Use the following data for PartA through E.
The balance sheet (with fair market values displayed) is for a three-person service partnership with three equal partners. Thornton enters into a retirement agreement with the partnership that provides for payments of $33,500 annually for 4 years and liability release of $6,000 at the end of the payout period. The partnership agreement does not provide for property payments to a partner for the partner’s share of goodwill.
| Value | Tax Basis | |
| Cash | 240000 | 240000 |
| Unrealized Receivables | 60000 | 0 |
| Unstated Goodwill | 60000 | 0 |
| Other Property | 60000 | 45000 |
| Total | 420000 | 285000 |
| Liabilities | 18000 | |
| Capital | Value | Tax Basis |
| Norton | 134000 | 95000 |
| Horton | 134000 | 95000 |
| Thornton | 134000 | 95000 |
A. Select ALL OF THE TRUE STATEMENTS from the list below.
– the total payments to Thornton under the agreement are $134,000
– the total payments to Thornton under the agreement are $140,000
– the total of the payments received less Thornton’s outside basis will be treated as capital gain
– part of the payments will be treated as ordinary and part as capital
– the partnership will receive a deduction from ordinary income for part of these payments to Thornton
– the payout agreement above is fixed
– the payout agreement above is contingent
B. How much of the total payments received will be considered ordinary income to Thornton? DO NOT USE COMMAS OR DOLLAR SIGNS IN YOUR ANSWER!!
C. What will be the total amount of the capital gain to Thornton under this payout? DO NOT USE COMMAS OR DOLLAR SIGNS IN YOUR ANSWER!!
D. When will Thornton recognize capital gain under this contract?
Year 1
Year 2
Year 3
Year 4
E. Suppose the partnership made a different retirement payout agreement with Thornton. Under this agreement, the partnership agreed to pay Thornton $90,000 in cash and $6,000 of liability release in the first year and 10% of the partnership profits for the following three years. SELECT ALL OF THE TRUE STATEMENTS FROM THE LIST BELOW.
Thornton would recognize $1,000 of capital gain in the first year
All payments after the first year would represent ordinary income to Thornton
The payments to Thornton would represent a guaranteed payment
The partnership would receive a deduction from ordinary income for all the payments to Thornton
Thornton is considered to continue as a partner until the Section 736(a) payments are completed
F. Assume the abbreviated balance sheet below (shown in fair market values) for a three-person service partnership. All partners were equal 1/3rd partners.
| Value | Tax Basis | |
| Cash | 180000 | 180000 |
| Unrealized Receivables | 45000 | 0 |
| Other Property | 60000 | 48000 |
| Total | 285000 | 228000 |
| Capital | Value | Tax Basis |
| Lowell | 95000 | 76000 |
| Standish | 95000 | 76000 |
| Mellon | 95000 | 76000 |
Partner Standish dies on July 31st of the year (the partnership is a calendar year partnership). The partnership agrees to make a $95,000 payment to Standish’s estate to buy out the estate’s interest in the partnership. SELECT THE FALSE STATEMENT FROM THE LIST BELOW
Standish’s estate will take a fair market value at date of death basis in its share of all partnership assets so it will not recognize any gain on the receipt of the $95,000 from the partnership.
The estate will recognize $15,000 of ordinary income upon receipt of the $95,000 just as Standish would have if she had lived.
The estate will not recognize any taxable income on $80,000 of the distribution.
The partnership tax year will close for partner Standish on the date of death