Newton is a one-third owner of ProRite Partnership. Newton has decided to sell h
ID: 2410535 • Letter: N
Question
Newton is a one-third owner of ProRite Partnership. Newton has decided to sell his interest in the business to Betty for $63,500 cash plus the assumption of his share of ProRite’s liabilities. Assume Newton’s inside and outside basis in ProRite are equal. ProRite shows the following balance sheet as of the sale date: Tax Basis FMV Assets: Cash $ 122,000 $ 122,000 Receivables 24,000 24,000 Inventory 50,750 100,400 Land 31,000 18,100 Totals $ 227,750 $ 264,500 Liabilities and capital: Liabilities $ 60,000 Capital – Newton 55,917 – Barbara 55,916 – Liz 55,917 Totals $ 227,750 What is the amount and character of Newton’s recognized gain or loss?
Explanation / Answer
Assets Basis FMV Cash $122,000 $122,000 Receivables $24,000 $24,000 Inventory $50,750 $100,400 Land $31,000 $18,100 Totals $227,750 $264,500 Liabilities and capital Liabilites $60,000 $60,000 Capital - Newtown $55,917 $55,917 - Barbara $55,916 $55,916 - Liz $55,917 $55,917 Totals $227,750 Amount realized Cash $63,500 Debt Relief $20,000 $83,500 Less: basis in partnership interest (including liabilities) -$75,917 Newton’s realized and recognized gain $7,583 To the extent Newton realizes any amounts attributable to hot assets, his gain will be classified as ordinary. If ProRite sold its assets for their fair market value at the sale date, the ordinary gain would be as follows: Tax Basis FMV Gain/Loss Ndewton's share Inventory $50,750 $100,400 $49,650 $16,550 Total Gain $7,583 Less: Ordinary gain -$16,550 Capital Loss -$8,967