The December 31,2008,balance sheet of the RST General Partnership reads as follows.

The partners share equally in partnership capital,income,gain,loss,deduction and credit.Ted's adjusted basis for his partnership interest is $40,000.On December 31,2008,he retires from the partnership,receiving a $60,000 cash payment in liquidation of his interest.The partnership agreement states that $2,500 of the payment is for goodwill.Which of the following statements about this distribution is false?
A)If capital is NOT a material income-producing factor to the partnership, the § 736(a) payment will be $2,500.
B)If capital IS a material income-producing factor, the entire $60,000 payment will be a § 736(b) property payment.
C)The payment for Ted's share of goodwill will create $2,500 of ordinary income to him.
D)The partnership can deduct any amount which is a § 736(a) payment since it will be determined without regard to partnership profits.
E)All statements are false.

Question

The December 31,2008,balance sheet of the RST General Partnership reads as follows.

The partners share equally in partnership capital,income,gain,loss,deduction and credit.Ted's adjusted basis for his partnership interest is $40,000.On December 31,2008,he retires from the partnership,receiving a $60,000 cash payment in liquidation of his interest.The partnership agreement states that $2,500 of the payment is for goodwill.Which of the following statements about this distribution is false?
A)If capital is NOT a material income-producing factor to the partnership, the § 736(a) payment will be $2,500. 
B)If capital IS a material income-producing factor, the entire $60,000 payment will be a § 736(b) property payment. 
C)The payment for Ted's share of goodwill will create $2,500 of ordinary income to him. 
D)The partnership can deduct any amount which is a § 736(a) payment since it will be determined without regard to partnership profits. 
E)All statements are false.

Quizplus · Accepted Answer

Because this is a liquidating distribution of a partner by an ongoing partnership,§ 736 applies.Choice a.is true since the cash payment for Ted's share of the receivables is a § 736(a)payment if capital is not a material income-producing factor of the partnership.Ted's share of the receivables is $2,500 ($7,500 F1F1F1S1F1F1F10 1/3).The § 736(b)payments are $57,500,consisting of Ted's one-third share of cash and capital assets and the $2,500 payment stated in the partnership agreement for goodwill [($165,000 F1F1F1S1F1F1F10 1/3)+ $2,500].Payment for the $2,500 share of receivables is also a § 736(b)property payment if capital IS a material income-producing factor.Goodwill is a § 736(b)property payment whether or not capital is a material income-producing factor since payment of goodwill is provided for in the partnership agreement.Choice b.,therefore,is also true.Choice d.is true because the § 736(a)payment,if any,is a guaranteed payment which is deductible by the partnership and taxable as ordinary income.All of the choices are true except for choice c.,since the payment for Ted's share of goodwill is treated as a § 736(b)return of basis/capital gain since it is provided for in the partnership agreement.

The December 31,2008,balance Sheet of the RST General Partnership Reads