In: Accounting
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.
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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