The ABC general partnership, a law firm, has the following unusual but pedagogically useful balance sheet:

Assets Partners Capital

A.B. F.M.V. A.B. F.M.V.

Cash $60,000 $60,000 A $20,000 $50,000

Goodwill 0 90,000 B 20,000 50,000

C 20,000 50,000

$60,000 $150,000 $60,000 $150,000

A is leaving the firm and retiring. He will receive $50,000 cash, which will be his only income for the year.

1. What results if the transaction is structured as a sale of As interest to B and C?
2. What results if the transaction is structured as a sale of As interest to B and C but the payment is made by the partnership rather than by B and C?
3. What result if the transaction is structured as a liquidation? Should goodwill be stated?
4. How can the parties be sure that their chosen structure will be respected by the Service so that they can avoid litigation?