Paolo is a 50% partner in the Capri Partnership and has decided to terminate his partnership interest. Paolo is considering two options as potential exit strategies. The first is to sell his partnership interest to the two remaining 25 percent partners, Giuseppe and Isabella, for $105,000 cash and the assumption of Paolo's share of Capri's liabilities. Under this option, Giuseppe and Isabella would each pay $52,500 for half of Paolo's interest. The second option is to have Capri liquidate Paolo's partnership interest with a proportionate distribution of the partnership assets. Paolo's basis in his partnership interest is $110,000, including Paolo's share of Capri's liabilities. Capri reports the following balance sheet as of the termination date:

a. If Paolo sells his partnership interest to Giuseppe and Isabella for $105,000, what is the amount and character of Paolo's recognized gain or loss?
b. Giuseppe and Isabella each have a basis in Capri of $55,000 before any purchase of Paolo's interest. What are Giuseppe and Isabella's basis in their partnership interests following the purchase of Paolo's interest?
c. If Capri liquidates Paolo's partnership interest with a proportionate distribution of the partnership assets ($25,000 deemed cash from debt relief, $15,000 of actual cash, and half of the remaining assets), what is the amount and character of Paolo's recognized gain or loss?
d. If Capri liquidates Paolo's interest, what is Paolo's basis in the distributed assets?
e. Compare and contrast Paolo's options for terminating his partnership interest. Assume that Paolo's marginal tax rate is 35 percent and his capital gains rate is 15 percent.

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Tax Basis FMV S 80,000 40.000 80,000 60.000 Assets Cash Receivables Inventory S 80,000 40.000 50,000 50,000 20 000 260.000 an Totals Liabilities and capital S 50,000 85,000 42,500 42.500 Liabilities Capital Paolo - Giuseppe Isabella Totals