The December 31,2012,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 31,2012,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 that is a § 736(a)payment because it will be determined without regard to partnership profits.
E)All statements are false.

Question

The December 31,2012,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 31,2012,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 that is a § 736(a)payment because it will be determined without regard to partnership profits. 
E)All statements are false.

Quizplus · Accepted Answer

According to the partnership agreement, $2,500 of the $60,000 cash payment made to Ted is for goodwill. This means that the payment for Ted's share of goodwill will create $2,500 of ordinary income to him. The other statements are true:

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.
D) The partnership can deduct any amount that is a § 736(a) payment because it will be determined without regard to partnership profits.

Therefore, the false statement is C.

The December 31,2012,balance Sheet of the RST General Partnership Reads