Question

1. Bust-out Partner had the following balance sheets at year-end：

	Basis	FMV
Cash	30,000	30,000
Property 1	33,000	51,000
Property 2	42,000	60,000
Property 3	27,000	45,000
TATAL ASSETS	132,000	186,000
Capital, Sam	33,000	46,500
Capital, Maggie	33,000	46,500
Capital, Jack	66,000	93,000
TOTAL LIABILITIES & CAPITAL	132,000	186,000

On December 31, Jack sold his fifty percent interest in the partnership to an unrelated buyer for $93,000. None of the partnership’s properties constitute inventory unrealized receivables.

Assume the partnership does not have a Section 754 election in effect, and decides not to make one. Shortly after new buyer’s acquisition of Jack’s interest in the partnership, the partnership sells property 1 for its $51,000 fair market value.

a. How much gain will the partnership recognize on the sale, and how much of this gain will be allocated to the new partner for tax purposes?

b. If the partnership did have a Section 754 election in effect, how much gain would be allocated to the new partner in connection with the partnership’s sale of property 1.

c.Assume the partnership had a Section 754 election in effect when the new partner acquired Jack’s fifty percent partnership interest. Assume that the partnership later sold property 1 for $69,000(it appreciated in value after the new partner’s entry). How much gain would the partnership recognize for tax purposes, and how much of this gain would be allocated to the new partner?

Answer 1

1	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.
	Since Partnership firm does not have a Section 754 election in effect and decides not to make one New Buyer does not have any interest on gain araised out of Sale of Property
2	If the partnership did have a Section 754 election in effect, new partner in connection with the partnership’s sale of property 1 he is eligible for 50% in Jack share.
			Amount($)
	sale proceds of Property 1		$51,000
	Jack Share		51000*66000/132000
			25500
	New Partner share		25500*50%
			12750
3	Section 754 election should be in place at the time of transaction takes place .therefore in the present scenario at the time of sale of property 1 section 754 election was not there so new partner does not have any interest in the sale proceeds