Sean, Penelope, and Juan Formed the SPJ Partnership by Each $\quad$

question 71

Essay

Sean, Penelope, and Juan formed the SPJ partnership by each contributing assets with a basis and fair market value of $200,000. In the following year, Penelope sold her one-third interest to Pedro for $225,000. At the time of the sale, the SPJ partnership had the following balance sheet:
$\quad$$\quad$$\quad$$\underline{\text {Basis}}$$\quad$$\quad$$\underline{\text { FlMV }}$
$\begin{array}{lll}\text { Cash } & \$ 200,000 & \$ 200,000 \\\text { Land } &\$400,000&\$475,000 \\&\$600,000&\$675,000\end{array}$ Shortly after Pedro became a partner, SPJ sold the land for $475,000. What are the tax consequences of the sale to Pedro and the partnership (1) assuming there is no Section 754 election in place, and (2) assuming the partnership has a valid Section 754 election?

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