The Greene Services Group is owned equally by Norma, Irene, and Carole. The entity is a calendar-year, cash-basis partnership that was organized in Indiana about ten years ago. Greene Services operates a same-day trucking service out of the Indianapolis airport, taking small packages of hazardous materials to customers when national delivery companies will not handle the shipped goods.

Greene Services has been highly profitable since its inception, as profit margins are high. In fact, delivery fees are raised as needed to cover increases in insurance, maintenance, licenses, and fuel costs. Greenes drivers are not unionized, but the Group provides adequate salaries and generous fringe benefits to its employees. Greene operates essentially as a cash-only business no services are delivered until the customer remits the invoice in full, almost always by electronic funds transfer.

Rumors circulated that DHL was about to move into the market and present some aggressive competition, but that company no longer operates in the US, so those rumors have died down, and none of the other potential competitors seems interested.

Carole wants to move permanently back to Fort Wayne so as to care for her aging parents. All three partners knew that at some point one of them might retire, but they had not planned for it to happen this soon. The time required to meet these needs means that Carole will retire from the entity at the end of the current year, Year One. No additional capital is needed by Greene to carry on at its existing service levels, and Norma and Irene have no current expansion plans.

The projected end-of-Year-One balance sheet and capital accounts for Greene Services and its owners is presented below. All parties agree that Caroles one-third interest then will be worth $750,000, but as you can see, there are challenges associated with the partnership coming up with that kind of cash. On one hand, the partnership could liquidate Caroles interest through the use of a transfer of accounts receivable, up-front cash, and future cash payments for the difference with Norma and Irene assuming all of Greenes liabilities. Obviously, the land and the trucks are non-negotiable because they are used in the day-to-day operations of the business.

On the other hand, the partnership is considering an outside third-party sale because of the cash-flow deficiency that a liquidating distribution would cause, especially if an installment plan cannot be worked out with Carole.

Myrna, Greenes long-time accountant, has prepared the Groups financial statements and Forms 1065 for seven years running, but she feels that a third-party like you should analyze the tax effects for both Carole and the partnership.

Directions: Prepare a spreadsheet outlining the tax ramifications for both Carole and the partnership under the following assumptions: (1) Caroles interest is liquidated through a distribution of the A/R and cash to Carole, with the cash shortfall being made up through a bank loan, (2) Caroles interest is liquidated through a distribution of the A/R as a down payment, with the remainder being paid (interest-free) in two equal installments over the next two years, and (3) if a third-party bought Caroles interest. Specifically, you are asked to determine any gains or losses recognized by any of the partners and provide an ending balance sheet for your clients reference. In addition, please hand in a letter to Carole outlining any assumptions you made, any tax or nontax issues that might have been missed, and your opinion on which alternative would provide the best answer for Carole and the other partners.

		Tax Book @ 1/1/21	FMV@ Carole's retirement
Assets
Cash		100,000 100,000	100,000
A/R		- 300,000	300,000
Trucks		150,000 300,000	250,000
Land		500,000 500,000	750,000
Building		750,000 900,000	1,400,000

Liabilities			900,000
Norma		500,000	400,000
Irene		500,000	400,000
Carole		500,000	400,000
Totals		1,500,000	1,900,000

Totals 1,500,000 2,100,000 2,800,000