McKenzie, Brackman & Chaney is an equal general partnership engaged in legal practice (i.e., it is a service partnership). McKenzie is planning to retire. On January 1 of Year 1, McKenzies outside basis is $100. The partnership has made a 754 election. On this date, the partnerships balance sheet is as follows (expanded to include goodwill and fair market values)

Assets Liabilities & Capital

AB/Bk FMV Mortgage $150

Cash $120 $120

Accts Rec. 0 75

Building 90 255

Land 90 300

Goodwill 0 150

$300 $900

Capital Accounts Tax/Bk FMV

McKenzie $50 $250

Brackman 50 250

Chaney 50 250

$150 $750

Assume that no principal payments are due on the mortgage until Year 5. What are the tax consequences to McKenzie if, in the alternative:

(a) Brackman and Chaney purchase McKenzies partnership interest, each paying $125 cash.

(b) The partnership makes a lump sum payment to McKenzie in the amount of $250 in complete liquidation of McKenzies interest in the partnership, and the agreement makes no reference to partnership goodwill?

(c) The partnership makes a lump sum payment to McKenzie in the amount of $250 in complete liquidation of McKenzies interest in the partnership. Under the partnership agreement, $50 of the payment is specifically allocated to McKenzies share of the partnerships goodwill.

(d) How would your answer to part (b) change if the partnership agrees to pay McKenzie the $250 over time: $50 in Year 1, $100 in Year 2 and a final $100 in Year 3? McKenzie agrees to remain personally liable on mortgage until he receives her last payment.