How Do I Sign Massachusetts Assignment of Partnership Interest

How do i document type sign assignment of partnership interest massachusetts

partnership sales and distribution this is problem one so let's look first at our balance sheet our information we've got three partners a B and C they're all equal partners so they're all one-third partners on January 1st the current year a is outside basis is $250 and a balance sheet is as follows so we've got some assets we've got some liabilities we've got the capital accounts all right so specifically the questions asking us to situations that we can do together a one of the tax consequences to partner a a partner a where to sell her interest for $500 also assume in this problem that the machinery was purchased three years ago for $120 and that depreciations been taking on the building and also part of the same problem P purchases the one-third interest from partner a for $500 cash and the questions asking what is the consequences to the selling partner and then what's the consequences to the partner that is purchasing the partnership interest all right so when we do a partner when we deal with partnership sales you're selling to somebody outside you're selling your partnership interest to somebody outside the partnership or a partner you're not selling to the partnership itself that would be treat as a distribution we have three steps that we always go through we always start with the seller those are the three steps sorry out so I meant when we talk about the three steps let me let me start over whenever we have a sale partnership interest where you are selling your partnership interest either to partner inside the partnership or someone else I the partnership join the partnership you have to apply the sales of partnership interest rules if you are selling your partnership interest to the partnership itself distribution rules so we have to look at the seller and the buyer with respect to the seller we have three steps that we have to focus on so step one is to determine the section 1001 amount realized - adjusted basis so we apply the normal rules of amount realized as a basis here again we're looking at partner a partner a is selling his or her partnership interest so what is a getting a is getting five hundred dollars of cash from P and also look here we've got a liability relief since each partner is a one third partner profits or losses we don't know what kind of liability it is we do no recourse non-recourse the different you know changes up the profit loss ratio how you allocate we do know that it's the same right one third partner so fifty four each so a as liability relief of $50 now the base sets amount realized total is 550 now the basis that a has in a partnership interest is being sold we're told as 250 there's another way you can get that we take the two hundred tax book amount under the capital accounts and we add the $50 of liability to pay so A's realize and recognize gain and this transaction is going to be $300 and that's both realized and recognized okay so step one we're determining the total gain that it has to recognize a is gonna have a total gain of 300 dollars in net step two is a term in step two and three are breaking down the character of that $300 gain step two is a determine the portion of the gain that's attributable to hot assets hot assets are considered ordinary income assets ordinary income or ordinary loss I should say ordinary income or ordinary loss assets so what we do is we go through each asset on the list of the balance sheet and we look if the partnership was to sell that asset would it create ordinary income ordinary loss so cash of course there's no gain no loss ever account receivable is an ordinary income asset ordinary loss asset inventory always ordinary machinery so machinery could be section 1231 ordinary through section 1245 well here we're told in the facts we saw earlier that the partnership purchased the machinery three years ago for $120 and we know the basis now is $55 so what does that mean that means there's been sixty five dollars of depreciation because you take the 120 purchase price minus the 55 depreciation taken you get 65 of depreciation so that is depreciation recapture we're gonna do the lesser of the realize gain or that so we'll keep that in mind building we depreciate the building which we're told we did over the last five years does that create depreciation recaptured no it does not unless you purchase the building before 1987 which that one is not the case here stock that is not ordinary income house and goodwill internally generated because it's zero not internally generated asset so we've got three assets that are what we call hot assets the reason why and this is a phrase we use in the tax law we call them hot assets are because these are the assets that are gonna create ordinary income and sometimes ordinary loss but usually ordinary income and ordinary income for taxpayers individuals bad right so these are hot assets like a hot potato okay so this is what we do in step two remember step one it's a total game step two you must recognize the partners share of hot-ass at ordinary income or ordinary loss that the partnership would have had to recognize if it sold it so we've got these three assets we've got accounts receivable we've got inventory and we have machinery we basically treat it as if the partnership was going to sell these assets and when the amount realized is going to equal the fair market value total so account receivable fair market value is sixty inventory 150 and machinery 100 minus the adjusted basis so minus seventy five for just just basis for accounts receivable ninety for inventory and 55 for machinery we get the gain the partnership would have to recognize if it was to sell these assets what we actually of a loss for a couch table look at that fifteen inventory sixty machinery forty five now again when it comes to ordinary income recapture which is what we're focusing on here for hot assets it's the lesser of the depreciation taken which was sixty five or the $45 realized gain realizing recognized gain so of course the forty five is the lesser sets what we use we then are going to take our partner that's leaving or selling the interest their share so a is a 1/3 interest we take 1/3 of that for A's portion and we get a negative 5 20 and 15 we then sum them all together we sum these all together we get positive 30 this is ace share of ordinary gain so a has in this transaction $30 of ordinary gain finally we get to step three step three is the easiest step we take step one - step two so step one we have a total gain of $300 - step two 30 gain we get 270 this is a $270 capital gain that a takes on it would be long-term capital gain if a held a partnership interest for more than a year short transfer year or less so you notice that 270 plus 30 is 300 that's exactly how it works the amount of gain that a recognises in step one you're breaking out the character ordinary in step two capital and step three by the way it's also possible to have a loss in step one game in step two and even bigger loss in step two capital loss in step three that actually happens sometimes you can have all different types of scenarios that it has to net out to that amount so those are the consequences of the seller a with respect to the purchaser P we're told that again that P pay $500 cash so we need to note two things what is P's outside basis and we also need to know what happens with respect to the partnership to P so peas outside adjusted basis is the $500 paid sorry I put 5,000 called use plus remember there's also liabilities you always have to allocate liabilities when it comes to partnerships plus the $50 of liabilities so this equals $550 so pees outside basis is $550 now the other issue is that in terms of P what happens with respect to the partnership so there's no section 754 lat sorry there's no section 754 election in place here because there's no section 754 election in place all that happens is we cross out a and put P over it so literally P steps into the shoes of a with respect to the partnership yes P does have a $550 basis and his partnership interest so he was a sell he does use 554 the adjusted basis however when it comes to the partnership of the partnership sells property or does something all this stuff stays the same so if the partnership was to sell the account receivable inventory or machine the next day guess what P would have that ordinary income or ordinary loss okay we're if P sold his or her interest in next day he would have guess what $30 of ordinary game in $30 of or I'm sorry yes $30 of capital loss so one way that we have we fixed this is to make a section 754 election what a section 754 election does is it remedies this situation it adjusts all the assets on the balance sheet up and down by 1/3 the fair market value and the basis so I'm saying is that for the accounts receivable we would increase the adjustment we would actually decrease the adjusted basis by 1/3 of the $15 difference the $5 that we saw so the basis would go down to 70 the inventory would go up to 110 and the machinery would go up to 70 and then what happen is if the partnership sold those assets P would not have any gain on those assets B and C though would their share of that and that's how you would do it we would also adjust pease tax book amount to $500 to be 500 500 the other partners would say the same and that would be that's the end of this respective problem you