Continue with the GAB LLP and balance sheet shown in Problem 45, assuming instead that Gina sells her partnership interest to Jess for $140,000 of cash.
a. What is the amount and character of Gina’s gain?
b. What deductions can be claimed by the LLP?
c. What action might Jess request of the partnership?
SOLUTION
a. If Gina sells her interest for $140,000 and has a basis of $90,000, she realizes a gain of $50,000. Of this amount, the portion related to Gina’s share of unrealized receivables, or $25,000, is treated as ordinary income, and the remaining $25,000 is taxed as a capital gain.
b. Because this sale is external to the partnership, the partnership does not claim any deductions.
c. Jess might request that the partnership make a § 754 election to step up the inside basis of partnership assets to reflect the $50,000 premium she has paid. If the election is not made, Jess will pay tax on the $25,000 of receivables when they are collected, and she will not be able to recover the amount she has paid for the land appreciation and partnership goodwill until she sells or liquidates her partnership interest. (If, instead, the election is made, Jess will not pay any tax on the $25,000 of receivables when they are collected, and she will have additional basis in the land and partnership goodwill.)