Sean, Penelope, and Juan Formed the SPJ Partnership by Each

question 65

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:
Basis FMV
Cash $200,000 $200,000
Land $400,000 $475,000
$600,000 $675,000
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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Definitions:

Money

Money is a medium of exchange in the form of coins and banknotes; by which goods and services are valued and exchanged.

Present Value

The current financial value of money or cash flows that will be obtained in the future, factored by a particular rate of return.

Annuity

An economic device offering a steady series of disbursements to someone, commonly utilized as a financial support for retired individuals.

Market Rate

The prevailing rate at which a particular good, service, or asset is bought and sold in a free market.