Chapter 21 solution

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Unformatted text preview: McGraw-Hills Taxation, by Spilker et al. Chapter 21 Dispositions of Partnership Interests and Partnership Distributions SOLUTIONS MANUAL Discussion Questions 1. [LO 1] Joey is a 25% owner of Loopy LLC. He no longer wants to be involved in the business. What options does Joey have to exit the business? Answer: Joeys two most common options are to sell or exchange his interest in the LLC to a third party or to have the LLC liquidate his interest. Joey may also exchange his interest for corporate stock, give the interest away, or transfer the interest upon his death. 2. [LO 1] Compare and contrast the aggregate and entity approaches for a sale of a partnership interest. Answer: Under the aggregate approach, the disposition of a partnership interest represents a sale of the partners share of each of the partnership assets. This approach would require complex tax rules because the partner would need to allocate the sales proceeds among the different assets and determine the character of the gain or loss from each asset. Under the entity approach, the sale of a partnership interest would be very similar to the sale of corporate stock. The partner would recognize capital gain or loss on the sale based on the difference between the sales price and the partners tax basis in the partnership interest. 3. [LO 1] What restrictions might prevent a partner from selling his partnership interest to a third party? Answer: Partnership agreements may specify whether a partner may voluntarily leave the partnership. If the agreement does not allow for a voluntary withdrawal, the partnership may need to be dissolved to effect the termination. A partnership agreement may also specify whether a partner may assign his interest to a third party. This will determine if the partner is free to sell his interest to someone other than the existing partners. © The McGraw-Hill Companies, Inc., 2010 1 Taxation of Individuals, by Spilker et al. 4. [LO 1] Explain how a partners debt relief affects his amount realized in a sale of partnership interest. Answer: When a partner sells his partnership interest, often he is relieved of his partnership debt obligations. As is the case in sales of other assets, debt relief will increase the amount realized in the sale of a partnership interest. Because the partners outside basis includes his share of the partnership debt, this negates the effect of debt on the gain or loss of the partnership interest sale. 5. [LO 1] Under what circumstances will the gain or loss on the sale of a partnership interest be characterized as ordinary rather than capital? Answer: To the extent that a gain or loss on the sale of a partnership interest is attributable to certain ordinary income assets held by the partnership, the gain or loss is ordinary. §...
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