Lesson # 6

Honeymooner is a calendar year general partnership whose partners, Kramden and Norton, share equally in the profits, losses and capital. Kramden and Norton founded the partnership several years ago and funded the partnership with cash contributions. As of December 31, 20163, the partnership had the following balance sheet:

Description	Tax Basis	Fair Market Value
Cash	$30,000	$30,000
Inventory	$10.000	$50,000
Equipment	$20,000	$70,000
Land Held for Investment	$120,000	$10,000
Totals	$180,000	$160,000
Capital
Kramden	$90,000	$80,000
Norton	$90,000	$80,000
Totals	$180,000	$160,000

The partnership is liquidated by the following distributions:

Description	Tax Basis	Fair Market Value
To Kramden: Cash	$30,000	$30,000
Inventory	$10,000	$50,000
Totals	$40,000	$80,000
To Norton Equipment:	$20,000	$70,000
Land	$120,000	$10,000
Totals	$140,000	$80,000

Assumptions:

The equipment would yield $40,000 of ordinary income under IRC Section 1245 if sold by the partnership.

The land is a capital asset to the partnership.

Kramden and Norton each have a $90,000 tax basis in their respective partnership interests on the date of the distribution. NOTE: Each question should be reproduced in bold italic type, followed by your answer in normal type. There is no minimum or maximum length for your answers. They should simply be sufficient to answer the questions

Questions:

1. Do Kramden and Norton recognize gain or loss on the liquidating distributions? What is the amount and character of such gain or loss, if any?
2. Does Honeymooner recognize any gain or loss relating to the liquidating distributions?
3. What is Kramden and Nortons tax basis in the respective property received by them in the liquidating distribution?
4. If Kramden sells the inventory after holding it for two years as investment property for its fair market value of $50,000, what is the amount of the gain or loss recognized and what is the character of such gain or loss?
5. If Norton sells the equipment and land for their respective fair market values soon after receiving the property, what is the amount of gain or loss recognized on each sale and what is the character of each gain or loss?
6. For this question and question number 7 only, assume that the distributions were current distributions and not liquidating distributions, do Kramden, Norton or the partnership recognize any gain or loss on such distributions and what is the character of such gain or loss, if any?
7. Assuming that such distributions were current distributions, what are Kramden and Nortons tax basis in the property received?
8. For this question only, assume that Honeymooner redeems an 18.75% interest from Kramden for $30,000, thereby leaving Kramden with a 31.25% interest after the redemption; what are the tax consequences to Kramden and Honeymooner as a result of this transaction (assume that Honeymooner does not have an IRC Section 754 election in place)?
9. For this question and question number 10 only, assume that instead of a liquidation of Honeymooner or a redemption of Kramdens interest, Kramden sells his entire partnership interest to Alice for $80,000; what gain or loss does Kramden recognize and what is the character of such gain or loss assuming that the purchase price was allocated based on the above values under arms length negotiations?
10. What is Alices tax basis in her partnership interest and if Honeymooner has an IRC Section 754 election in effect, what basis adjustments must Honeymooner make on the sale of the interest from Kramden to Alice and to what assets are such adjustments allocated?