Question

Basic Facts: DEF is an equal general partnership engaged in medical practice. On January 1, 2007, D died, triggering the partnership’s buy/sell agreement. Just prior to his death, D’s outside basis was $130. According to the agreement, the partnership must pay D’s sole beneficiary, B, $500 in liquidation of her interest in the partnership. Neither the partnership agreement nor the buy/sell agreement mentions goodwill. There is no §754 election in place. On the date of death, DEF’s balance sheet (with FMVs) was as follows:

            Assets                                                                         Liabilities & Capital

                                    AB/Book         FMV                                        Liabilities        $150               

Cash                            $120                $120

Acc’ts Rec.                  0                      150

Installment Oblig.       150                  270

Equipment                  90                    300

Land                            30                    510

Goodwill                     0                      300

                                    $390                $1650

                                                                                                Capital Accounts

                                                                                                Tax/Bk                        FMV   

                                                                                    D          $80                  $500

                                                                                    E          80                    500

                                                                                    F          80                    500

                                                                                                $240                $1500

Assume that the equipment was purchased by the partnership for $400, and that the land is used in the partnership’s business.

Questions:

1. Before the distribution to B in liquidation of her interest in the partnership, what is her outside basis?
2. If there were a §754 election in place what would be the amount of the §743(b) adjustment, and among which assets (and in what amount) would it be allocated?
3. What are the income tax consequences to B of the $500 distribution?
4. What difference would it have made if the agreement explicitly allocated $100 to goodwill?
5. What difference would it have made if there were no buy/sell agreement and B (who is also a doctor) becomes a partner in D’s place?

Answer 1

Realisation A/C
Particulars	Amount	Amount	Particulars	Amount	Amount
To Assets			By Liabilities		150
Cash	120
Installment	150
Equipment	90		By Assets A/C
Land	30	390	Accounts rec	150
			Installment (270-150)	255
To liabilities		150	Equipment (300-90)	210
			Land (510-30)	480	1095
To Profit on realisation	D (705/3)	235
	E(705/3)	235
	F(705/3)	235
		1245			1245
D'S Beneficiary
Particulars	Amount	Amount	Particulars	Amount	Amount
			By D's Capital A/C		215
To Bal c/d		500	By Excess as per agreement				142.5
			E	142.5
			F	142.5	285
		500			500
Capital A/C's
Particulars	D	E	F	Particulars	D	E	F
To D's Beneficiary		142.5	142.5	By Capital A/C	80	80	80
				By Cash A/c
tO Goodwil	100	100	100	By Realisation	235	235	235
To D's Beneficiary	215
To Bal C/D		72.5	72.5
	315	315	315		315	315	315
1	Just before the liquidation, B's outside basis is 215
2	Under section 754, a partnership may elect to adjust the basis of partnership property when property is distributed or when a partnership interest is transferred. The purpose of a Section 754 election is to reconcile a new partner's outside and inside basis in the partnership. This election allows the new partner to receive the benefits of depreciation or amortization that he or she may not have received if the election was not made.
3	Capital gains on the amount over and above 215
4	Goodwill would have been generated and distributed over the partners and then
5	B will have to give his share of goodwill plus equivalent share of capital so that profits could be shared equally. In the current scenario, D will have to give his share of goodwill of 100 plus capital such that the closing capital be equal