Peter, Sarah, Tim, and Rachel form RiverStone, LLC to sell and distribute classic rock records and memorabilia. Each partner made equal cash contributions. RiverStone borrowed an additional $600,000 from Anderson bank on a recourse basis. Assume all items of income, loss, and deduction, as well as debt, are allocated equally. RiverStone’s updated books and asset fair market values (as of Jan 1 year 2) are listed below. Assume that the memorabilia and records are inventory, and that in year 1 RiverStone took $8,000 of depreciation on the machinery and $20,000 of depreciation on the building. Assets FMV Book Tax Debt Book Tax Cash 908,000 908,000 908,000 Recourse 600,000 600,000 Records 580,000 400,000 400,000 Memorabilia 352,000 400,000 400,000 Machinery 40,000 32,000 32,000 Capital Building 600,000 580,000 580,000 Peter 510,000 510,000 Land 280,000 160,000 160,000 Sarah 510,000 510,000 Goodwill 140,000 0 0 Rachel 510,000 510,000 Stock 100,000 160,000 160,000 Tim 510,000 510,000 a. On the first day of year 2, Rachel sells her partnership interest to Mike for $600,000 + debt assumption. How much gain/loss does Rachel recognize on the sale? What is the character of the gain/loss? b. What is Mike’s outside basis in his partnership interest? Assume RiverStone files a section 754 election with its form 1065. What is the amount of Mike’s section 743(b) adjustment? How is the section 743(b) adjustment allocated among the partnership’s assets? c. During year 2, the partnership sells all of its memorabilia for $376,000, the stock for $124,000, and the land for $280,000. What amount of income/gain/loss will be allocated to Mike from the sale of each of these items?
Peter, Sarah, Tim, and Rachel form RiverStone, LLC to sell and distribute classic rock records and memorabilia. Each partner made equal cash contributions. RiverStone borrowed an additional $600,000 from Anderson bank on a recourse basis. Assume all items of income, loss, and deduction, as well as debt, are allocated equally. RiverStone’s updated books and asset fair market values (as of Jan 1 year 2) are listed below. Assume that the memorabilia and records are inventory, and that in year 1 RiverStone took $8,000 of
|
Assets |
FMV |
Book |
Tax |
Debt |
Book |
Tax |
|
Cash |
908,000 |
908,000 |
908,000 |
Recourse |
600,000 |
600,000 |
|
Records |
580,000 |
400,000 |
400,000 |
|||
|
Memorabilia |
352,000 |
400,000 |
400,000 |
|||
|
Machinery |
40,000 |
32,000 |
32,000 |
Capital |
||
|
Building |
600,000 |
580,000 |
580,000 |
Peter |
510,000 |
510,000 |
|
Land |
280,000 |
160,000 |
160,000 |
Sarah |
510,000 |
510,000 |
|
|
140,000 |
0 |
0 |
Rachel |
510,000 |
510,000 |
|
Stock |
100,000 |
160,000 |
160,000 |
Tim |
510,000 |
510,000 |
a. On the first day of year 2, Rachel sells her
b. What is Mike’s outside basis in his partnership interest? Assume RiverStone files a section 754 election with its form 1065. What is the amount of Mike’s section 743(b) adjustment? How is the section 743(b) adjustment allocated among the partnership’s assets?
c. During year 2, the partnership sells all of its memorabilia for $376,000, the stock for $124,000, and the land for $280,000. What amount of income/gain/loss will be allocated to Mike from the sale of each of these items?
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