Consider the following balance sheet for DEF Partnership:

Suppose Daniel wishes to exit the partnership completely. After discussions with Edward and Frances, the partners agree to let Daniel choose one of three options:
1. Daniel takes a liquidating distribution of $60,000 cash.
2. Daniel takes a pro rata liquidating distribution of $20,000 cash, $20,000 receivables, and Land A (FMV $20,000).
3. Daniel sells his entire partnership interest to Doris for $60,000 cash.
Required:
a. Determine the tax consequences to Daniel of each option including gains (losses) realized, recognized, and deferred; character of gains (losses); and bases of assets.
b. Discuss the relative merits of each option to Daniel, that is, what are the advantages and disadvantages of each option? What factors could sway your recommendation one way or the other?

Transcribed Image Text:

Partnership's Basis FMV Assets Cash S60,000 S 60,000 Receivables 小 60,000 Land A 10,000 20,000 Land B 10,000 20,000 Land C Total S90,000 S180,000 Partners capital Daniel S30,000 S 60,000 Edward 30,000 60,000 Frances 60.000 Total S90,000 $180,000