A partnership has assets with a total FMV of $100,000 and basis to that partners

Question

A partnership has assets with a total FMV of $100,000 and basis to that partnership of $60,000 There are four partners who each hold a 25% share whose basis is $10,000. partner Amy, wants to liquidate her interest, and Partner Brett decides to buy her out for $25,000 which will bring his shar e up to 50%. Soon after this transaction completes, the three partners decide to sell the partnership assets for $100,000 cash and distribute it according to their interests. The partnerships elects a section 754 adjustment. Explain how to arrive at the correct adjustment for Amy, and whether or not she should recognize any ordinary income. why or why not? A) Amy has a $10,000 optional adjustment and $50,000 of ordinary income B) Amy has a $10,000 optional adjustment and $10,000 of ordinary income C) Amy has a $25,000 optional adjustment and $10,000 of ordinary income D) Amy has a $20,000 optional adjustment and no ordinary income

Explanation / Answer

Option C.

Amy has 25,000 optional adjustment and 10,000 of ordinary income.

Explanation ;

When brett wants to purchase the share of Amy, he has to pay for basis of capital i.e., 10,000 which is an ordinary income.,

In order to get the entire share of Amy, Brett has to purchase her share of assets also for 25,000 as it is 25% of the FMV of the assets [100,000].

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