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Weycomas
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Joined: 04 Oct 2009
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Posted: 04 Oct 2009 at 02:56 \| IP Logged

I'm doing one of the exam simulations, and the answer to one of the problems is making me really mad. Here's the problem:
Partner A is a 1/3 partner and sells his partnership interest. His capital account is 20,000 and his share of liabilities is 30,000. Z buys A's the interest for 170,000 and assumes the 30,000 liability. How much gain/ ordinary income will A recognize from the sale?
**Note** Accounts Rec, with an adjusted basis of 0, have a FMV of 150,000 (this counts as a hot asset, and is treated as ordinary income based on the partner's share of the asset).

In the book, the formula for computing the gain is as follows:
Beg cap account- 20,000
+ share of liabilities- 30,000
= Adjusted basis- 50,000

Cash Received- 170,000
Cancellation of debt- 30,000
=200,000

200,000-50,000 = 150,000 gain

I would say this:
Gain on sale of partnership interest is 150,000. Since there were hot assets (the appreciated FMV of A/R), this must be recognized as ordinary income. Partner A had a 1/3 share, and 1/3 of 150,000 is 50,000. Thus, 50,000 is the ordinary gain, and 100,000 is a capital gain.

The answer says this:
Sale Price- 170,000
Basis- 50,000
Gain- 120,000
Share of hot assets- 50,000
50,000 ordinary gain, 70,000 capital gain

What?? The book says you need to add liabilities assumed by the purchasing party to the cash received. It shows the formula and even gives an example. Is this answer wrong, or am I missing something completely?

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Voldemort
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Posted: 04 Oct 2009 at 09:48 \| IP Logged

Weycomas -

You are right on this for the hot assets part. (The partner takes his share of the 150 to get 50 or ordinary income.) I don't have the problem in front of me, but I think in the question they said that the 170 sales price included the relief of partner liabilities. So you don't need to add the 30 back, its already in there.

That's what I remember at least - someone correct me if I'm wrong.

ms500
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Posted: 04 Oct 2009 at 11:59 \| IP Logged

Hi weycomas

This question is little tricky. This question can be solved in other way, please correct me if I am wrong

In the question one thing you have overlooked, i.e. capital assets gain i.e. (basis 90000- fmv 300000=210000).
partner's share in capital assets= 210000/3= 70000 capital gain
Receivable/Hot Assets= ordinary gain i.e. (basis 0- fmv 150000=150000).
partner's share in Receivable= 150000/3= 50000 Ordinary gain
So, I believe, Becker's answer is correct

Appreciate if some one confirms above

Thanks

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Weycomas
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Posted: 04 Oct 2009 at 17:16 \| IP Logged

Voldemort wrote:

Weycomas -

That's what I remember at least - someone correct me if I'm wrong.

Yeah you are right, the relief of assets was included in the price.

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Reg- 10/05/09

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