Good Times is a general partnership with the following balance sheets: Basis FMV Cash $15,000 $15,000...

Good Times is a general partnership with the following balance sheets:

Basis	FMV
Cash	$15,000	$15,000
Capital assets	35,000	75,000
Land	85,000	240,000
Totals	$135,000	$330,000

Recourse liabilities	$90,000	$90,000
Capital, Claire	15,000	80,000
Capital, Lorie	15,000	80,000
Capital, Tom	15,000	80,000
Totals	$135,000	$330,000

The partners share equally in profits, losses and capital. Tom is negotiating to sell his interest in the partnership to an unrelated buyer. Assume the buyer is willing to pay $120,000 cash for half Tom’s interest.

What will be the amount realized by Tom on the sale?
What is the tax basis of the interest to be sold by Tom?
How much gain will Tom recognize on the sale?
What will be the buyer’s tax basis in the newly acquired interest?

Expert Solution

Answer

A. Calculation of realized amount by Tom on sale

1. It is given that the partners profit sharing ratio is eual. Share of profit of Tom will be 25% as four partners are in Good times.
2. A third party is willing to give 120,000 for half Toms interest.
3. Therefore, realized amount on the sale of Toms interest will be $ 240,000
(Assumed that Tom is going to sell entire interest in good times to third party)

B. Calculation of Tax basis of Toms interest

Assumption: In the question two balance sheets were given. Therefore, it is assumed that the one which has balance sheet total of $ 330,000 as FMV values and the other one as cost. Reason being the land value always appreciates.

Sl No	Particulars	Amount $
1	Total Assets (FMV) (Note 1)	3,30,000
2	Toms Interest (25%)	82500

Note 1: For the purpose of tax basis calculation, FMV of the asset has to be considered. Carrying cost of assets in Good times books is not relevant.

C. Gain to Tom on sale

Sl No	Particulars	Amount $
1	Sale consideration	240000
2	Toms Interest	82500
3	Gain on sale	157500

D. Tax basis of buyer

The tax basis of newly acquired interest will be $ 240,000. It is the cost the new buyer has spent in acquiring the interest. Therefore, it is his tax base.

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