Redline Assignment of Partnership Interest with airSlate SignNow

Signature assignment of partnership interest

all right we're talking about sales a partnership interest we got lime lemon and orange are equal partners and the skittles limited liability partnership they form the business several years ago by contributing cash on January 1st this year limes outside basis is $250 and skittles balance sheet including fair market values as follows so you've got a bunch of different types of assets we've got some liabilities we've got the capital accounts of lime lemon and orange on January 1st of this year lime sells her entire interest to a new partner green apple for $500 cash assume that skittles purchased the Machine three years ago for $120 and that $120 in depreciation has been taken on the building since its acquisition five years ago what are the tax consequences to each partner and the partnership on the sale and purchase sorry sale purchased by lime and green apple let's start there let's just start by looking at the seller because doesn't matter who you're looking at when you're focusing on the consequences of a sale purchase of a partnership interest I always start the seller so remember that when it comes to the seller there's a three-step process so the seller here is lime lime is selling her interest for $500 cash to green apple there's three steps the first step is we go to section 1001 because we have a sale of a property piece of property right partnership interest is property we calculate the amount realized minus the adjusted basis to give us the realized gain and then intersection 1001 see because we're receiving cash it's gonna be all recognized because there's not no non-recognition rule that applies whenever you receive all cash so let's calculate the amount realized with respect to lime so Matt realizes May before things actual cash constructive cash or liability relief fair market value of non-cash property minus selling expenses so first thing is we know that lime is getting $500 of actual cash so we have $500 of actual cash plus the partnership is showing a total of $150 of liabilities now lime lemon and orange are all equal partners we've gone through in previous discussion liability allocation if all three of these partners are equal when it comes to profit loss and everything else capital you're gonna have one-third one-third one-third with respect to everything okay so we're gonna take one-third of one hundred fifty dollars and limes portion of that liability at this day is 50 so because lime is leaving the partnership lime is no longer responsible for this $50 think about the partnership went belly-up why now business why we be responsible $50 of that guess what limes all I'm responsible so that's liability relief of $50 so the total amount realized that lime gets in this problem is $550 now the adjusted basis of limes partnership interest is the outside basis to the time of the sale we're told it's $200 but another way to calculate this and you can't always do this because if you have revaluations you have issues with the capital account we values and another discrepancies another way to get this number that's 250 we've got the tax book $200 for lime and again $50 to the liability portion that's 250 but we're giving the outside basis of $250 so they're realized and recognized gain that lime records is $300 right 550 minus 250 is $300 that is to realize and recognize gain under Section 1001 okay it's our first step we got two more steps the second step is to determine if there's any portion of hot assets hot assets just me is there any ordinary income or ordinary loss off this transaction because the general rules under Section 741 that the sale of partnership interested capital gain capital loss so that's why we stopped at Step two before go to step three and then determine the rest as 741 capital game let's go through a list of assets do we have any hot assets we're looking for hot assets under 750 1c and 751 d now when it comes to 751 a which is where we find the sales of partnership interests all inventory all in all inventory not substantially appreciated all inventory is included in this even if it's lost inventory hey we got inventory so right there accounts receivable as well account receivable are also considered hot assets under 751 C 71 D unrealized receivables okay cash is not a hot asset because we wouldn't even create a gain or loss anyways as always the face value basis machinery that's questionable unrealized receivables include section 1245 recapture now there's no 704 C issues in this problem because they all form the business several years ago by contributing cash no 704 C issues so that means the business acquired this machinery and we've been told that Skittles the partnership purchased the machinery three years ago and we're told that the basis now is $55 so in determining the 1245 portion we take the 120 purchase price on just the basis right when you purchased it - the 55 that gives us 65 depreciation taken depreciation taken on the respective asset okay so 65 depreciation now for purposes of section 1245 it's the lesser of the realized recognized gain which if that if the partnership were to sell the asset here they would receive based on the fair market value 100 amount realized minus 55 adjusted basis that's a $45 gain the lesser of the $45 realized recognized gain and the depreciation of 65 would be the 45 so the entire Machinery is section 1245 at this time so all of it is the building considered a 751 C or 751 D unrealizable no okay building there's no section 1253 capture here we're not assuming this business was acquired before 1987 and then under capture section twelve forty three capture Section 1250 is not an issue stock and goodwill is not gonna create hot assets either so we've got three hot assets in this problem so the hot asset first we've got the account receivable second the inventory and third we've got the machinery and again because the entire portion of potential gain if the partnership was to sell it right you take the lesser of those two that's the hot asset portion 45 versus 65 we pick the lesser of those two numbers and the 45 is the lesser which is the entire game so in order to determine the portion of hot assets for lime we take each asset and we take the fair market value which we're going to assume hypothetically hey the partnership is going to deem sell this asset this time using fair market value so accounts receivable fair market value on this date is sixty inventory fair market value is 150 and machinery is 100 we subtract away the adjusted basis the partnership has at this date that's 75 90 and 55 and we calculate the realized gain or loss in the calculation so this is gonna be for countable a fifteen dollar loss inventory with a sixty dollar game and for machinery a $45 game now the next step is to take the exiting partner the selling partners partnership interest at this date which is one-third right lime owns one-third and multiply it by that that's gonna be for accounts receivable $15 loss times one third is a $5 loss sixty times one third is 20 and then 45 times one third is 15 next we sum up those three are all the items by summing those items we're gonna get 30 right this equals 30 that amount is ordinary income or ordinary loss so this is ordinary gain or ordinary income of 30 okay that is step two we finished up to now we go to step three step three is to take the amount from step one which is three hundred minus the amount from step two which is 30 and that gives us 270 and that is the section seven forty one capital gain now the problem tells us that they formed the business several years ago so we can deem or it's pretty reasonable to assume that this partnership interest the entire amount held for more than a year since it's gonna be a long term capital gain of two hundred seventy dollars to line and of course we've got the thirty dollars of ordinary income so again let's just summarize what we did step one is it calculate the total gain under Section 1001 which was three hundred dollars step two is to break out a portion of that total gain as ordinary income or ordinary loss and step three is the remaining portion his long term capital gain now in this example right we saw $300 total gain and thirty of that was ordinary income and then the rest 270 was long-term capital gain or capital gain it's possible if I change up the facts I can give you a situation where hey lion could have a three hundred dollar gain ordinary loss let's say I don't know make up a number ten and then of course if you did step one - step two you'd actually get three hundred ten of long-term capital gain that can happen that is possible okay you can actually have more gain in step three than in step one because again as you saw the accounts receivable it created a loss what if the count receivable was the only asset here then we'd have a $5 ordinary loss we have 305 long term capital gain so that is possible so just keep that in mind don't think like oh you know I'm doing this on an exam calculation CPA exam whatever it is and hey I got a loss on step two I don't know what to do in step three you just follow the same steps another issue is just keep all the facts the same and let's just say that I keep it simple I told you that the machinery has $30 of depreciation on it not the 60 that a 65 we calculated well again it's the lesser of the two numbers the lesser of the two numbers so you would use 30 here again this would change okay you take 30 times 1/3 that would be 10 and now of course change your numbers around significantly then this number would become 25 here for ordinary but I just want to give you that heads-up that when you're calculating again it's the lesser of here the lesser of course was the entire amount of gain but you do the lesser of the depreciation that will be recaptured or the realized recognize gay in that situation all right so that is the consequence as a seller it's always where you start by the way are there any consequences to the partnership no when it comes to the sale of partnership interest everything is done outside the partnership if it was if the partnership was involved that would be distribution and we're going to see the consequence of the distribution and later topic that's under section 731 732 733-6025 33 napple green apple is purchasing limes interest the entire interest under Section 742 the buyer takes a cost basis in the amount paid so green apple is paying $500 we start there right 742 but remember liabilities we've talked about liabilities a lot liabilities the allocation changes all the time with this new partner coming in we have to reallocate the liabilities when the new partner joins a partnership between or sorry among lemon orange and green apple again if we're going by just simply everything is split equally capital off it losses and losses and profits and there's no special situations of non-recourse and duck you know now recourse liabilities all that good stuff guess what $50 of the liability 1/3 right one-third of the liability under 752 gets allocated to green apple so any of the day green apples basis is going to be 550 what about everything else that's the outside basis what about inside basis issues because remember when we do 721 722 723 on formation we have to look at all those consequence that we always drew up the balance sheet the good news here is that hey look at this we've already got our balance sheet created for us so it saves a lot of time and energy so let me erase balance sheet cause we're gonna write some stuff up all right this is now green apples 50 dollars of liability so let's change that so let's put GA for green apple that's 50 right there if there's no 750 for election in place section 750 for election there's no section 750 for election in place which we're not told so far in the problem right because these two are independent situations so no nothing tells us 754 in the original fact pattern green apple yes takes an outside basis of 550 but for purposes of inside basis and capital accounts and all this stuff all we do we take lime and we replace lime with green apple everything else stays the same some of you are wondering well how could that be that is how everything works out and to illustrate the disparity that create let's jump to the next part of the problem so that is the answer to that part if there's no 7:54 election in place which we're not told green-apple takes 1/7 of $550 basis and the partnership interest outside basis all the assets keep the same basis right because no assets been is gone green apple literally just takes the shoes of lime inside the partnership so green apples capital counts 200 fair market value is $500 it's still the same now we're moving over to if green Apple sells the interest three years later for five hundred dollars one of the tax consequences each partner and the partnership on the sale purchase by green apple and it's a saying as to unrealistically hey nothing has changed no transactions have a curse it's been a holding company okay just to make it simple to show you what happens obviously we know that this is a real business it's gonna have some differences some changes but to keep it simple I don't wanna make it too involved I also ignore cost recovery so everything is the same as it was three years ago and green apple joint so first we're gonna start by saying if there's no 7:54 election in place made by the partnership and by the way the partnership is the one that makes the 7:54 election the partnership does okay so now green apple is selling selling his or her interest for $500 well guess what we do the same three-step process we do have lime step one we calculate amount realized minus the adjusted basis if green apples sells sells the interest for five hundred dollars it's gonna be exactly the same as line rain terms amount realize it's gonna be the five hundred dollars of cash received plus the liability relief we've got amount realized of 550 however the adjusted basis the green apple is different than lime remember the outside basis we determined is five hundred and fifty dollars so - 550 so step one is zero realize gain or loss recognize gain or loss under step 1 of 0 okay and yes I said realized and recognized but that's just under step 1 now you're gonna see the interesting part step 2 comes guess what happens we gotta go through the hot asset analysis again if green-apple steps into the shoes of lime exactly the way it was and nothing changed this analysis is identical that means that you go through the same thing that counts receivable inventory machinery boom it's all the same which means that under step 2 green apple has ordinary income of $30 that's how the tax law works finally we get to step 3 that's the 751 analysis green apple has a $30 ordinary game 751 a finally get to step 3 741 analysis we take step 1 - step 2 step 1 was zero step 2 is 30 minus 30 the 741 capital loss specifically a long-term capital loss because green Apple has held the interest for three years $30 a $30 capital loss this is the worst situation can have because in all of tax world because you have an ordinary game and a long-term capital loss which as you all know capital losses are severely limited severely limits it so when we say that green apples steps into the shoes of lime we really mean it the only thing that changes that green Apple takes a higher it takes that different basis in the partnership interest at five-fifty rather than limes 250 basis but everything else stays the same so green apple in this situation where I have no 750 for election if there's no 750 for election maybe by the partnership green apple is gonna have to report an ordinary gain of 30 dollars in a long-term capital lost under Section 741 of $30 that's bad yeah nets to zero but as you all know ordinary income is something to higher rates than capital gains and then capital losses are much more severely limited than ordinary losses are so that's what the 754 election fixes and make sure this situation does not happen okay now I'm gonna use a different color let's use green all right so with 750 for elections in place which is the next part of the problem we just did that part the 750 for election is in place we do the same three steps we just did however step two is going to be different and the reason why it's going to be different is because under a 750 for election let's say a 750 for election was made since the beginning so even when green Apple purchased the interest from the line that was always in place since green apples been around 750 for elections been there then what happens is we have to adjust each asset for green apple so we do as we go through each of the assets we start off cash count receivable inventory machinery building stock good will we go through each one we do a similar analysis like we did in step two but for each asset and by the way this is a very very very very simple example of a 754 adjustment 754 makes things extremely difficult so so we take the fair market value at the date we subtract away the adjusted basis the date so we're using this date that green apple joints so even if the 74 elections always been in place since the very beginning we still apply the numbers when green apple joins which is on this date we take the fair market values minus the adjusted basis and we get the gain or loss amount so of course cash is not gonna have gain or loss account receivable we have 75 - my apologies 60 minus 75 my apologies there so we're taking these numbers given to us 60 minus 75 that goes fifteen dollar loss inventory we've got 150 minus 90 machinery that gives us 60 machinery we've got 100 minus 55 that gives us 45 building we have 500 minus 200 that gives us 300 stock we have 300 minus 90 that gives us to 10 and then goodwill we have 300 minus 0 and that gives us 300 sir we then multiply that gain or loss by green apples percentage which of course is 1/3 because green apple was acquiring 1/3 and joining so we multiply each of these numbers by 1/3 just go ahead and put a line cuz the same number 0 negative 5 2015 170 and 100 so these amounts we now keep track this amount is now considered green apples portion attributable to each of those assets have already been recorded so whenever you do tax accounting this is why why when it comes to partnerships accounting firms are almost always involved with partnerships because there's so many different books or so many different tax worksheets and records used to keep track of all these different whenever an event occurs at 7:54 purposes now green apple has these amounts of treatable to each asset which creates a new worksheet and Excel or whatever you want to think of and we also increase the adjusted basis of each asset by these amounts so the new adjusted basis for cash will you add these numbers so you take the adjusted basis and you add still gonna be 240 accounts receivable now is going to be 70 inventory is now gonna be 110 Machinery is now gonna be [Music] 70 building is now going to be 300 stock is now going to be 160 and goodwill is now going to be 100 so that is the new adjusted basis and that increase is purely attributable to green apple so I'm saying is that now when green apple goes through the analysis for the sale of partnership interest this has already been recorded anything beyond that would go to green apple for a hot asset but because this problem nothing has changed unrealistically right there's no change there so now we do step to the hot assets are all going to be zero for green apple because now this adjustment has been taken into account but what if between that time lemon or orange left well then this amount this new basis would be used but then their old portion would be still intact right their bold portion would still be there so that's what I'm going to keep track of this new set of records now so if lemon or orange left they would have that attributable amount but green apple basically the idea is that the portion that was true to a lime is now starting fresh for green apple now we go through our analysis if we have a 750 for election in place step one is the exact same step two changes and we go through the hot acid analysis and you would find that for each of the hot assets accounts receivable inventory and machinery the portion or I remember we had and we had limes portion that was this negative five 20 and 15 because no transactions have occurred in those three years that's the same amount that was attributable from line two green apple and there'd be zero it'd be zero zero and zero and that brings it to zero again if we did have transactions you'd have to go above and beyond that you have to go from that amount that baseline that 754 adjustment baseline then that bring us to step three step three it's like hey we take step one step two both are 0 therefore step three is also zero so notice with no 7:54 election you have a thirty dollar ordinary income $30 long-term capital loss so there's no 754 election made but there is a 74 election it's just zero across the board and the zero across the board is much better for a taxpayer now some of you might be wondering why would a partnership not make a 7:54 election because wouldn't it be make more sense what if there was a situation where there was an ordinary loss that would be beneficial a taxpayer because then you would have ordinary loss to the taxpayer and then you would have capital gain and that would be good that's very rare though but you have to think about that situation right again think about what if the account receivable was only hot asset here well then when lime soda there'd be a $5 ordinary loss which is better than the capital loss that's good and then when green green apple comes in sells again green apple also gets another bite at the Apple not you know pardon the pun gets an Arab bite at the five dollar loss and get to require $5 loss as well even though technically green apple so there's another five dollar loss so it's a two-way street it could benefit the taxpayer but mostly it burns tax here so that's why most partnerships make the 754 election they also do it because this makes more economic sense and it also makes sense when you look at R evaluations and stuff one other thing I want to mention is we talked about how green apples or the partnerships new basis and all the assets we calculated that as well that's all this right here right so if you're looking at the balance sheet right these would all change these adjusted basis would all change that well the cash would stay the same but they count seeable that basis is now equal to 70 inventory is now 110 so that's why I mean all those and you would add all those up the fair market values will still the same sayings again nothing has changed and then green apples amount here this is gonna change the 500 which makes sense because green apple went to the partnership paying 500 so that's there that should be the capital account book and the fair market value 500 right wait five hundred two hundred two hundred is now nine hundred so this is gonna equal ten fifty when you add all these up you'll get ten fifty so the basis of all these added up or now ten fifty okay fair market value still say the same because again transaction wise nothing has changed all right so that's really how everything fits together when it comes 7:54 sales of partnerships purchases please watch the videos on distributions because again that's another element in itself