Red Bush and Green Tree are equal partners in Arbor Partnership. Each partner has contributed capital of $60,000 to the partnership and this is also their adjusted cost base for the partnership interest. Blue Grass wants to join the partnership as an equal partner. Both Red Bush and Green Tree have capital losses and would like to generate a capital gain from the admission of Blue Grass. Which of the following alternatives will accomplish both objectives?
A)Blue Grass pays $20,000 directly to both of the original partners.
B)Blue Grass pays $30,000 directly to both of the original partners.
C)Blue Grass pays $40,000 directly to the partnership.
D)Blue Grass pays $60,000 directly to the partnership.

Question

Quizplus · Accepted Answer

For Red Bush and Green Tree to generate a capital gain and for Blue Grass to become an equal partner, Blue Grass needs to contribute an amount that effectively buys into the partnership at the same level as the existing partners. By paying $30,000 directly to both of the original partners, Blue Grass is contributing a total of $60,000, which matches the original capital contribution of the other partners. This not only allows Blue Grass to become an equal partner but also provides Red Bush and Green Tree with a direct payment, which can be used to realize a capital gain, assuming the payment exceeds their adjusted cost base in the partnership interest.

Red Bush and Green Tree Are Equal Partners in Arbor