1230. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS 95 The December 31 2011 balance sheet of the DBW General Partnership is as follows: Basis FMV Cash Receivables Capital assets Total Dana capital Brooke capital Whitney capital Total $240 000 –0– 90 000 $330 000 $110 000 110 000 110 000 $330 000 $240 000 75 000 150 000 $465 000 $155 000 155 000 155 000 $465 000 The partners share equally in partnership capital income gain loss deduction and credit and capital is not a material income-producing factor. On December 31 2011 general partner Dana receives a distribution of $155 000 cash in liquidation of her interest under § 736. Dana’s outside basis for the partnership interest immediately before the distribution is $110 000. What is Dana’s gain or loss on the distribution and its character? 1231. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS 96 Susan is a one-fourth limited partner in the SJ Partnership in which capital is not a material income-producing factor. Partnership assets consist of land (fair market value of $100 000 basis of $80 000) accounts receivable (fair market value of $100 000 basis of $0) and cash of $200 000. SJ distributes $100 000 of the cash to Susan in liquidation of her interest. Susan’s basis in the partnership interest was $70 000 immediately before the distribution. How much gain or loss does Susan recognize and what is its character? How much can the partnership deduct? . 1232. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS 97 On August 31 of the current tax year the balance sheet of the RBD General Partnership is as follows: Basis FMV Cash Receivables Capital assets Total Nonrecourse debt Rachel capital Barry capital Dale capital Total $150 000 –0– 600 000 $750 000 $150 000 200 000 200 000 200 000 $750 000 $150 000 90 000 660 000 $900 000 $150 000 250 000 250 000 250 000 $900 000 On that date Rachel sells her one-third partnership interest to Lisa for $300 000 including cash and relief of Rachel’s share of the nonrecourse debt. The nonrecourse debt is shared equally among the partners. Rachel’s outside basis for her partnership interest is $250 000. How much capital gain and/or ordinary income will Rachel recognize on the sale? 1233. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS 98 Hannah sells her 25% interest in the HIJK Partnership to Alyssa for $120 000 cash. At the end of the year prior to the sale Hannah’s basis in HIJK was $70 000. The partnership allocates $15 000 of income to Hannah for the portion of the year she was a partner. On the date of the sale the partnership assets and the agreed fair market values were as follows. Basis FMV Cash Accounts Receivable Land Total $100 000 –0– 240 000 $340 000 $100 000 80 000 220 000 $400 000 Determine the amount and character of any gain that Hannah recognizes on the sale. 1234. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS 99 The December 31 2011 balance sheet of the calendar-year JKL Partnership reads as follows. Basis FMV Cash Capital asset (nondepreciable) Total Jan capital Ken capital Laura capital Total $24 000 33 000 $57 000 $19 000 19 000 19 000 $57 000 $ 24 000 105 000 $129 000 $ 43 000 43 000 43 000 $129 000 Each partner shares in 1/3 of the partnership capital income gain loss deduction and credit. On December 31 2011 Jan sells her 1/3 partnership interest to Jennifer for $43 000 cash. Assume the partnership makes a § 754 election for 2010. a. What is the amount of Jennifer’s “step-up” adjustment under § 743(b)? b. If the nondepreciable capital asset is sold the next year for $120 000 determine the amount of gain that Jennifer will recognize on her tax return because of the sale. 1235. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS100 Cindy a 20% general partner in the CDE Partnership wants to retire and has approached the other partners about having the partnership buy her out. The partnership is a cash basis service oriented partnership in which Cindy is an active partner. The partnership assets consist primarily of unrealized receivables and cash. The partnership also has substantial going concern value (goodwill) which is probably its most valuable asset. The other partners in the partnership are also active in the business and are not related to Cindy. Discuss from Cindy’s viewpoint how you would structure the liquidation of her interest under § 736. Answer as if you are her advocate. Do you think the other partners will agree with this structure? If not what structure would they prefer? 1236. CHAPTER 11—PARTNERSHIPS: DISTRIBUTIONS TRANSFER OF INTERESTS101 Your client has operated a sole proprietorship for several years and is now interested in raising capital for expansion. He is considering forming either a C corporation or an LLC. a. Describe the treatment of an LLC and discuss any advantages the LLC offers over the C corporation. b. Assume instead the client has previously operated as a C corporation. Describe the tax consequences of converting to an LLC.
