Problem 5

Atlas and Basil operate a widget manufacturing business as partners.

The partnership has a 754 election in place.

In the current year, the partnership distributes to Atlas a widget-manufacturing machine purchased over one year ago by the partnership for $5,000, which has an adjusted basis of $2,000, and a fair market value of $3,000 at the time of distribution. Atlas' outside basis just before the distribution is $1,000.

(a) What are the tax consequences of this distribution to: Atlas; Basil; and the partnership?

(b) If Atlas immediately sells the machine for $3,000, what are the tax consequences of this sale to him? Be specific.