Lesson 8 Case Brief

Following a style similar to the technique set forth in Legal Research, Writing & Analysis,
prepare a brief of the following case:
Diamond v. Commissioner of Internal Revenue
56 TC 530 (1971), aff'd, 492 F2d 286 (7th Cir. 1974).
Include a discussion of the current status of the law as it pertains to the receipt of a profits
interest in a partnership in exchange for services including a brief discussion of
subsequent cases and IRS pronouncements.
1. Your Senior Partner has asked you to research the following questions. In a
memorandum prepared in a professional manner with all appropriate citations, answer
the following questions:
a. Homer is a 10% partner and Burns is a 90% partner in a partnership that owns a piece
of land outside of Springfield with a tax basis of $50,000 and a value of $750,000. Homer
and Burns formed the partnership years ago. The land is encumbered by a $200,000
nonrecourse mortgage.
If Homer sells his entire interest to Moe for $55,000 how much gain is recognized by
Homer? What is the character of the gain? What are the tax consequences to Moe?
Gain will be sales price - basis in the stock. Accordingly, capital gain would be
$ 55000 - $ 5000 = $ 50000 taxable in hands of Homer

If Homer transfers his partnership interest to his wholly owned corporation in exchange
for additional common stock in the corporation, does Homer recognize any gain?
No Homer does not recognize any gain. Homer gets 351 nonrecognition treatment. His
ownership (from 100% to 100%) does not exchange any additional value.
b. Steve and Andrew are equal partners in a partnership that operates a sporting goods
store. The partnership has two assets: (a) inventory with a tax basis of $500,000 and a
value of $900,000 and (b) goodwill with a tax basis of zero and a value of $3,100,000.
Andrew and Steve each have an outside basis of $250,000. Steve sells a 25% interest in the
partnership to Robin for $1,000,000. How much gain is recognized by Steve? What is the
character of the gain?
Gain would be $ 1,000,000 - $ 125,000 = $ 875,000
Out of $ 875,000; $ 100,000 related to inventory appreciation under 751 would be normal
ordinary income while the rest would be capital gain.
2. Andrew, Leslie, and James are equal partners in a partnership. Andrew contributed
land with a tax basis of $10,000 and a value of $50,000, Leslie and James each contributed
$50,000 of cash, which was invested in AAA-rated debt instruments. The land is now worth
$90,000, and the debt instruments are now worth $120,000. Assume the partnership has a
Rule 754 election in effect.
a. What are the consequences if Jamie sells his interest in the partnership to Marc for
$70,000? (Assume Jamie's outside basis is still $50,000)
Consequences if Jamie sell his interest to Marc:
Realized gain =$70,000
Less: Jamie outside basis = ($50,000)
Amount capital gain for Jamie = $20,000
Since the partnership has elected for Rule 754
It records an adjustment for Marc:
Marc paid = $70,000
Less: Jamie inside basis = $70,000 [($90,000 + $210,000) / 3]
Adjustment = $0
Hence no adjustments needed for Marc.

b. What are the consequences if Andrew sells his interest in the partnership to Marc for
$70,000? (Assume Andrew's outside basis is still $10,000).
Consequences if Andrew sell his interest to Marc:
Realized gain =$70,000
Less: Andrew outside basis = ($10,000)
Amount capital gain for Andrew = $60,000
Since the partnership has elected for Rule 754
It records an adjustment for Marc:
Marc paid = $70,000
Less: Jamie inside basis = $70,000 [($90,000 + $210,000) / 3]
Adjustment = $0
Hence no adjustments needed for marc.
3. Denise purchases for $30,000 a 20% interest in a partnership that has inventory with a
tax basis of $50,000 and a value of $100,000 and depreciable property with a tax basis of
$100,000 and a value of $50,000. The partnership did not have a Rule 754 election at the
time of Denise's acquisition.
If the partnership distributes a 20% interest in the inventory and depreciable property to
Denise within two years of her acquisition of the 20% interest, what is Denise's basis in the
distributed assets if no election is made under Rule 732(d) (and the values and bases of the
property remain constant)? What is her basis if an election is made under Rule 732(d)?
Denise purchases 20% interest in partnership, which is valued at $30,000.
Value of Inventory
tax basis = $50,000 , value= $100,000
Value of depreciable property
tax basis = $100,000, value= $50,000
Partner Denise basis:
With out election under rule 732(d) :
inventory : 30,000/150,000*50,000= $10,000
depreciable asset : 30,000/150,000*100,000= $20,000
With election under rule 732(d) :
inventory : 30000/150000*100000= $20,000
depreciable asset : 30,000/150,000*50,000= $10,000