Question

Allison, Keesha, and Steven each own equal interests in KAS Partnership, a calendar year-end, cash-method entity. On January 1 of the current year, Steven’s basis in his partnership interest is $31,750. During January and February, the partnership generates $36,270 of ordinary income and $5,982 of tax-exempt income. On March 1, Steven sells his partnership interest to Juan for a cash payment of $55,450. The partnership has the following assets and no liabilities at the sale date:

		Tax Basis		FMV
Cash	$	39,500		$	39,500
Land held for investment		39,500			79,000
Totals	$	79,000		$	118,500

a. Assuming KAS’s operating agreement provides for an interim closing of the books when partners’ interests change during the year, what is Steven’s basis in his partnership interest on March 1 just prior to the sale?

c. What is Juan’s initial basis in the partnership interest?

d. What is the partnership’s basis in the assets following the sale?

Answer 1

a) Steven’s basis in his partnership interest on March 1 just prior to the sale

Particulars	Amount($)
Outside Basis as of January 1	$31,750
Add :- Share of Distributive Income of Steven
Ordinary Income ( $36,270/3)	12,090
Tax Exempt income ( $5,982/3)	1,994
Outside Basis as of March 1	$45,834

c). Juan’s initial basis in the partnership interest = $55,450

as Juan purchases Steven’s partnership interest for $55,450 cash payment. This cash payment of $55,450 is the Juan’s initial basis in the partnership interest

d) partnership’s basis in the assets following the sale

The sale of partnership interest does not affect the partnership’s basis in the assets. It will be the same following the sale as it before the sale, which is equal to the Tax Basis total - $79,000