Sale of Partnership Interest Glenns Candy Company (Glenns) a Partnership is one

Question

Sale of Partnership Interest

Glenns Candy Company (Glenns) a Partnership is one of your firm’s best clients. It was formed twenty years ago by Mabel Adamson (mabel). Vince Rigone(Vince) and Clayton Childs (Clayton). Each one contributes in cash, one-third of the capital needed to start the business. The partnership agreement, prepared by your firm, provides that Mabel, Vince and Clayton each own a one-third interest in capital, profits and losses. To the best of the knowledge of your associates, there have not been any special allocations of income, gain loss, deduction or credit made by the partnership nor have there been any transfer of part or all of a partnership interest. The foregoing has been confirmed to you by the partners in Glenns who have further advised you that each year each partner withdraws an equal amount in cash the total of such withdrawals never exceeding the profits for the year

Vince, who is getting on in years, would like to sell his partnership interest Roberta Johnson (Roberta), who has a background in the manufacture and sale of boxed candies is interested in purchasing it, and Mabel and Clayton have agreed that they will consent to the sale. Vince and Roberta have tentatively agreed on $270,000 as the value of the assets of the partnership and that Roberta will pay Vince $90,000 for his interest, assuming Vince share of partnership liabilities in the amount of $24,000 and giving him her note for $66,000 bearing interest at 13% per annum payable in three equal annual installments and secured by a security interest in the partnership interest. Subsequent to Vince’s and Roberta’s reaching the tentative agreement described above Vince received an agreement prepared by Roberta attorney proving among other things the following

1. Payment for Capital Interest

1.01 Roberta agrees to pay Vince $60,000 for Vince’s capital interest in Glenns Candy Company(partnership) Robert payment to Vince of the 60,000 referred in to Section 1.01 hereof and the $6,000 referred to in Section 3.03 hereof shall be made by delivering to Vince at closing, Roberta note for $66,000 bearing interest at the rate of 13% per annum, payable in three equal annual installments. Payment of the note shall be secured by a security interest in the partnership interest purchased. Roberta shall deliver to Vince at closing a security agreement providing for the security interest describes in the Section 1.02

Assumption of Partnership Liabilities

2.01 In addition to the payment for Vince’s Capital interest as described in Section 1.01 hereof, Roberta will assume Vince’s position as a partner with respect to partnership liabilities and indemnify and hold Vince harmless against any such liabilities A. Fully advise Vince of the income tax results to him if he sells his partnership interest to Roberta on the terms and conditions provided in the agreement prepared by Roberta’s attorney B. Fully advise Vince of the changes you would propose in the agreement prepared by Roberta’s attorney in order to produce the best income tax results for Vince. You are in assume that neither Roberta nor Vince will accept a value greater or less than $270,000 for the assets of the partnership purchase prices greater or less than $90,000 for Vince’s partnership interest and the other than Roberta’s assumption of liabilities the purchase prices is to be paid in installments

Fully advise Vince of the income tax results to him if he sells his partnership interest to Roberta on the terms and conditions provided in the agreement prepared by Roberta’s attorney

Fully advise Vince of the changes you would propose in the agreement prepared by Roberta’s attorney in order to produce the best income tax results for Vince. You are in assume that neither Roberta nor Vince will accept a value greater or less than $270,000 for the assets of the partnership purchase prices greater or less than $90,000 for Vince’s partnership interest and the other than Roberta’s assumption of liabilities the purchase prices is to be paid in installments

Explanation / Answer

Income tax results to the sale of partnership interests:

Vince will be liable to pay income tax on the amount of gain, if any, resulted from the sale of his share in the partnership to Roberta. In this case let us calculate the gain, if any, which has resulted to Vince subsequent to the sale of his interest in the partnership.

Sale consideration of the partnership share received $90000.00

Less: Share in assets of the partnership

(270000 x 1/3)                                                                         $90000.00

Gain                                                                             $0

Since, no gain has been made on the sale of partnership share in the partnership there would not be any tax implications for Vince subsequent to the sale of his share to Roberta.

Advice for best income tax result to Vince:

The only change that can be recommended to ensure best income tax result to Vince is the payment should be made at once instead of instalments. Thus, Vince should ask Roberta to make the payment $90000 at one go and not in instalments. Apart from that Vince should also ask for the payment of goodwill for the hard work that the partners have put in over the years to bring the partnership to its present state.

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