Question

Newton is a one-third owner of ProRite Partnership. Newton has decided to sell his interest in the business to Betty for $63,500 cash plus the assumption of his share of ProRite’s liabilities. Assume Newton’s inside and outside basis in ProRite are equal. ProRite shows the following balance sheet as of the sale date: Tax Basis FMV Assets: Cash $ 122,000 $ 122,000 Receivables 24,000 24,000 Inventory 50,750 100,400 Land 31,000 18,100 Totals $ 227,750 $ 264,500 Liabilities and capital: Liabilities $ 60,000 Capital – Newton 55,917 – Barbara 55,916 – Liz 55,917 Totals $ 227,750 What is the amount and character of Newton’s recognized gain or loss?

Answer 1

	Assets	Basis	FMV
	Cash	$122,000	$122,000
	Receivables	$24,000	$24,000
	Inventory	$50,750	$100,400
	Land	$31,000	$18,100
	Totals	$227,750	$264,500
	Liabilities and capital
	Liabilites	$60,000	$60,000
	Capital - Newtown	$55,917	$55,917
	- Barbara	$55,916	$55,916
	- Liz	$55,917	$55,917
	Totals	$227,750
	Amount realized
	Cash	$63,500
	Debt Relief	$20,000	$83,500
	Less: basis in partnership interest (including liabilities)		-$75,917
	Newton’s realized and recognized gain		$7,583
	To the extent Newton realizes any amounts attributable to hot assets, his gain will be classified as ordinary.
	If ProRite sold its assets for their fair market value at the sale date, the ordinary gain would be as follows:
		Tax Basis	FMV	Gain/Loss	Ndewton's share
	Inventory	$50,750	$100,400	$49,650	$16,550
	Total Gain	$7,583
	Less: Ordinary gain	-$16,550
	Capital Loss	-$8,967