Section 2: 30–40%T7

Partnership Compliance and Basis

Exam insight

Partnerships pass income through on Schedule K-1, and unlike other entities they add each partner's share of liabilities to outside basis, which TCP tests through basis rollforwards and distribution analysis. Guaranteed payments, Section 704(b) allocations, and Section 751 hot assets show up often and carry a lot of points.

What AICPA wants you to know

1Identify separately and non-separately stated items reported on Form 1065 and Schedule K-1.
2Compute a partner's outside basis including the share of partnership liabilities.
3Apply the treatment of guaranteed payments to the partner and the partnership.
4Apply Section 704(b) allocations and the substantial economic effect requirement.
5Distinguish nonliquidating from liquidating distributions and compute the resulting gain, loss, and basis.
6Recharacterize gain on the sale of a partnership interest using Section 751 hot assets.

Patterns in this topic

The exam re-skins the same archetypes. Recognize these here, then drill them in the Pattern Lab.

The Partnership AllocationTrack outside basis the partnership way: add the share of liabilities, run distributions for gain, and carve out 751 hot assets and 736 payments.

Exam tip

Study smarter: before you expand each card, cover the screen and try to recall what the concept means from its title alone. Retrieving it from memory builds the recall the exam actually tests, and it beats re-reading.