Assume you have been doing the personal tax return for Mr. Mathy for a number of years. He is the partner in a popular fast food establishment. He no longer believes that his partner, Mr. Dopeland, see eye to eye. Mr. Dopeland is a nonbeliever and feels the restaurant should be open 7 days a week to maximize profits. Mr. Mathy strongly believes that being closed on this day allows employees the opportunity to rest, spend time with family and friends, and most importantly worship if they choose. Would you advise Mr. Mathy to end the partnership? Explain what options he has to exit the business? Describe the tax consequences of each option.
It is not advisable for Mahy to end the Partnership.The options he has to exit the business are
1. Wihdraw all his contributions i.e both capital and profits from the partnership firm.
2. Transfer the share in the firm to other party.
3. Take assets from the company in lieu of his share
Tax Consequences under this options are:
1. Revenue profits and capital contributions are withdrawn from a firm are not liable to tax
2. Transfer of a share of in a partnership firm is liable to tax and capital gains will arise.
3. if any property was transferred from firm to partner, it will be taxable in the hands of the firm as capital gains and fair market value will be taken as sale consideration. The partner need not to pay any tax on such assets.
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