b. What is Jaclyn’s basis in the partnership interest? c. If the LLP has a § 754 election in effect, how much is the adjustment and to which partner(s) is it allocated? a. Serena recognizes a gain of $60,000, including ordinary income of $48,000 and a capital gain of $12,000. She received $140,000 plus relief of $40,000 of liabilities for a total of $180,000. Her basis in the LLP interest was $120,000, resulting in a net gain of $60,000. Of this gain, she reports ordinary income in the amount of her share of the LLP’s unrealized receivables, or $48,000 ($120,000 ´ 40%). The remaining gain is a capital gain. b. Jaclyn’s basis equals the $180,000 paid, including the $40,000 share of the LLP’s liabilities. b. If the LLP has a § 754 election in effect, it records an adjustment of $76,000 {$180,000 paid – $104,000 share of inside basis [($80,000 + $0 + $180,000) ´ 40%]}. This step up is allocated to Jaclyn.

100. On August 31 of the current tax year, the balance sheet of the RBD General Partnership is as follows: Adjusted Basis FMV Cash Receivables Capital assets Total Nonrecourse debt Rachel, capital Barry, capital Dale, capital Total $150,000 –0– 600,000 $750,000 $150,000 200,000 200,000 200,000 $750,000 $150,000 90,000 660,000 $900,000 $150,000 250,000 250,000 250,000 $900,000 On that date, Rachel sells her one-third partnership interest to Lisa for $300,000, including cash and relief of Rachel’s share of the nonrecourse debt. The nonrecourse debt is shared equally among the partners. Rachel’s outside basis for her partnership interest is $250,000 (including her share of partnership debt). How much capital gain and/or ordinary income will Rachel recognize on the sale? Rachel’s realized gain is $50,000 ($300,000 received less $250,000 outside basis). As the receivables are a § 751 “hot asset,” Rachel is treated as having sold her 1/3 share and, therefore, will recognize $30,000 ordinary income. The rest of the sale is taxed under the general rule of § 741 and generates a capital gain of $20,000. 101. Hannah sells her 25% interest in the HIJK Partnership to Alyssa for $120,000 cash. At the end of the year prior to the sale, Hannah’s basis in HIJK was $70,000. The partnership allocates $15,000 of income to Hannah for the portion of the year she was a partner. On the date of the sale, the partnership assets and the agreed fair market values were as follows. Adjusted Basis FMV Cash Accounts Receivable Land Total $100,000 –0– 240,000 $340,000 $100,000 80,000 220,000 $400,000 Determine the amount and character of any gain that Hannah recognizes on the sale. Hannah’s basis is increased from $70,000 at the beginning of the year to $85,000 at the sale date, as a result of HIJK’s allocation of $15,000 of income to her during the sale year. Her total gain is $35,000 ($120,000 sales price – $85,000 basis). Hannah recognizes $20,000 of ordinary income under § 751(a) and a $15,000 capital gain under § 741. Hannah recognizes ordinary income to the extent of her share of the partnership’s inventory and unrealized receivables. Hannah’s 25% share of the receivables is $20,000 (25% ´ $80,000). The difference between the amount Alyssa paid ($120,000) and Hannah’s share of the value of partnership assets ($100,000) is probably the value of the partnership’s intangible assets or goodwill.