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

question 38

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 o the sale, the SPJ partnership had the following balance sheet: $$\begin{array} { c c c } & \text { Basis } & \text { FMV } \\\text { Cash } & \$ 200,000 & \$ 200,000 \\\text { Land } & \$ 400,000 & \$ 475,000 \\& \$ 600,000 & \$ 675,000\end{array}$$ Shortly after Pedro became a partner, SPJ sold the land for $475,000. What are the tax consequences of the sale to and the partnership (1) assuming there is no Section 754 election in place, and (2) assuming the partnership has a Section 754 election?

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Definitions:

Sample Mean

The average value calculated from a sample of data, used as an estimate of the population mean.

Normally Distributed

Describes a distribution that follows a normal curve or bell curve, where most observations cluster around the central peak and the probabilities for values further away from the mean taper off equally in both directions.

Sampling Distribution

The distribution pattern of probabilities for a specified statistic obtained from a random sample.

Normally Distributed

A data distribution that is symmetric about the mean, showing that data near the mean are more frequent in occurrence than data far from the mean.