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 bases 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 bases of Marika and Zoe in the new LM Partnership is:

Quizplus · Accepted Answer

To determine the new bases of Marika and Zoe in the new partnership, we need to allocate the assets to the partners based on their profit and loss sharing ratios. 
Before the sale, Latasha had a 60% interest and Marika had a 40% interest. So the allocation of the assets would be as follows:

Cash: $20,000 x 60% = $12,000 to Latasha and $20,000 x 40% = $8,000 to Marika 
Accounts Receivable: $40,000 x 60% = $24,000 to Latasha and $40,000 x 40% = $16,000 to Marika 
Inventory: $80,000 x 60% = $48,000 to Latasha and $80,000 x 40% = $32,000 to Marika 
Land: $200,000 x 60% = $120,000 to Latasha and $200,000 x 40% = $80,000 to Marika

Total allocation: Latasha - $200,000; Marika - $136,000

Since Latasha sells her interest to Zoe, Zoe would take over Latasha's allocation of the assets. So Zoe's total allocation would be $200,000 + $100,000 (the amount she paid for Latasha's interest in the partnership) = $300,000.

Therefore, the new bases for Marika and Zoe would be:

Marika: $64,800 (original outside basis) - $136,000 (her allocation of the partnership assets) = -$71,200 (negative basis)
Zoe: $100,000 (cash paid for Latasha's interest) + $300,000 (her allocation of the partnership assets) = $400,000

Option C is the correct answer.

The LM Partnership Terminates for Tax Purposes on July 15