A and B operate a taxi business as partners. In the current year the partnership

Question

A and B operate a taxi business as partners. In the current year the partnership distributes to A a taxi purchased over one year ago for $5,000, which has an adjusted basis of $2,000 and a value of $3,000 when distributed. A’s outside basis is $1,000. (To make Internal Revenue Code Section 751(b) inapplicable, assume an identical distribution to B). The disposition of the taxi is not a taxable event to the partnership, see Internal Revenue Code Sections 731(b) and 1245(b)(3). What are the tax consequences to A if he immediately sells the cab for $3,000?

Explanation / Answer

There is tax consequences to A if he immediately sells the cab for $3000

Ordinary income provided in the sction 1245 if property disposed of the amount by which lower of

1. the recomputed basis of the propert or

2.a) in case of sale , exchange, the amount realized

b) in case of any other of disposition, the fair market value of such property

exceeds the adjusted basis of such property shall be treated as income.

($5000- $2000) = $ 3000 will be taxable for A

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