Samantha decides to leave the SRK Partnership after owning the interest for many

Question

Samantha decides to leave the SRK Partnership after owning the interest for many years. She owns a 52% capital, profits, and loss interest in the general partnership (which is not a service partnership). Samantha’s basis in her partnership interest is $ 60,000 just before she leaves the partnership. The partnership agreement does not mention payments to partners who leave the partnership. The partnership has not made an optional basis adjustment election ( Sec. 754). All partnership liabilities are recourse liabilities, and Samantha’s share is equal to her loss interest. When Samantha leaves the partnership, the assets and liabilities for the partnership are as follows:

Analyze the following two alternatives, and answer the associated questions for each alternative.
a. Samantha could receive a cash payment of $ 110,000 from the partnership to terminate her interest in the partnership. Does Samantha or the partnership have any income, deduction, gain, or loss? Determine both the amount and character of any items.
b. Rook already owns a 30% general interest in the SRK partnership prior to Samantha’s departure. Rook is willing to buy Samantha’s partnership interest for a cash payment of $ 110,000. What income, gain, loss, or deduction will Samantha recognize on the sale? What are the tax implications for the partnership if Rook buys Samantha’s interest?

Partnership’s Basis FMV
Assets Cash $120,000 $120,000 Inventory $12,000 $12,000 Receivables -0- $32,000 Land 30,000 50,000 Total Assets $162,000 $214,000 Liablities 30,000 30,000

Explanation / Answer

GOODWILL A/C

$

$

Creation

Reversal

Samantha 52%

27040

Rook 82%

42640

Rook 30%

15600

K 18%

9360

K18%

9360

52000

52000

WORKINGS:

BOOK VALE OF PARTNERSHIP:   $162,000

FAIR VALUE                                         : $214,000

                       52,000

a) It means under Option 1 the company SRK should pay Samantha $110,000 an excess of $50,000 to her Partnership Capital amount of $60,000

b) Rook paying Samantha $110,000 for Option 2 makes no gain over Option 2 for Samantha. But that agreement has to be done for Rook with the balance existing Partner K who should be willing to agree.

Once S leaves she has no say in the matter

$

$

Creation

Reversal

Samantha 52%

27040

Rook 82%

42640

Rook 30%

15600

K 18%

9360

K18%

9360

52000

52000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.