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Problem 11-43 (a) (LO. 6) The December 31 balance sheet of the Gemco LLP reads as...

Problem 11-43 (a) (LO. 6)

The December 31 balance sheet of the Gemco LLP reads as follows.

	Adjusted Basis	FMV
Cash	$215,000	$215,000
Receivables	-0-	77,000
Capital assets	40,000	48,000
Total	$255,000	$340,000
Felix, capital	$63,750	$85,000
Fernando, capital	63,750	85,000
Francesca, capital	127,500	170,000
Total	$255,000	$340,000

Capital is not a material income-producing factor for the LLP. Felix is an active (general) partner and owner of a 25% interest in the LLP's profits and capital. On December 31, Felix receives a distribution of $94,000 cash in liquidation of his partnership interest. Nothing is stated in the partnership agreement about goodwill. Felix's outside basis for the partnership interest immediately before the distribution is $63,750.

a. How much is Felix's recognized gain from the distribution?

Capital gain:	$
Ordinary income:	$

All payments that are not classified as § 736(b) property payments are categorized as § 736(a) income payments.

b. How much can Gemco claim as a deduction?
$

Expert Solution

Answer :-

From the balance sheet of Gemco LLP it can be seen that the Fair Market Value of Felix's share is $85000. So the excess payment of $ 9000 ($94000 - $ 85000) is for the unstated Goodwill of the Felix's share.

The payment that Felix has received for his interest in cash and capital assets is a 736(b) property payment. Such amount of payment turns out to be $63750. $63750 is consisting of $53750 (1/4th share ie 25% of $215000) paid for the cash and $10000 (1/4th share ie 25% of $40000) paid for the fair market value of the capital assets.

The property payment of $ 63750 cash includes amounts for Felix's share of Capital Assets and cash only. Neither of which shall be considered as a Cash Asset.

As the outside basis of Felix is for the partnership interest immediately before the distribution is $63750 there is no CAPITAL GAIN ., i.e., ($63750- {$53750 + $10000})

Therefore GEMCO LLP CANNOT deduct any part of $ 63750 Property Payment.

Felix's 736(a) payment is $ 28250 consisting of $ 19250 cash payment i.e., ( 25% of $77000) for Felix's pro rata share of the unrealised receivables and $ 9000 payment for the unstated Goodwill.

As the payment of $ 28250 under 736(a) is not determined by reference to partnership income, the payment shall be classified as a GUARANTEED PAYMENT. It shall be included as Ordinary Income on Felix's tax return and is deductible by the partnership firm GEMCO LLP.

In case of any furthur help or clarifications required do comment and let me know. Thanks!

ekkarill92 answered 2 years ago

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