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.
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 is this result different from Barry’s result when the interest is sold? The LLC's operating agreement does not address payment of goodwill to the partner.
Barry's gain would be $50,000. It would be classifed 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 guaranteed payment.
The partnership may deduct the code section 736(a) payment of __________.
Transcribed Image Text:Cash
Accounts receivable
Capital assets
Total
Basis
$120,000
0
30,000
$150,000
FMV
$120,000
Note payable
90,000 Capital accounts
75,000
$285,000
Barry
David
Dale
Total
Basis
$30,000
40,000
40,000
40,000
$150,000
FMV
$30,000
85,000
85,000
85,000
$285,000
Definition Definition Increase in the value of a capital asset and the amount that is realized when the asset is sold off. A capital gain may be short-term or long-term depending on the tenure for which the asset is held.
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