ExpertHard1 markMultiple Choice
CPA · Question 49 · Area 3: Entity Tax Compliance
A partnership has nonrecourse liabilities of $100,000. Partner A contributes property with a basis of $40,000 and FMV of $100,000. The property secures the $100,000 debt. Under Section 752 and Tier 2 (Section 704(c) minimum gain), how much debt is allocated to Partner A?
A partnership has nonrecourse liabilities of $100,000. Partner A contributes property with a basis of $40,000 and FMV of $100,000. The property secures the $100,000 debt. Under Section 752 and Tier 2 (Section 704(c) minimum gain), how much debt is allocated to Partner A?
Answer options:
A.
$0
B.
$40,000
C.
$60,000
D.
$100,000
How to approach this question
1. Nonrecourse Debt Allocation Tiers:<br/> - Tier 1: Partnership Minimum Gain (none here).<br/> - Tier 2: Section 704(c) Minimum Gain (taxable gain if property satisfied debt).<br/> - Tier 3: Profit share.<br/>2. Calculate Tier 2: Liability ($100,000) - Basis ($40,000) = $60,000 potential gain.<br/>3. Allocation: $60,000 of debt is allocated to Partner A.
Full Answer
C.$60,000✓ Correct
The partnership would recognize $60,000 gain if it surrendered the property for the debt ($100k debt - $40k basis). This $60,000 of debt is allocated to Partner A.
Common mistakes
Allocating based on profit ratio only.
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