constructive_liquidation_scenarios - Step Five Partnership...

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Topic: Constructive Liquidation Scenario AB Partnership has two assets: cash $9,000, and land with a basis of $40,000. The partnership has a recourse payable of $25,000, and two equal partners. Partner A’s capital account is $10,000 and Partner B’s capital account is $14,000. Step One: Assets are deemed worthless. Step Two: Partnership sustains a $49,000 loss. Step Three: Losses are allocated equally to partner’s, therefore Partner A’s capital account is $(14,500) [$10,000 – $24,500] and Partner B’s capital account is $(10,500) [$14,000 – $24,500]. Step Four: Partner A contributes $14,500 and Partner B contributes $10,500, to restore their respective capital accounts to $0.
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Unformatted text preview: Step Five: Partnership repays recourse payable. Step Six: Partnership liquidates (any remaining cash is distributed to partners with positive capital balances – zero in this case). Thus, Partner A’s share of liabilities is $14,500 (and his basis is $24,500) and Partner B’s share of liabilities is $10,500 (and his basis is $24,500). Note: This is a hypothetical “worst-case” scenario. The partnership does NOT actually sell their assets for $0; the partners do NOT actually contribute money to the partnership; and the partnership is NOT liquidated. This is merely an exercise to allocate partnership recourse debt to the individual partners....
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This note was uploaded on 09/09/2011 for the course TAX 5015 taught by Professor Kelliher,c during the Spring '08 term at University of Central Florida.

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