Problem 2. Welby, Kiley & Lopez is an equal general partnership engaged in medical practice, (i.e., it is a service partnership). On January 1 of this year, Welby died, triggering the partnerships buy/sell agreement. Just prior to his death, Welbys outside basis was $130. According to the agreement, the partnership must pay Welbys sole beneficiary, Sandy, $500 in liquidation of her interest in the partnership.

Neither the partnership agreement nor the buy/sell agreement mentions goodwill. There is no 754 election in place. On the date of death, the partnerships balance sheet (with FMVs) was as follows:

Assets Liabilities & Capital

AB/Book FMV Liabilities $150

Cash $120 $120

Accts Rec. 0 150

Installment Oblig. 150 270

Equipment 90 300

Land 30 510

Goodwill 0 300

$390 $1650

Capital Accounts

Tax/Bk FMV

Welby $80 $500

Kiley 80 500

Lopez 80 500

$240 $1500

Assume that the equipment was purchased by the partnership for $400, and that the land is used in the partnerships business.

(a) Before the distribution to Sandy in liquidation of her interest in the partnership, what is her outside basis?

(b) What are the income tax consequences to Sandy of the $500 distribution?

(c) What difference would it have made if the agreement explicitly allocated $100 to goodwill?