The LM Partnership terminates for tax purposes on July 15 when Latasha sells her 60% capital and profits interest to Zoe for $100,000. The partnership has no liabilities, and its assets at the time of termination are as follows: Marika, a 40% partner in the LM Partnership, has a $64,800 basis in her partnership interest (outside basis)at the time of the termination. She has held her LM Partnership interest for three years at the time of the termination. The basis of Marika and Zoe in the new LM Partnership is:

Question

The LM Partnership terminates for tax purposes on July 15 when Latasha sells her 60% capital and profits interest to Zoe for $100,000. The partnership has no liabilities, and its assets at the time of termination are as follows:  Marika, a 40% partner in the LM Partnership, has a $64,800 basis in her partnership interest (outside basis)at the time of the termination. She has held her LM Partnership interest for three years at the time of the termination. The basis of Marika and Zoe in the new LM Partnership is:

Quizplus · Accepted Answer

The basis of a partner's interest in a partnership includes the partner's initial capital contribution as well as any increases or decreases over time due to partnership operations. When a partnership terminates, the partnership's assets are deemed to be sold to the partners at fair market value, and any gain or loss is allocated to the partners' capital accounts based on their profit and loss sharing ratios. 
In this case, Latasha sells her 60% interest to Zoe for $100,000, which represents the fair market value of the partnership's assets. The remaining 40% interest is held by Marika. The total value of the partnership's assets is $166,800, so Zoe's basis in her new 60% interest is $100,080 ($100,000 purchase price plus $80 of her share of the partnership's basis), and Marika's basis in her new 40% interest is $66,720 ($64,800 outside basis plus $1,920 of her share of the partnership's basis). 
Therefore, the correct answer is Choice C.

The LM Partnership Terminates for Tax Purposes on July 15