When Jerry died on April 16 of the current year, he owned a 40% interest in the JM Partnership, and Michael owns the remaining 60% interest. All his assets are held in his estate for a two-year period while the estate is being settled. Jerry€™s estate is his successor-in-interest for the partnership interest. Under a formula contained in the partnership agreement, the partnership must pay Jerry€™s successor-in-interest $40,000 cash shortly after his death plus $90,000 for each of the two years immediately following a partner€™s death. The partnership agreement provides that all payments to a retiring partner will first be payments for the partner€™s share of assets, and then any additional payments will be Sec. 736(a) payments. When Jerry died, the partnership had the following balance sheet:

Jerry€™s basis for the partnership interest on the date of his death was $120,000 including his $30,000 share of partnership liabilities.
a. How will the payments be taxed to Jerry€™s successor-in-interest?
b. What are the tax implications of the payments for the partnership?

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Partnership's Basis FMV Assets: Cash $100,000 $100,000 Land 200,000 300,000 Total $300,000$400,000 Liabilities and capital: $75,000 75,000 90,000 130,000 135,000 195,000 $300,000$400,000 Liabilities Capital-Jerry -Michael Total