The KM Partnership pays its only liability? (a $80,000 ?mortgage) on April 1 of
ID: 2391342 • Letter: T
Question
The KM Partnership pays its only liability? (a $80,000 ?mortgage) on April 1 of the current year and terminates that same day.Karen and Mark were equal partners in the partnership but have partnership bases immediately preceding these transactions of $90,000 and $170,000?,respectively, including his or her share of liabilities. The two partners receive identical distributions with each receiving the following? assets:
Assets
Partnership's Basis
FMV
Cash
$10,000
$10,000
Inventory
33,000
35,200
Receivables
12,200
10,000
Building
30,000
85,000
Land
11,000
8,000
Total
$96,200
$148,200
Requirement
What are the tax implications to Karen?,Mark?,and the KM Partnership of the April 1 transactions? (i.e., basis of assets to Karen and Mark?,amount and character of gain or loss? recognized, etc.)? Assume that no Sec. 754 election is in effect.
Assets
Partnership's Basis
FMV
Cash
$10,000
$10,000
Inventory
33,000
35,200
Receivables
12,200
10,000
Building
30,000
85,000
Land
11,000
8,000
Total
$96,200
$148,200
Explanation / Answer
The basis of partnership property is adjusted as a result of the transfer of an interest in a partnership by sale or exchange or on the death of a partner only if the election provided by section 754 (relating to optional adjustments to the basis of partnership property) is in effect with respect to the partnership. Whether or not the election provided in section 754 is in effect, the basis of partnership property is not adjusted as the result of a contribution of property, including money, to the partnership.
(b)Determination of adjustment. In the case of the transfer of an interest in a partnership, either by sale or exchange or as a result of the death of a partner, a partnership that has an election under section 754 in effect -
(1) Increases the adjusted basis of partnership property by the excess of the transferee's basis for the transferred partnership interest over the transferee's share of the adjusted basis to the partnership of the partnership's property; or
(2) Decreases the adjusted basis of partnership property by the excess of the transferee's share of the adjusted basis to the partnership of the partnership's property over the transferee's basis for the transferred partnership interest.
(c)Determination of transferee's basis in the transferred partnership interest. In the case of the transfer of a partnership interest by sale or exchange or as a result of the death of a partner, the transferee's basis in the transferred partnership interest is determined under section 742 and § 1.742-1. See also section 752 and §§ 1.752-1 through 1.752-5.
(d)Determination of transferee's share of the adjusted basis to the partnership of the partnership's property -
(1)Generally. A transferee's share of the adjusted basis to the partnership of partnership property is equal to the sum of the transferee's interest as a partner in the partnership's previously taxed capital, plus the transferee's share of partnership liabilities. Generally, a transferee's interest as a partner in the partnership's previously taxed capital is equal to -
(i) The amount of cash that the transferee would receive on a liquidation of the partnership following the hypothetical transaction, as defined in paragraph (d)(2) of this section (to the extent attributable to the acquired partnership interest); increased by
(ii) The amount of tax loss (including any remedial allocations under § 1.704-3(d)), that would be allocated to the transferee from the hypothetical transaction (to the extent attributable to the acquired partnership interest); and decreased by
(iii) The amount of tax gain (including any remedial allocations under § 1.704-3(d)), that would be allocated to the transferee from the hypothetical transaction (to the extent attributable to the acquired partnership interest).
(2)Hypothetical transaction defined. For purposes of paragraph (d)(1) of this section, the hypothetical transaction means the disposition by the partnership of all of the partnership's assets, immediately after the transfer of the partnership interest, in a fully taxable transaction for cash equal to the fair market value of the assets. See § 1.460-4(k)(3)(v)(B) for a rule relating to the computation of income or loss that would be allocated to the transferee from a contract accounted for under a long-term contract method of accounting as a result of the hypothetical transaction.
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