RT Ranches is a general partnership with the following balance sheets:

On December 31, in complete liquidation of his interest, the partnership distributed property 2 and $30,000 cash to Clay. None of the partnership’s properties constitute inventory or unrealized receivables,

a. How much gain will Clay recognize in connection with the distribution?

b. Assume the partnership did not have a Section 754 election in effect and chose not to make one. Compare the amount of taxable gain which will be reported by Larry and Robert if the partnership sells properties 1 and 3 after Clay’s departure to the amount of gain they would have recognized had the partnership sold all three of its properties just prior to Clay's departure from the partnership.

c. What explains the difference you identify in part b above? Is there a remedy available to Larry and Robert?

Transcribed Image Text:

Cash Property 1 Property 2 Property 3 TOTAL ASSETS Capital, Larry Capital, Robert Capital, Clay TOTAL CAPITAL Basis 30,000 63,000 18,000 24,000 135,000 45,000 45,000 45,000 135,000 FMV 30,000 93,000 43,000 53,000 219,000 73,000 73,000 73,000 219,000