Mr. Smitovich (age 68) and his daughter Grace Pelton (age 32) are equal partners in Shore Realty Partnership. They plan to discontinue Shore's business and divide the partnership's $14,000 cash and two remaining inventory items between them. The inventory items are tracts of undeveloped land: Greenacre (FMV $100,000 and inside basis $60,000) and Sunnyacre (FMV $100,000 and inside basis $92,500). Because the two tracts have the same value, the partnership could distribute an undivided half interest in each tract to father and daughter. Alternatively, it could distribute one tract to Mr. Smitovich and the other tract to Ms. Pelton. Advise the partnership as to which tract of land should go to which partner based on the following information.
? Both partners have a $91,250 outside basis in their partnership interest.
? Mr. Smitovich owns an investment portfolio of marketable securities that generates significant capital gain income each year. Ms. Pelton's only other investment is her Roth IRA.
? Mr. Smitovich plans to hold the land that he receives from the partnership as a longterm investment. Ms. Pelton plans to sell the land that she receives as soon as possible and use the proceeds to build a new personal residence.
Without digging too dig into partnership law, I think this problem wants to determine how much or how little tax each partner will pay on liquidation of the partnership. There are two layers of tax for Grace who plans to sell her land as soon as she receives it.
For the capital gain transaction represented by the liquidation of the partnership, one partner will take $7000 cash + land with a basis of $60,000 = $67,000. The other partner will take $7000 cash + land with a basis of $92,500 = $99,500.
The solution compares the gain/loss derived from both liquidation and subsequent sale of a piece of land under two scenaries. It is a fairly complex set of transactions.