, capital assets.

e. The partner can recognize gain, but not loss, on a proportionate liquidating distribution.

3. Which of the following statements is trueregarding the sale of a partnership interest?

a. The selling partner’s share of partnership liabilities is disregarded in determining the proceeds from the sale of a partnership interest.

b. Forpurposesofcomputingthesellingpartner’sgainorloss,thepartner’sbasisinthepartnershipinterestis determinedasofthelastdayofthepartnershiptaxyearendingbeforetheyearinwhichtheinterestissold.

c. Ifapartnersellsaninterestinapartnership,incomerelatedtothatinterestfortheyearofthesaleisallocated tothepurchaser.

d. Thesellingpartnercouldberequiredtoreportbothordinaryincomeandacapitallossonsaleofthepartnershipinterest.

e. Thepartner’s shareofpartnership “hotassets”is disregardedin determiningthe characterofthe partner’sgainonthesaleofthepartnershipinterest.

4. Nicholas is a 25% owner in the DDBN LLC (a calendar year entity). At the end of the last tax year, Nicholas’s basis in his interest was $50,000, including his $20,000 share of LLC liabilities. On July 1 of the current tax year, Nicholas sells his LLC interest to Anna for $80,000 cash. In addition, Anna assumes Nicholas’s share of LLC liabilities, which, at that date, was $15,000. During the current tax year, DDBN’s taxable income is $120,000 (earned evenly during the year). Nicholas’s share of the LLC’s unrealized receivables is valued at $6,000 ($0 basis). At the sale date, what is Nicholas’s basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss?

a. $45,000 basis; $6,000 ordinary income; $44,000 capital gain.

b. $60,000 basis; $6,000 ordinary income; $29,000 capital gain.

c. $60,000 basis; $35,000 capital gain.

d. $75,000 basis; $0 ordinary income; $20,000 capital gain.

e. $75,000 basis; $6,000 ordinary income; $14,000 capital gain.

.

5. The BLM LLC’s balance sheet on August 31 of the current year is as follows.

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