Dispositions of Partnership Interests and Partnership Distributions
Chapter 10
Dispositions of Partnership Interests and Partnership Distributions
SOLUTIONS MANUAL
Discussion Questions
1. [LO 1] Joey is a 25% owner of Loopy LLC. He no longer wants to be involved in the business. What options does Joey have to exit the business?
Answer: Joey’s two most common options are to sell or exchange his interest in the LLC to a third party or to have the LLC liquidate his interest. Joey may also exchange his interest for corporate stock, give the interest away, or transfer the interest upon his death.
2. [LO 1] Compare and contrast the aggregate and entity approaches for a sale of a partnership interest.
Answer: Under the aggregate approach, the disposition of a partnership interest represents a sale of the partner’s share of each of the partnership assets. This approach would require complex tax rules because the partner would need to allocate the sales proceeds among the different assets and determine the character of the gain or loss from each asset.
Under the entity approach, the sale of a partnership interest would be very similar to the sale of corporate stock. The partner would recognize capital gain or loss on the sale based on the difference between the sales price and the partner’s tax basis in the partnership interest.
3. [LO 1] What restrictions might prevent a partner from selling his partnership interest to a third party?
Answer: Partnership agreements may specify whether a partner may voluntarily leave the partnership. If the agreement does not allow for a voluntary withdrawal, the partnership may need to be dissolved to effect the termination.
A partnership agreement may also specify whether a partner may assign his interest to a third party. This will determine if the partner is free to sell his interest to someone other than the existing partners.
4. [LO 1] Explain how a partner’s debt relief affects his amount realized in a sale of partnership
Dispositions of Partnership Interests and Partnership Distributions
SOLUTIONS MANUAL
Discussion Questions
1. [LO 1] Joey is a 25% owner of Loopy LLC. He no longer wants to be involved in the business. What options does Joey have to exit the business?
Answer: Joey’s two most common options are to sell or exchange his interest in the LLC to a third party or to have the LLC liquidate his interest. Joey may also exchange his interest for corporate stock, give the interest away, or transfer the interest upon his death.
2. [LO 1] Compare and contrast the aggregate and entity approaches for a sale of a partnership interest.
Answer: Under the aggregate approach, the disposition of a partnership interest represents a sale of the partner’s share of each of the partnership assets. This approach would require complex tax rules because the partner would need to allocate the sales proceeds among the different assets and determine the character of the gain or loss from each asset.
Under the entity approach, the sale of a partnership interest would be very similar to the sale of corporate stock. The partner would recognize capital gain or loss on the sale based on the difference between the sales price and the partner’s tax basis in the partnership interest.
3. [LO 1] What restrictions might prevent a partner from selling his partnership interest to a third party?
Answer: Partnership agreements may specify whether a partner may voluntarily leave the partnership. If the agreement does not allow for a voluntary withdrawal, the partnership may need to be dissolved to effect the termination.
A partnership agreement may also specify whether a partner may assign his interest to a third party. This will determine if the partner is free to sell his interest to someone other than the existing partners.
4. [LO 1] Explain how a partner’s debt relief affects his amount realized in a sale of partnership