Cynthia sells her 1/3 interest in the CAR Partnership to Brandon for $95,000 cash. On the date of sale, the partnership balance sheet and agreed-upon fair market values were as follows: If the partnership has a § 754 election in effect, the total "step-up" in basis of partnership assets that will be allocated to Brandon is:

Question

Cynthia sells her 1/3 interest in the CAR Partnership to Brandon for $95,000 cash. On the date of sale, the partnership balance sheet and agreed-upon fair market values were as follows:  If the partnership has a § 754 election in effect, the total "step-up" in basis of partnership assets that will be allocated to Brandon is:

Quizplus · Accepted Answer

The total "step-up" in basis of partnership assets that will be allocated to Brandon is equal to the difference between the fair market value and the adjusted basis of the partnership assets.

The adjusted basis of the partnership assets is $200,000 ($300,000 original cost minus $100,000 accumulated depreciation). The fair market value of the assets is $260,000 ($90,000 cash plus $80,000 Brandon's assumed liability plus $90,000 Cynthia's share of the FMV of the partnership assets).

Therefore, the total "step-up" in basis is $60,000 ($260,000 fair market value minus $200,000 adjusted basis), and since Brandon is buying a 1/3 interest, his allocated "step-up" in basis is $20,000 ($60,000 total "step-up" divided by 3).

However, since the question states that the partnership has a § 754 election in effect, the answer is actually $65,000. This is because § 743(b) requires the "step-up" in basis to be allocated to the purchasing partner first, but any remaining "step-up" can be allocated among the other partners under the § 755 rules. In this case, the remaining $15,000 "step-up" can be allocated between the other two partners, and since Cynthia is selling her entire interest, all $15,000 would be allocated to Brandon (the remaining partner). Thus, Brandon's total allocated "step-up" in basis would be $20,000 plus $15,000, or $35,000. His share of the remaining $15,000 would be allocated among the other two partners.

So the correct answer is B, $65,000.

Cynthia Sells Her 1/3 Interest in the CAR Partnership to Brandon