PROBLEM 4 A, B and C are equal partners in the ABC partnership. On January !, 20

Question

PROBLEM 4 A, B and C are equal partners in the ABC partnership. On January !, 2000, A's outside basis is $250 and ABC's balance sheet (including FMV's) is as follow: Assets Liabilities &Capital; EMV Cash A/C Rec 75 Inv. Machinery 55 Building 200 Stock Goodwil 0 240 240 60 150 100 500 300 150 90 90 0300 lax 500 A 200 B 200 C 200 500 Total-60 1500 500 What are the tax consequences to A if A were to sell her interest to P for $500 cash? Assume that ABC purchased the machine three years ago for $120, and that $120 in depreciation has been taken on the building since its acquisition five years ago.

Explanation / Answer

Liabilities: When a third-party buys a partnership interest, the buyer generally assumes the selling partner's share of indebtedness of the partnership, and thus, is added on to the sale price.

Nothing mentioned about the income allocation, hence, no treatment for it.

Hot Assets: Account receivables and inventory are termed hot assets. The selling partner recognizes the income as if these assets were sold at that time , originating ordinary income in order to prevent conversion of ordinary income into capital gain.

Purchase price of partnership by P= $500+$50 ($150/3=$50; A's share of liabilities)

Income allocation= Profit on revaluation of Machine+

Total gain= $550-$250= $300

Ordinary income= Inventory and Accounts Receivables' FMV-AB*partnership interest%

                        = ($210-$165)/3= $15

Capital Gain= Total gain-Ordinary Income

                  = $300-$15= $285

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