Eric and Denise are partners in ED Partnership. Eric owns a 60% capital, profits and loss interest. Denise owns the remaining interest. Both materially participate in the partnership activities. At the beginning of the current year, ED s only liabilities are $50,000 in accounts payable, which remain outstanding at year-end. In August, ED borrowed $120,000 on a nonrecourse basis from Delta Bank. The loan is secured by property with a $230,000 FMV. These are ED s only liabilities at year-end. Basis for the partnership interest at the beginning of the year is $40,000 for Denise and $60,000 for Eric before considering the impact of liabilities and operations. ED has a $200,000 ordinary loss during the current year. How much loss can Eric and Denise recognize?

Problem 6

Linda pays $100,000 cash for Jerry s interest in the JILL Partnership. The partnership has a Sec. 754 election effect. Just before the sale of Jerry s interest, JILL s balance sheet appears as follows:

Partnership s Basis FMV


Cash $75,000 $75,000

Land $225,000 $325,000

Total $300,000 $400,000

Partners’ capital

Jerry $75,000 $100,000

Instrument Corp $75,000 $100,000

Logo Corp $75,000 $100,000

Lighthouse Corp $75,000 $100,000

Total $300,000 $400,000

a. What is Linda s total optional basis adjustment?

b. If JILL Partnership sells the land for its $325,000 FMV immediately after Linda purchases her interest, how much gain or loss will the partnership recognize?

c. How much gain will Linda report as a result of the sale?