Transfer v. Redemption

(180 minutes 180 points see further allocations below)

ABC has the following balance sheets:

Asset	Inside Basis	Book Value	Partner	Outside Basis	Book Value
Cash	147,000	147,000	Debt		100,000
Accounts Receivable	0	56,000	A-25%	70,000	80,000
Inventory	28,000	33,600	B-25%	70,000	80,000
Machinery and Equipment	28,000	43,400	C-50%	140,000	160,000
Collectible	21,000	56,000
Building	56,000	84,000
Total	280,000	420,000		280,000	420,000

A want to leave the partnership. A can either sell his 25% partnership interest to D for $115,000, or have the partnership redeem his interest for the same $115,000. Assume As share of partnership debt is 25%. Determine which route is most advantageous to A, and which is most advantageous to B, C and the partnership, as specified below in parts a, b and c.

Regarding the redemption of As interest, assume that capital is not a material income producing factor and that any goodwill is unstated.

Assume that ABC has made the Sec. 754 election and has elected to maintain capital accounts per 1.704-1(b)(2)(iv). Further assume that ordinary income is taxed at the 40% rate and that long term capital gain is taxed at the 20% rate. Finally, assume that 25% of partnership debt is properly allocated to A.

All book value amounts of tangible assets shown are amounts ABC could sell items to third parties for cash as of the date of the transaction. All assets were purchased or generated internally by ABC.

ABC purchased the Machinery and Equipment several years ago for $70,000 and depreciated it down to its present basis of $28,000 using MACRS.

ABC purchased the building several years ago for $200,000 and has depreciated it using MACRS straight-line depreciation.

Determine the tax consequences to all parties of A transferring the interest to D for $115,000 cash.