Need to do a research tax memo. Can pay $100 if solution is correct and not plagiarized

PwC Case Studies in Taxation, 2015, PwC, LLP WOLFORD GENERAL PARTNERSHIP Wolford General Partnership (WGP) operates an extremely profitable plumbing supply business. It is the exclusive supplier for a number of successful and stable construction firms, and it has an excellent reputation for reliability and service. Your client, Eli Wolford, is planning to sell his interest in WGP to Kevin Dole on June 30, 2015. Dole has offered total consideration of $550,000 ($50,000 cash down at closing and a $500,000 note secured by the partnership interest). The note will bear a 3.5 percent market rate of interest and will be payable in ten annual principal payments of $50,000 each, the first of which is due on January 1, 2016. Accrued interest will be due with each principal payment. (The stated interest rate is adequate for purposes of 483 and 7872, and for the original issue discount rules.) Dole also will assume Wolford's share of partnership liabilities outstanding upon date of sale. The projected balance sheet of the business as of June 30, 2015 is attached. This balance sheet was the basis for negotiation of the terms of the sale between Eli and Kevin Dole. For a number of years, WGP has been Eli Wolford's main source of income. Eli and his two partners originally founded WGP by making contributions of cash, and each partner has a tax basis in his partnership interest equal to the capital account balance plus any share of partnership liabilities allocated to the partner under 752. WGP uses an accrual method of accounting and has reported on a June 30 fiscal year since its formation many years ago. All three partners and Kevin Dole are calendar year taxpayers. Upon formation, WGP made a 444 election to use this fiscal year and has properly made its required payments under 7519. The partnership also has a 754 election in effect. All profits and losses of the partnership are allocated 60 percent to Eli Wolford, 20 percent to Ethan Wolford, and 20 percent to Nora Latham. This sharing ratio will continue subsequent to the sale of Eli's interest to Kevin Dole. The amount of guaranteed payment for Kevin Dole's services to the partnership has not yet been negotiated. According to the partnership agreement, all allocations of profit and loss are reflected in the partners' capital accounts. The capital accounts are maintained in accordance with the 704(b) regulations; upon liquidation of the partnership, all distributions to partners will be made in accordance with the balances in their capital accounts. Upon liquidation, each partner is required to restore any deficit capital account balance to the partnership. Eli Wolford / Kevin Dole Nora Latham 60% Ethan Wolford 20% 20% Page 1 of 3 PwC Case Studies in Taxation, 2015, PwC, LLP WOLFORD GENERAL PARTNERSHIP I Eli Wolford has engaged you to determine the amount and character of any taxable gain generated by the sale as it currently is structured. II Ethan Wolford (Eli's son) and Nora Latham (not related to the Wolfords) are the other partners in WGP. Under the terms of the partnership agreement, they both must approve the sale of Eli's interest to Kevin Dole. During the last several years, Eli has been in poor health and has been unable to devote the necessary time to the partnership business. Consequently, both Ethan and Nora are eager for Dole to take Eli's place as managing general partner. Dole plans to work in the business full time, and should be able to contribute considerable energy, experience, and talent to the operation. The existing partners are concerned, however, about any unexpected or adverse tax consequences of the proposed sale to WGP, or to them as continuing partners. Kevin Dole also wants to understand the tax consequences of his becoming a partner. These three individuals have requested that you analyze the transfer of the partnership interest from Eli Wolford to Dole from the point of view of the ongoing partnership, providing them with a summary of any significant tax consequences. They also would appreciate any suggestions by which they could minimize or eliminate any tax problems that you uncover. Page 2 of 3 PwC Case Studies in Taxation, 2015, PwC, LLP WOLFORD GENERAL PARTNERSHIP Wolford General Partnership Projected Balance Sheet June 30, 2015 Tax Basis Cash and deposits Trade accounts receivable Marketable securities Inventory Furniture and fixtures Accumulated depreciation Totals Fair Market Value $ 37,000 34,000 40,000 462,000 136,000 Assets $ 37,000 34,000 36,000 575,000 77,000 (59,000) $ 650,000 $ 759,000 Liabilities and Capital Accounts Trade accounts payable Capital accounts Totals $ 50,000 Eli Wolford Ethan Wolford Nora Latham $ 360,000 120,000 120,000 600,000 $ 650,000 Page 3 of 3