If Partnership Debt Is Reduced and a Partner Is Deemed

question 7

Multiple Choice

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

• A)The partner will treat the distribution in excess of her basis as ordinary income.
• B)The partner will treat the distribution in excess of her basis as capital gain.
• C)The partner will not ever be taxed on the distribution in excess of her basis.
• D)The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

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Definitions:

Principal-Agent Problem

A dilemma in economics where one party (the agent) is able to make decisions that impact another party (the principal), potentially leading to conflicts of interest.

Ownership

The act, state, or right of possessing something.

Control

The exercise of authoritative or regulatory influence over something or someone to guide or manage operations and behaviors.

Moral Hazard

A situation in which one party is more likely to take risks because they do not bear the full consequences of their actions, often due to asymmetrical information or misaligned incentives.