BDD Partnership is a service-oriented partnership that has three equal general partners. One of them, Barry Evans, sells his interest to another partner, Dale Allen, on December 31 (the last day of the current tax year) for $90,000 cash and the assumption of Barry's share of partnership liabilities. (Liabilities are shared equally by the partners.) Immediately before the sale (after reflecting operations for the year), the partnership's cash basis balance sheet was presented as shown below. The capital accounts before the sale reflect the partners' bases in their partnership interests, excluding liabilities. The payment exceeds the stated fair market value of the assets because of goodwill that is not recorded on the books. Basis FMV Basis FMV Cash $120,000 $120,000 Note payable $30,000 $30,000 Accounts receivable 0 90,000 Capital accounts Capital assets 30,000 75,000 Barry 40,000 85,000 David 40,000 85,000 Dale 40,000 85,000 Total $150,000 $285,000 Total $150,000 $285,000 If an amount is zero, enter "0". a. What is the total amount realized by Barry on the sale? $____________________ b. How much, if any, ordinary income must Barry recognize on the sale? $f____________________ c. How much capital gain must Barry report? $____________________ d. What is Dale's basis in the partnership interest acquired? $____________________ e. Refer to Reg. § 1.751–1(a)(3). What information is the seller required to provide? Complete the statement below that meets these requirements. Sale of Partnership Interest by Barry Evans This statement is filed pursuant to Reg. § 1.751-1(a)(3). On December 31 of the current tax year, the taxpayer sold his one-third interest in the BDD Partnership to Dale Allen. The taxpayer's basis in the partnership interest was $____________________. He sold his partnership interest for $____________________, including $____________________ for his share of the partnership's unrealized receivables in which the partnership had a $____________________ tax basis. Consequently, in his tax return for the year, Barry has recognized ordinary income of $____________________ In addition, this return reflects a $____________________ long-term capital gain on the disposition of the partnership interest. f. How would Barry's tax result differ if, instead, BDD distributed $90,000 of its cash in liquidation of Barry's interest (with the remaining partners assuming Barry's share of partnership debt)? Why does this happen? The LLC's operating agreement does not address payment of goodwill to the partner. Barry's gain would be $____________________. It would be classified as $____________________ of ordinary income and $____________________ of capital gain. Because the payment for partnership goodwill is not provided for in the partnership agreement, Barry will report the amount as (a capital gain, a guaranteed payment) The partnership (may, is not allowed to) deduct the § 736(a) payment of $____________________
BDD
Immediately before the sale (after reflecting operations for the year), the partnership's cash basis
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If an amount is zero, enter "0".
a. What is the total amount realized by Barry on the sale?
$____________________
b. How much, if any, ordinary income must Barry recognize on the sale?
$f____________________
c. How much
$____________________
d. What is Dale's basis in the partnership interest acquired?
$____________________
e. Refer to Reg. § 1.751–1(a)(3). What information is the seller required to provide? Complete the statement below that meets these requirements.
Sale of Partnership Interest by Barry Evans
This statement is filed pursuant to Reg. § 1.751-1(a)(3).
- On December 31 of the current tax year, the taxpayer sold his one-third interest in the BDD Partnership to Dale Allen.
- The taxpayer's basis in the partnership interest was $____________________. He sold his partnership interest for $____________________, including $____________________ for his share of the partnership's unrealized receivables in which the partnership had a $____________________ tax basis. Consequently, in his tax return for the year, Barry has recognized ordinary income of $____________________
- In addition, this return reflects a $____________________ long-term capital gain on the disposition of the partnership interest.
f. How would Barry's tax result differ if, instead, BDD distributed $90,000 of its cash in liquidation of Barry's interest (with the remaining partners assuming Barry's share of partnership debt)? Why does this happen? The LLC's operating agreement does not address payment of goodwill to the partner.
Barry's gain would be $____________________. It would be classified as $____________________ of ordinary income and $____________________ of capital gain. Because the payment for partnership goodwill is not provided for in the partnership agreement, Barry will report the amount as (a capital gain, a guaranteed payment)
The partnership (may, is not allowed to) deduct the § 736(a) payment of $____________________
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