The balance sheet (with fair market values displayed) is for a three-person service partnership with three equal partners. Thornton enters into a retirement agreement with the partnership that provides for payments of $33,500 annually for 4 years and a liability release of $6,000 at the end of the payout period. The partnership agreement does not provide for property payments to a partner for the partner’s share of goodwill.
|
Value |
Tax Basis |
|
|
Cash |
240000 |
240000 |
|
Unrealized Receivables |
60000 |
0 |
|
Unstated Goodwill |
60000 |
0 |
|
Other Property |
60000 |
45000 |
|
Total |
420000 |
285000 |
|
Liabilities |
18000 |
|
|
Capital |
Value |
Tax Basis |
|
Norton |
134000 |
95000 |
|
Horton |
134000 |
95000 |
|
Thornton |
134000 |
95000 |
Suppose the partnership made a different retirement payout agreement with Thornton. Under this agreement, the partnership agreed to pay Thornton $90,000 in cash and $6,000 of liability release in the first year, and 10% of the partnership profits for the following three years. SELECT ALL OF THE TRUE STATEMENTS FROM THE LIST BELOW.
|
1 |
Thornton would recognize $1,000 of capital gain in the first year |
|
2 |
All payments after the first year would represent ordinary income to Thornton |
|
3 |
The payments to Thornton would represent a guaranteed payment |
|
4 |
The partnership would receive a deduction from ordinary income for all the payments to Thornton |
|
5 |
Thornton is considered to continue as a partner until the Section 736(a) payments are completed |
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