Consider the following simple, three person general partnership: Assets Liabilities & Capital AB/Book FMV Liabilities Cash $30 $30 $0 Accts Rec. 0 60 Land 30 60 $60 $150 Capital Accounts Tax/Book FMV X $20 $50 Y 20 50 Z 20 50 Total $60 $150 X sells her interest in the partnership to Buyer for $50 cash. A number of important tax consequences will result from the sale. First, what is the amount and character of Xs gain from the sale? Second, what is Buyers outside basis in his newly acquired partnership interest, and what are the balances in his book and tax capital accounts? And finally, how much income must Buyer report if the partnership collects the accounts receivable, or sells the land? In the introductory example above, what is the amount and character of the gain or loss realized by X upon sale of her partnership interest to Buyer?

QUESTION 2 A, B and C are equal partners in the ABC partnership. On January 1 of this year, As outside basis is $250 and ABCs balance sheet (including FMVs) is set forth below. What are the tax consequences to A if A were to sell her interest to P for $500 cash? Assume that ABC purchased the machine three years ago for $120, and that $120 in depreciation has been taken on the building since its acquisition five years ago. Assets Liabilities & Capital AB/Book FMV Liabilities Cash $240 $240 $150 Accts Rec. 75 60 Inventory 90 150 Machinery 55 100 Building 200 500 Stock 90 300 Goodwill 0 300 Total $750 $1650 Capital Accounts Tax/Book FMV A $200 $500 B 200 500 C 200 500 Total $600 $1500 Path: pWords:0 0 points QUESTION 3 In the introductory example above, what is the Buyers initial outside basis in his partnership interest? In the absence of any elections, how much income will the Buyer report if the partnership collects the receivables? Might Buyer find that result problematic? Path: pWords:0 0 points QUESTION 4 P purchased the 1/3 interest from A Problem 2 in Part A above for $500 cash. What is P's initial outside basis and the balance in her capital account at the time of purchase? Path: pWords:0 0 points QUESTION 5 In the absence of a 754 election, what would be the tax consequences to P if she held the interest for three years and then sold it for $500. Assume that during this period of time the partnership engaged in no transactions and there was no change in the value of its assets (ignore cost recovery allowances). Path: pWords:0 0 points QUESTION 6 If the partnership makes a 754 election, what is the amount of the 743(b) adjustment and how should it be allocated among the partnerships assets?