Question

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?
$

Answer 1

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.

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