Question

Grace, James, Helen, and Charles each own equal interests in GJHC Partnership, a calendar year-end, cash-method entity. On January 1 of the current year, James’s basis in his partnership interest is $62,000. For the taxable year, the partnership generates $80,000 of ordinary income and $30,000 of dividend income. For the first five months of the year, GJHC generates $25,000 of ordinary income and no dividend income. On June 1, James sells his partnership interest to Robert for a cash payment of $70,000. The partnership has the following assets and no liabilities at the sale date:

Cash @ Tax basis = $27,000 Cash @ FMV = 27,000

Land Held for Investment @ Tax basis = $80,000 Land Held for Investment @ FMV = $100,000

Totals Tax Basis = $107,000 FMV = $127,000

a. Assuming GJHC’s operating agreement provides that the proration method will be used to allocate income or loss when partners’ interests change during the year, what is James’s basis in his partnership interest on June 1 just prior to the sale?
b. What is the amount and character of James’s recognized gain or loss on the sale?

c. If GJHC uses an interim closing of the books, what is the amount and character of James’s recognized gain or loss on the sale?

Answer 1

a.

Outside basis as of January 1:	$62,000
Add: distributive share of income
Ordinary ($80,000 x 25% x 5/12)	$8,333
Dividend ($30,000 x 25% x 5/12)	$3,125
Outside basis as of June 1:	$73,458

b.

Amount realized:	$70,000
Less: basis in partnership interest	$73,458
Capital loss	-$3,458

c.

Outside basis as of January 1:	$62,000
Add: distributive share of income
Ordinary ($25,000 x 25%)	$6,250
Outside basis as of June 1:	$68,250
Amount realized:	$70,000
Less: basis in partnership interest	$68,250
Capital gain	$1,750