Question

Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in his/her partnership interest of $104,000. On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000. The partnership has the following assets and no liabilities as of the sale date:

		Tax Basis		FMV
Cash	$	18,000		$	18,000
Accounts receivable		0			12,000
Inventory		69,000			81,000
Equipment		180,000			225,000
Stock investment		45,000			75,000
Totals	$	312,000		$	411,000

The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago.

a. What are the hot assets [§751(a)] for this sale?

b. What is Marco’s gain or loss on the sale of his partnership interest?

d. What are Ryan’s inside and outside bases in the partnership on the date of the sale?

Answer 1

(a) The hot assets include the potential depreciation recapture in the equipment ($45,000), the accounts receivable, and the inventory.

(b) Macro's Gain

Amount realized $137,000

Less: basis in partnership interest ($1,04,000)

Macro's realized and recognized gain $33,000

(c) Ryan inside and outside basis in partnership on the date of sale

Ryan's outside basis of the partnership interest is equal to $1,37,000, while his inside basis is equal to Marco's inside basis before the sale is equivalent to $1,04,000.