A partnership started on January 1, 2016 has two partners, Charlie and Linus. On the date the
partnership initiated, Charlie and Linus had $25,000 of initial tax basis, respectively, and
each had a 50 percent profits interest. Their respective initial tax bases each had $5,000
related to a loan (totaling $10,000) the partnership had taken out without collateral where
each partner had signed to be personally responsible for $5,000 should the business profits
not be enough to pay the debt off. On July 1, 2016, Linus sold his profits and capital interest
to Sally for $65,000. On the date of the sale, Linus’s adjusted outside tax basis in his
partnership interest was $45,000 (after adjusting his basis for items that increased or
decreased his basis throughout the first half of the year). Charlie and Linus’s profits interest
didn’t change between the partnership’s initiation and July 1, 2016. Sally would take on
Linus’s partnership interests and sign the same $5,000 responsibility for the business loan for
which Linus had previously been responsible.
) Will the partnership
immediately recognize any gain or loss on Linus’s
sale of his partnership interest? If so, how much will it recognize?
) What will Sally’s outside tax basis be on July 1, 2016?