TAX 9900 Study Guide - Final Guide: Ordinary Income, Capital Gain, Arkansas Highway 18

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21 Apr 2020
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Chandler wants to purchase the entire business for $400. Assume the partnership
has the following assets (and no liabilities):
Tax/Book
Basis FMV
Real Estate $26 $80 (purchased 10 years ago for
$80)
Inventory $30 $40
Acct. Rec. $0 $30
Equipment $10 $30 (purchased for $20)
ABC Stock $20 $44 (purchased 6 months ago)
XYZ Stock $24 $36 (purchased 5 years ago)
Goodwill $0 $140
TOTAL $110 $400
Monica’s outside basis is $44, and Rachel’s outside basis is $66.
(i) What are the consequences (i.e., amount and character of gain) to
Monica and Rachel if the partnership sells all of its assets to
Chandler for $400?
The partnership will recognize a gain of $290
Rachel 60% = $174
Monica 40%= $116
Characterization of gains
Real estate- Sec 1250
Inventory - Ordinary
A/R - Ordinary
Equipment - 1231 again
ABC stock- short-term cap gain
XYZ stock - long term capital gain
Goodwill - 1231 gain
(ii) What are the consequences to Monica and Rachel if they sell their
partnership interests to Chandler for $160 and $240, respectively?
What difference would it make, if any, if Chandler paid them with
a note (with adequate interest) due in three years?
Rachel and Monica are treated as having their interest sold for the
cash they receive
Their gain would be allocated 40% and 60% respectively
The ordinary gain from selling Inventory, A/R, and depreciation
must be subtracted from the gain to figure out the capital gain
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