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In: Accounting

Jim sells her interest in Judd Enterprises, LLC (a partnership selling movies and music) to Wynona...

Jim sells her interest in Judd Enterprises, LLC (a partnership selling movies and music) to Wynona (they are unrelated). At the time of the sale, Judd had the following balance sheet:

                                                            AB                              FMV

Cash                                                    $300,000                     $300,000

Accounts Receivable                           $0                                $200,000

Inventory                                             $200,000                     $500,000

Land                                                    $200,000                     $500,000

Total                                                    $700,000                     $1,500,000

Debt                                                    $300,000                     $300,000

Capital, Gary     $200,000                     $600,000

Capital, Jim $200,000                     $600,000

Total                                                    $700,000                     $1,500,000

The sales price is $800,000. Jim's basis in her partnership interest is $350,000.

a. What are the tax consequences to Jim?

b. What basis will Wynona take in her partnership interest?

c. If a 754 election is in place, what will the balance sheet look like after the transaction?

Solutions

Expert Solution

Answer:

(a) The tax consequences to Jim

Partnership interest or income is considered ordinary income to the partners since the partnership is not allowed to pay taxes. Therefore, any gain or loss made from a transaction related to a partner's share of interest will be taxed at an individual level. Jim's partnership interest had a basis of $350,000 but she sold it to Wynona at $800,000. She realized a capital gain of $450,000. The capital gain will be added to her other ordinary income for tax purposes and taxed at the individual tax rates.

.

(b) Wynona's basis in her partnership interest

A new partner's basis in a partnership is always the purchase price of the exiting partner's interest. Therefore, Wynona's basis of interest in the partnership will be $800,000.

.

(c) Balance sheet after the sale of Jim's partnership interest

Judd Enterprises
New Balance Sheet
Assets Amount Liabilities & Capital Amount
Cash $     3,00,000 Debt $   3,00,000
Accounts receivable $     2,00,000 Capital, Jim $   6,00,000
inventory $     5,00,000 Capital, Wyana $   6,00,000
Land $     5,00,000
Total Assets $ 15,00,000 Total Liabilities & Capital $15,00,000

ekkarill92 answered 1 year ago
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