Allison, Keesha, and Steven each own equal interests in KAS Partnership, a calen

Question

Allison, Keesha, and Steven each own equal interests in KAS Partnership, a calendar year-end, cash-method entity. On January 1 of the current year, Steven’s basis in his partnership interest is $28,250. During January and February, the partnership generates $31,650 of ordinary income and $4,890 of tax-exempt income. On March 1, Steven sells his partnership interest to Juan for a cash payment of $47,750. The partnership has the following assets and no liabilities at the sale date:

a. Assuming KAS’s operating agreement provides for an interim closing of the books when partners’ interests change during the year, what is Steven’s basis in his partnership interest on March 1 just prior to the sale?

b. What is the amount and character of Steven’s recognized gain or loss on the sale?

Neither gain nor loss recognized

$7,320 ordinary income

$20,460 ordinary income

$7,320 capital gain

$20,460 capital gain

c. What is Juan's initial basis in the partnership interest?

d. What is the partnership’s basis in the assets following the sale?

Tax Basis FMV Cash $ 32,500 $ 32,500 Land held for investment 32,500 65,000 Totals $ 65,000 $ 97,500

a. Assuming KAS’s operating agreement provides for an interim closing of the books when partners’ interests change during the year, what is Steven’s basis in his partnership interest on March 1 just prior to the sale?

b. What is the amount and character of Steven’s recognized gain or loss on the sale?

Neither gain nor loss recognized

$7,320 ordinary income

$20,460 ordinary income

$7,320 capital gain

$20,460 capital gain

c. What is Juan's initial basis in the partnership interest?

d. What is the partnership’s basis in the assets following the sale?

Explanation / Answer

1 Outside basis as of January 1: 28250 Plus: distributive share of income Ordinary 10550               Tax exempt 1630 Outside basis as of March 1: 40430 2 Amount realized: 47750 Less: basis in partnership interest 40430 Capital gain 7320 3 Juan’s basis in his partnership interest is his cost of $47750. 4 The partnership has a basis in its assets equal to the assets before the sale. The saledoes not affect the partnership’s basis in its assets.

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