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Chapter C:10
Special Partnership Issues
Discussion Questions
C:10-1 A liquidating distribution. A current distribution is a distribution that does not terminate the
partner’s interest in the partnership, nor is the payment one of a series of payments intended to
terminate the partner’s interest in the partnership. A liquidating distribution is made with the
intention of terminating the partner’s entire interest in the partnership either with this payment or
with a planned series of payments including this one. The January distribution to Javier is the first in
a series of distributions that will terminate his interest in the partnership and, therefore, is a
liquidating distribution. p. C:10-2.
C:10-2 The basis of a single asset received in a liquidating distribution is determined by two factors:
the basis of the distributed property in the partnership’s hands and the distributee partner’s basis in
his or her partnership interest prior to the distribution. However, the total basis to the distributee
partner of the assets received generally will equal the partner’s basis in the partnership interest
immediately prior to the distribution. Because Mariel received a single asset that was not money,
accounts receivable, or inventory, her basis will be $60,000 in the land regardless of what the
partnership’s basis in the land was prior to its distribution. pp. C:10-12 through C:10-14.
C:10-3 Cindy’s basis for the property she receives will be reduced to $4,000 from its $4,500 basis to
the CDE Partnership because it is limited to Cindy’s basis in her partnership interest before the
distribution. Even though Cindy will hold the property as an investment, the sale of the inventory
would generate ordinary income for five years from the date of the distribution. The sale of the
capital asset would generate long-term capital gain that is taxed at the applicable capital gains rate.
pp. C:10-4 through C:10-7.
C:10-4 Sec. 1245 depreciation recapture potential. The partnership’s accounts receivable probably are
not unrealized receivables because the partnership uses the accrual method of accounting. However,
depreciation recapture potential under Secs. 1245 is treated as an unrealized receivable. The
partnership has Sec. 1245 recapture potential on the machines used to produce the inventory (and
presumably also from other machinery, furniture, and equipment the partnership owns). The building
has no Sec. 1250 recapture potential, and therefore does not produce an additional unrealized
receivable because it was depreciated under MACRS, which requires straight-line depreciation. The
building, however, does have unrecaptured Sec. 1250 gain potential, but unrecaptured Sec. 1250 gain
is not an unrealized receivable. p. C:10-8.
C:10-5 a, b, c, e. In essence, any property that is not a capital asset or Sec. 1231 property (to the
extent exceeding Sec. 1245 and Sec. 1250 elements). p. C:10-8.
C:10-6 For Sec. 751 to come into play in a current distribution, the distributing partnership must
have both Sec. 751 assets (unrealized receivables and/or substantially appreciated inventory) and
non-Sec. 751 assets. In addition, the distributee partner must have given up some of his or her
Copyright © 2019 Pearson Education, Inc.

C:10-1
interest in one of the two classes of assets in exchange for an increased interest in the other class of
assets. In other words, the distribution must be disproportionate. p. C:10-9.
C:10-7 Under Sec. 731, a partner can recognize a loss on a distribution only if the distribution is a
liquidating distribution that consists only of money, unrealized receivables, and/or inventory. The
partner recognizes a loss if the amount of money and the carryover basis of the receivables and
inventory are less than the partner’s predistribution basis in his or her partnership interest. p. C:10-
12.
C:10-8 Yes. In determining the character of gain and/or loss on the sale of a partnership interest, the
partnership is deemed to sell all its assets in a hypothetical sale for their FMV. The selling partner is
then allocated his or her share of the ordinary income or loss from the sale of Sec. 751 assets. The
partner’s residual gain or loss on the sale is capital gain or loss. If the partnership owns loss assets in
addition to Sec. 751 assets, the allocable ordinary income could exceed the partner’s total gain, in
which case the residual amount would be a capital loss. This result occurs in Example C:10-20 in
the text. pp. C:10-16 through C:10-19.
C:10-9 a. When Tyra’s interest in the partnership terminates, she will be deemed to have received
a money distribution in the amount of her interest in partnership liabilities. Because she has a zero
basis, she must report gain equal to the money distribution. Any other property she receives in the
distribution will have a zero basis.
b. The amount realized will equal the sum of the money received and any liabilities
assumed by the purchaser. Because her basis is zero she will report a large gain. pp. C:10-12 and
C:10-16 through C:10-18.
C:10-10 If the entire partnership terminates, the Sec. 736 provisions do not apply at all. Rather each
partner is taxed under the liquidating distribution rules. Section 736 applies if one or more partners
(but fewer than all the partners) dies or retires. Accordingly, Sec. 736 applies to the payments to
Tom. pp. C:10-19 and C:10-20.
C:10-11 Section 736 divides payments into two categories. Section 736(b) payments are for a
partner’s interest in partnership property, and these payments are taxed under the rules for
liquidating distributions. The partner recognizes capital gain if she receives money exceeding basis
in her partnership interest, so Lucia will report a capital gain of $3,000 ($23,000 - $20,000) on the
payment she receives for partnership assets.
Section 736(a) payments will be taxed as a guaranteed payment (ordinary income) if the
distribution is not based on partnership income. If the payment is based on partnership income, the
partner will be taxed on a distributive share of partnership income with the character of the income
determined at the partnership level. Accordingly, Lucia will report her share of partnership income
as a distributive share. pp. C:10-19 and C:10-20.
C:10-12 No. The Tax Cuts and Jobs Act of 2017 repealed the technical termination rule of Sec.
708(b)(1)(B) for partnership tax years beginning after 2017. Therefore, the partnership will not
terminate if Jason sells his 55% interest in the partnership. p. C:10-23.

C:10-2
C:10-13 A publicly traded partnership (PTP) is defined as a partnership whose interests are either
traded on an established securities exchange or are traded in a secondary market or the equivalent
thereof. Two groups of PTPs are not taxed as corporations. A PTP that existed on December 17, 1987,
and which has not added a substantial new line of business, was not taxed as a corporation until tax
years beginning after December 31, 1997. These partnerships, which were grandfathered under the
1987 law for ten years, were granted a new election in the Taxpayer Relief Act of 1997 (TRA of
1997). The TRA of 1997 allows these PTPs to continue to be taxed as partnerships if they elect to do
so and agree to pay an annual tax of 3.5% of gross income from the partnership’s trade or business.
Partnerships that have 90% or more of their gross income being “qualifying income” (interest,
dividends, real property rents, etc.) continue to be taxed as partnerships. pp. C:10-28 and C:10-29.
C:10-14 From a legal standpoint, all the owners of a limited liability company (LLC) have limited
liability for the firms debts. In a limited partnership, all general partners have significant liability for
firm debts. Under the check-the-box regulations, an LLC can choose whether to be treated as a
partnership or taxed as a corporation. If the LLC chooses partnership treatment, the LLC and the
limited partnership are treated similarly except the limited partnership must have at least one general
partner. pp. C:10-29 and C:10-30.
C:10-15 Yes. Even though the partnership’s total basis in assets does not exceed their FMV by
more than $250,000, the new partner would be allocated a loss of $600,000 ($2,400,000 x 0.25) if
the partnership were to sell its assets. This allocated loss exceeds $250,000, so a substantial built-in
loss exists, which in turn makes a mandatory downward basis adjustment of $600,000 necessary. pp.
C:10-26 and C:10-27.
Issue Identification Questions
C:10-16 • Does Kayla recognize a gain or loss on the current distribution?

• What is Kayla’s basis in the office equipment?
• When does Kayla’s holding period begin for the property?
• Does any depreciation recapture carryover to Kayla from the partnership?
• What is Kayla’s basis in her partnership interest following the distribution?
Kayla recognizes no gain or loss on the distribution. Her basis for the equipment would be a
carryover basis from the partnership ($35,000) if that were possible, but it is limited to her basis in
her partnership interest prior to the distribution ($30,000). Kayla’s holding period for the office
equipment includes the holding period the partnership had for the property. Her basis in the
partnership interest is zero following the distribution. The depreciation recapture potential is an
unrealized receivable that will generate ordinary income under Sec. 735 (a)(1) when Kayla sells the
property. pp. C:10-2 through C:10-7.

C:10-3
C:10-17 • How much is Joel’s distribution?
• Does the partnership have Sec. 751 assets?
• If the partnership has Sec. 751 assets, did Joel exchange any interest in Sec. 751
assets for cash?
• How much ordinary income must Joel recognize if he exchanges Sec. 751 assets for
cash?
• How must Joel treat any cash distribution received that exceeds the amount deemed
to be part of the Sec. 751 exchange?
The amount of the distribution includes both the cash and the relief from liabilities that he
received when his interest in the partnership changed from one-third to one-fourth. The partnership
probably has Sec. 751 assets because the partnership inventory is substantially appreciated.
Furthermore, the cash basis partnership probably has unrealized accounts receivable, and the
partnership may have recapture potential if it has any depreciable personality. Again, an exchange of
Sec. 751 assets for cash probably occurred because Joel received only cash and probably gave up a
portion of his interest (from one-third to one-fourth) in each Sec. 751 asset. The amount of ordinary
income is the difference between the amount of cash Joel is deemed to have received for the Sec.
751 assets and the adjusted basis that Joel would have had in the Sec. 751 assets had the Sec. 751
assets been distributed to Joel immediately before the deemed Sec. 751 sale (usually a carryover
from the partnership’s basis in these Sec. 751 assets). Any cash or deemed cash exceeding the
amount deemed to be part of the Sec. 751 exchange is treated as a current distribution. The current
distribution will reduce his basis in his partnership interest. If the current distribution is greater than
his basis in the partnership interest, Joel will recognize gain because he receives cash exceeding his
basis.
Note: The discussion in this chapter pertaining to disproportionate distributions conforms to existing
Treasury Regulations under Sec. 751(b). The Treasury Department has issued proposed regulations
that would alter the method for calculating disproportionate distributions and their tax consequences.
When this textbook went to press, those regulations were still only proposed. Therefore, this
textbook continues to apply the methods contained in existing Treasury Regulations.
C:10-18 • Does the partnership have Sec. 751 assets?

• What is the amount and character of the gain on the sale of Scott’s partnership
interest?
• Should the partnership make a Sec. 754 election so Sally can obtain an optional basis
adjustment?
The partnership has no unrealized receivables, but the partnership does have inventory. The
results of the sale are determined as follows:
Application of step 1 yields the following gain on Scott’s sale of his partnership interest:
Amount realized on sale $43,000
Minus: Adjusted basis of partnership interest ( 33,000)
Total gain realized $10,000
C:10-4
Application of step 2 yields the following allocation to Sec. 751 property:
Deemed Sale of Partnership Scott’s Share

Assets Gain (1/3)
Inventory $9,000 $3,000
Building 15,000a 5,000b
Land 6,000 2,000
a
$5,400 of which is unrecaptured Sec. 1250 gain.
b
$1,800 of which is unrecaptured Sec. 1250 gain.
Thus, on the sale of his partnership interest, Scott recognizes $3,000 of ordinary income and
$1,800 of unrecaptured Sec. 1250 gain.
Application of step 3 yields the following residual allocation to capital gain:

Minus: Allocation to ordinary income and unrecaptured Sec. 1250 gain ( 4,800)
Capital gain recognized $ 5,200
In summary, on the sale of his partnership interest, Scott recognizes $3,000 of ordinary income,
$1,800 of unrecaptured Sec. 1250 gain, and a $5,200 capital gain.
If the partnership made a Sec. 754 election, Sally’s optional basis adjustment would be
calculated as follows:
Cash purchase price $43,000
Minus: Sally’s share of partnership’s
basis in assets (1/3 x $99,000) ( 33,000)
Optional basis adjustment $ 10,000
The optional basis adjustment would be allocated $3,000 to the inventory, $5,000 to the building,
and $2,000 to the land.
pp. C:10-16 through C:10-19 and C:10-25 through C:10-27.
C:10-19 • Is this gift going to make Haley a partner in the HotWheels LLC for tax purposes?
• If Alex restructures the gift so that Haley has true control over the interest, how will
the LLC’s income be allocated between Alex and Haley?
Haley probably will not be a partner. For Haley to be considered a partner, she must
have control of the interest. For a minor, control includes the situation where the interest is
placed in trust for the benefit of the minor but only if the trustee is someone who will act in
the best interest of the trust beneficiary. It is not clear that Alex is giving up any control
over this interest since he will continue to control the 15% share he placed into Haley’s
trust. Thus, Haley is unlikely to be considered a partner. A two-step allocation process will
be used to allocate partnership income. First, Alex must be allocated a FMV salary. His

C:10-5
current salary is described as small, and it may be too small to be considered equal to the
FMV of his services. Once Alex is allocated a FMV salary, all other income allocated to
Alex and Haley must be divided on a pro rata basis. Alex must receive three-fourths and
Haley must receive one-fourth. In effect, the family partnership income allocation rules
override the special allocation to Alex. pp. C:9-33 and C:9-34.
C:10-20• Should Krypton choose to be taxed as a partnership or as a corporation?

• How much will be kept in the business for growth, and how much will be distributed to
the owners each year? The larger the percentage of earnings that will be distributed,
the more advantageous a flow-through entity such as a partnership can be.
• What is the marginal tax rate for Jeff, Susan, and Richard? If Jeff, Susan, and Richard
have lower marginal tax rates than does Krypton, partnership status has advantages.
When considering the individual tax rates, the 20% effective reduction in the rates
resulting from the qualified business income deduction must be factored into the
analysis.
• How should Jeff’s pay for operating the business be structured? If the business is
taxed as a corporation, a generous but reasonable salary will decrease the amount of
income subject to double taxation. However, the lower capital gains tax rate on
dividend income mitigates the double taxation of dividends. Also, the low 21% C
corporation tax rate takes some of the bite out of double taxation. If the business is
structured as a partnership, the partners need to decide whether to structure the
payment as distributive share, as an outright guaranteed payment, or whether to
establish a guaranteed minimum that may be some combination of the two. The
guaranteed payment has a major disadvantage, however. Any amounts diverted to
guaranteed payments will not qualify for the 20% business income deduction. pp.
C:2-3 through C:2-8, C:9-32, and C:9-33.
C:10-21 What method should XYZ Limited Partnership choose to use to operate under the publicly
traded partnership rules?
• Pay the annual 3.5% of gross income tax and continue to be taxed as a publicly
traded partnership?
• Buy back enough interests (or restrict opportunities for trading) so the partnership is
no longer publicly traded?
• Incorporate the entity and be taxed as a regular C corporation?
• If the XYZ Limited Partnership chooses to continue as a partnership, should it elect
to come under the electing large partnership rules?
The best alternative will be a function of the amount of gross income, amount of taxable
income, tax rates of the partners, amount of profits the firm wants to retain, and costs of buying back
partnership interests, and/or restricting trading, or incorporating.
The election reduces the partnership’s annual cost of providing information to partners but
will require some start-up cost to make the change. The election also has the advantage of making it
more difficult to accidentally terminate the partnership because of trades. However, the election
significantly reduces the partners’ reporting and audit options.
pp. C:10-28 and C:10-29.

C:10-6
Problems
C:10-22 a. Ending partnership interest basis is $7,000, determined as follows:
Beginning basis $ 25,000
Minus: Cash received ( 4,000)
Land basis ( 14,000)
Ending basis $ 7,000
Lisa recognizes no gain. Her basis in the land is $14,000.
b. Ending partnership interest basis is zero, determined as follows:

Basis before distribution of land $ 21,000
Minus: Basis of land to Lisa ( 21,000)
Ending basis $ -0-
Lisa recognizes no gain. Her basis in the land is limited to $21,000, which is the basis of
her partnership interest reduced by the cash distributed.
c. Ending partnership interest basis is zero, determined as follows:

Basis before distribution of land (but not less than zero) $ -0-
Minus: Basis of land to Lisa -0-
Ending basis $ -0-
Lisa recognizes a $3,000 gain, the amount by which cash distributed exceeds her partnership
basis before the cash distribution. Her basis in the land is limited to zero, which is the basis of her
partnership interest reduced by the cash distributed.
d. Ending partnership interest basis is zero, determined as follows:

Basis before distribution of property $ 21,000
Minus: Basis of receivables and inventory ( 10,000)
Basis before distribution of land $ 11,000
Minus: Basis of land to Lisa ( 11,000)
Ending basis $ -0-
Lisa recognizes no gain. Her basis in the receivables is zero, and her basis in the inventory
is $10,000. Her basis in the land is limited to $11,000, which is the basis of her partnership interest
reduced by the cash distributed and by the basis of receivables and inventory distributed.

C:10-7
e. FMV of land distributed $ 30,000
Minus: Basis of land distributed ( 14,000)
Gain recognized by the corporation (Sec. 311(b)) $ 16,000
In addition, the corporation increases its E&P by the E&P gain (which also is $16,000),
decreases E&P by taxes on the tax gain, and decreases E&P by the $34,000 ($4,000 cash + $30,000
FMV of land) dividend distribution to Lisa (Sec. 312).
Lisa recognizes a $34,000 ($4,000 cash + $30,000 FMV of land) dividend (Sec. 301(c) and
Sec. 316). Her basis in the land is its $30,000 FMV (Sec. 301(d)), and her basis in her corporate
stock remains at $25,000.
f. FMV of land distributed $ 30,000
Minus: Basis of land distributed ( 14,000)
Gain recognized by the corporation (Sec. 311(b)) $ 16,000
One-half the $16,000 gain passes through to Lisa.
Lisa’s basis in S corporation stock:

Plus: Gain pass-through 8,000
Basis before distributions $ 33,000
Minus: Distributions excluded from Lisa gross income ( 33,000)
Ending basis $ -0-
Lisa received a $34,000 ($4,000 cash + $30,000 FMV of land) distribution, which exceeded
her stock basis before the distribution. Thus, in addition to the $8,000 pass-through gain, Lisa
recognizes a $1,000 capital gain on the excess distribution (Sec. 1368(b)(2)). Her basis in the land is
its $30,000 FMV (Sec. 301(d)).
pp. C:10-2 through C:10-7, C:4-2 through C:4-11, and C:11-25 through C:11-29.
C:10-23
Partner’s
Postdistribution Basis
Gain/Loss Basis Property to Partner
a. -0- $7,000 Land $4,000
Machinery 3,000
b. -0- $4,000 Land 6,000
Inventory 7,000
c. $9,000 -0- Land - Parcel 1 -0-
Land - Parcel 2 -0-
d. -0- $14,000 Land - Parcel 1 4,000
Land - Parcel 2 6,000
Land - Parcel 3 4,000

C:10-8
C:10-24 a. $3,000 gain recognized. Because Mario does not receive cash exceeding his
partnership basis, he recognizes no gain under the current distribution rules of Sec. 731. However,
Sec. 737 requires an additional step when some precontribution gain remains unrecognized. Mario
must recognize gain equal to the lesser of:
1. Remaining precontribution gain ($8,000 = $18,000 - $10,000) or
2. The excess of the FMV of the property distributed over the adjusted basis of the
partnership interest immediately preceding the distribution ($3,000 = $23,000 -
$20,000 partnership basis).
Under Sec. 737, Mario recognizes a $3,000 gain, which takes its character from the land Mario
contributed to the partnership having the precontribution gain.
b. $8,000 basis, determined as follows:
Mario’s basis in partnership interest before
the distribution $20,000
Plus: Sec. 737 gain recognized on the distribution 3,000
Minus: Carryover basis of property distributed (15,000)
Basis in partnership interest after the distribution $ 8,000
Because Mario recognized gain under Sec. 737, he must increase the basis of his partnership
interest by the $3,000 amount of the Sec. 737 gain. His basis is increased before reducing the basis
for the distribution.
c. $13,000 basis. Because Mario recognizes $3,000 of gain under Sec. 737, the
partnership must increase its basis in the property related to the precontribution gain that Mario
recognized. The partnership’s basis in the land is increased to $13,000 ($10,000 carryover basis from
Mario at the time of the contribution + $3,000 Sec. 737 gain recognized on this distribution).
Students may note that $5,000 of precontribution gain related to this land remains, which
could be recognized under Sec. 737 if Mario receives other distributions that trigger the recognition
of this gain within seven years of the original contribution of the land to the partnership. pp. C:10-2
through C:10-7.
C:10-25 a. $3,000 gain by Andrew. Andrew must recognize the gain that would have been
allocated to him had the partnership sold the land for its FMV instead of distributing it to Bob.
Amount deemed realized $21,000
Minus: Adjusted basis ( 18,000)
Capital gain on deemed sale $ 3,000
b. and c. Basis in partnership interest: $24,000 for Andrew; $9,000 for Bob. Basis in land to
Bob is $21,000. All $3,000 of the gain would have been allocated to Andrew because his
pre-contribution gain was $4,000, so Andrew must recognize a $3,000 gain. He increases his basis
in the partnership interest by the $3,000 gain he recognizes to $24,000. Bob’s basis in his
partnership interest is not affected by the gain recognition. The partnership’s basis in the land is
deemed increased by the $3,000 gain to $21,000 immediately before the land is distributed.
Accordingly, the basis of the land to Bob is $21,000, and Bob’s basis in his partnership interest is
reduced to $9,000 ($30,000 - $21,000) by the distribution. Andrew’s basis in his partnership interest
is not affected by the distribution. pp. C:10-2 through C:10-7.

C:10-9
C:10-26 Basis in property after distribution: Land, $8,000; Inventory, $4,000; Cash, $10,000.
Basis in partnership interest after distribution: Alonzo, $11,000; Beth, $15,000; Cathy, $11,000.
First, Beth and Cathy must recognize precontribution gains on the distributed property.
1. Land: Amount deemed realized $10,000

Gain on deemed sale $ 6,000
The precontribution gain allocated to Beth on the deemed sale is $4,000 ($8,000 FMV - $4,000 basis
at contribution). Beth’s basis in her partnership interest after the deemed sale is $19,000 ($15,000 +
$4,000 gain recognized). The land’s basis to the partnership immediately before the distribution is
$8,000 ($4,000 basis + $4,000 gain recognized).
2. Inventory: Amount deemed realized $10,000

Gain on deemed sale $ 9,000
The precontribution gain allocated to Cathy on the deemed sale is $3,000 ($4,000 FMV - $1,000
basis at contribution). Cathy’s basis in the partnership interest after the deemed sale is $21,000
($18,000 + $3,000 gain recognized). The inventory’s basis to the partnership immediately before the
distribution is $4,000 ($1,000 + $3,000 gain recognized).
Then, the current distributions must be analyzed using the normal rules.
Alonzo’s distribution:
Basis in partnership interest before distribution $19,000
Minus: Carryover basis in land (see 1 above) ( 8,000)
Basis in partnership interest after distribution $11,000
Beth’s distribution:
Basis in partnership interest before distribution
(see 1 above) $19,000
Minus: Carryover basis in inventory (see 2 above) ( 4,000)
Cathy’s distribution:
Basis in partnership interest before distribution
(see 2 above) $21,000
Minus: Cash received in distribution ( 10,000)

C:10-10
C:10-27 a. Accounts receivable and depreciation recapture on the equipment.
b. Yes. The inventory’s $76,000 FMV ($16,000 + $52,000 + $1,500 equipment
depreciation recapture + $6,500) exceeds 120% of its adjusted basis [1.20 x ($0 + $50,000 + $0 +
$6,000) = $67,200]. The $1,500 depreciation recapture arises from the $1,500 built-in gain on the
equipment, all of which would be Sec.1245 because of the $4,000 depreciation taken on the
equipment. Supplies are part of inventory because Sec. 751(d) defines inventory essentially as
anything other than cash, capital assets, and Sec. 1231 property.
c.
(1) (2) (3) (4) (5)
Kay’s Interest Kay’s Interest Hypothetical
Beginning Before After Proportionate
Partnership Distribution Distribution Distribution Actual Difference
Amount (1/3) (1/4) (3)=(1)-(2) Distribution (5)=(4)-(3)
Sec. 751 Assets:

Receivables $16,000 $ 5,333 $ 4,000 $ 1,333 $-0- $(1,333)
Inventory 52,000 17,333 13,000 4,333 -0- ( 4,333)
Supplies 6,500 2,167 1,625 542 -0- ( 542)
Recapture 1,500 500 375 125 -0- ( 125)
Total $76,000 $25,333 $19,000 $ 6,333 $-0- $(6,333)
Other Assets:
Cash $ 30,000 $10,000 $ 2,500 $ 7,500 $20,000 $12,500
Equipment 9,000 3,000 2,250 750 -0- ( 750)
Land 65,000 21,667 16,250 5,417 -0- ( 5,417)
Total $104,000 $34,667 $21,000 $13,667 $20,000 $ 6,333
Kay’s sale:
Amount realized $ 6,333
Minus: Adjusted basis ( 4,666)a
Recognized gain (ordinary income) $ 1,667
Kay’s basis in partnership interest:
Beginning basis $33,750
Minus: Sec. 751 transaction:
Inventory ($50,000/$52,000 x $4,333) ( 4,166)
Supplies ($6,000/$6,500 x $542) ( 500)
Basis after Sec. 751 transaction $29,084
Minus: Non-Sec. 751 distribution (13,667)b
Ending partnership interest basis $15,417
a
$0 receivables + $4,166 inventory + $500 supplies + $0 depreciation recapture.
b
$20,000 total - $6,333 Sec. 751 exchange.
C:10-11
C:10-28 a. Sec. 1245 recapture on machinery. The receivables are not included because they
have been realized.
b. Yes. The inventory’s $86,000 FMV ($12,000 + $24,000 + $50,000 machinery
depreciation recapture) exceeds 120% of its adjusted basis [1.20 x ($12,000 + $21,000 + $0) = $39,600].
Realized as well as unrealized receivables are included in the Sec. 751(d) definition of inventory.
c.
(1) (2) (3) (4) (5)
Jack’s Jack’s Interest Hypothetical
Beginning Interest Before After Proportionate
Sec. 751 Assets:

Receivables $12,000 $ 3,000 $ 2,400 $ 600 $-0- $( 600)
Inventory 24,000 6,000 4,800 1,200 -0- ( 1,200)
Recapture 50,000 12,500 10,000 2,500 -0- ( 2,500)
Total $86,000 $21,500 $17,200 $4,300 $-0- $(4,300)
Other Assets:
Cash $ 48,000 $12,000 $ 4,600 $ 7,400 $25,000 $17,600
Machinery 190,000 47,500 38,000 9,500 -0- ( 9,500)
Land 76,000 19,000 15,200 3,800 -0- ( 3,800)
Total $314,000 $78,500 $57,800 $20,700 $25,000 $ 4,300
Jack’s sale:
Amount realized $ 4,300
Minus: Adjusted basis ( 1,650)a
Recognized gain (ordinary income) $ 2,650
Jack’s basis in partnership interest:
Minus: Sec. 751 transaction
Accounts receivable ( 600)
Inventory ($21,000/$24,000 x $1,200) ( 1,050)
Basis after Sec. 751 transaction $75,225
Minus: Non-Sec. 751 distribution (20,700)b
Ending basis $54,525
a
$600 receivables + $1,050 inventory + $0 recapture.
b
$25,000 total - $4,300 Sec. 751 exchange.

C:10-12
C:10-29
(1) (2) (3) (4) (5)
Paula’s Paula’s Interest Hypothetical
Beginning Interest Before After Proportionate
Sec. 751 Assets:

Receivables $ 40,000 $10,000 $ 8,000 $2,000 $ -0- $ (2,000)
Inventory 100,000 25,000 18,000 7,000 10,000 3,000
Total $140,000 $35,000
$86,000 $26,000 $9,000 $10,000 $ 1,000
Other Assets:
Cash $ 20,000 $ 5,000 $ 4,000 $1,000 $ -0- $(1,000) ($1,000)
Deemed cash distribution $1,000

Partnership’s sale of inventory for cash:
Amount realized $1,000
Minus: Adjusted basis of inventory (0.80 x $1,000) ( 800)a
Partnership’s recognized gain $ 200b
a
Because the total basis for the inventory is $80,000 and the total FMV is $100,000, the basis
of this portion of the inventory is assumed to be 80% of its FMV.
b
The $200 gain is allocated one-third to each of the other three partners (Reg. Sec. 1.751-
1(b)(2)(ii)). Thus, each other partner recognizes $67 of ordinary income.
Basis in partnership interest:
Paula Partner Q Partner R Partner S
Beginning basis $25,000 $25,000 $25,000 $25,000

Plus: Share of partnership income 67 67 67
Minus: Deemed distribution of cash (1,000)
Distribution of remaining
inventory
(adjusted basis = 0.80 x $9,000) ( 7,200) _______ _______ _______
Ending basis $16,800 $25,067 $25,067 $25,067
Paula’s basis in inventory:

Portion deemed purchased from
partnership (cost) $1,000
Remaining distribution (adjusted basis) 7,200
Total $8,200
C:10-13
C:10-30 The results of the two types of distributions are compared as follows:
Cleo Leo
Part a
Gain (loss) recognized $2,000 $ -0-
Basis in partnership interest -0- 2,000
Part b
Gain (loss) recognized 2,000 (2,000)
A partner recognizes gain on either type of distribution to the extent cash distributed exceeds the
partner’s basis in his or her partnership interest before the distribution. A partner recognizes a loss
only with liquidating distributions and then only where the partnership distributes no assets other
than cash, inventory, and/or unrealized receivables. The loss equals the excess of the partner’s basis
in the partnership interest over the amount of these assets distributed (in this case, cash). pp. C:10-2,
C:10-4, and C:10-12.
C:10-31 Partner’s
Postdistribution Basis
Gain/Loss Basis Property to Partner
a. -0- None Land $11,000a

Machinery 3,000
b. -0- None Land 10,000b
Inventory 7,000
c. $9,000 None Land - 1 -0-c
Land - 2 -0-
d. -0- None Land - 1 6,462d
Land - 2 10,769
Land - 3 10,769
a
Predistribution basis $20,000
Less: Cash distribution ( 6,000)
Basis to allocate $14,000
Basis of property to partners: Land Machinery
First allocate to property basis $ 4,000 $ 3,000

Then allocate to property appreciation 7,000 -0-
Total $11,000 $ 3,000
b
Basis to allocate $17,000
Less: Allocation to inventory ( 7,000)
Allocation to land $10,000

C:10-14
c
Basis to allocate (but not less than zero) $ -0-
d
Basis of property to partners: Basis to
Land 1 Land 2 Land 3 Allocate
First allocate to property basis $4,000 $ 6,000 $ 4,000 ( 14,000)
Balance $14,000
Then allocate to property appreciation 2,000 4,000 6,000 ( 12,000)
Finally allocate on relative FMV 462 769 769 (2,000)
Total $6,462 $10,769 $10,769 $ -0-
pp. C:10-12 through C:10-16.
C:10-32 Marinda: $30,000 capital gain; Partnership: No gain recognized. Even though Marinda
does not receive her proportionate share of each partnership asset in the liquidating distribution, the
transaction has no Sec. 751 implications because the partnership has no Sec. 751 assets. Marinda is
deemed to have received $110,000 in cash or deemed cash ($100,000 cash + $10,000 release from
liability). Accordingly, she must recognize capital gain of $30,000 ($110,000 received - $80,000
basis). The partnership recognizes no gain. pp. C:10-12 through C:10-16.
C:10-33
Alison Bob
Basis before liability reduction $ 110,000 $ 180,000
Minus: Liability reduction (deemed distribution) ( 50,000) ( 50,000)
Basis before distributions $ 60,000 $ 130,000
Minus: Cash distributions ( 20,000) ( 20,000)
Basis to be allocated $ 40,000 $110,000
Minus: Basis allocable to inventory ( 32,195)a ( 33,000)
Basis allocable to receivables ( 7,805)a ( 10,000)
Amount allocable to other property $ -0- $ 67,000
Minus: Basis allocable to land ( -0-) ( 15,000)b
Basis allocable to building ( -0-) ( 52,000)b
Ending basis in partnership interest $ -0- $ -0-

C:10-15
a
Allison’s allocation:
Inventory Receivables Total
FMV of asset $ 35,000 $ 8,000 $43,000
Minus: Partnership’s basis for the asset ( 33,000) ( 10,000) (43,000)
Difference $ 2,000 ( $2,000) $ -0-
Step 1: Give each asset the partnership’s basis
for the asset $ 33,000 $10,000 $ 43,000
Minus: Allison’s basis to be allocated ( 40,000)
Decrease to allocate $ 3,000
Step 2: Asset basis after Step 1 $ 33,000 $10,000 $43,000
Allocate the decrease first to assets
that have declined in value -0- ( 2,000) ( 2,000)
Adjusted basis at this point in the
calculation $ 33,000 $ 8,000 $41,000
Step 3: Allocate $1,000 remaining decrease
based on relative adjusted basis at this
point in the calculation ( 805)* ( 195) ( 1,000)
Allison’s basis in the assets $ 32,195 $ 7,805 $40,000
*$33,000/($33,000 + $8,000) x $1,000 remaining decrease to be allocated.
b
Bob’s allocation:
Land Building Total
FMV of asset $10,000 $60,000 $70,000
Minus: Partnership’s basis for the asset ( 15,000) ( 40,000) ( 55,000)
Difference ($ 5,000) $20,000 $15,000
for the asset $15,000 $40,000 $55,000
Minus: Bob’s basis to be allocated ( 67,000)
Increase to allocate $12,000
Step 2: Allocate the $12,000 increase first to
assets that have appreciated in value -0- 12,000 12,000
Bob’s basis in the asset $15,000 $52,000 $67,000
The basis in each asset received is the number used to reduce the partner’s basis in the partnership
interest. Note that Alison’s basis in the inventory and receivables is smaller than a carryover basis
from the partnership while Bob’s basis in the building is larger than a carryover basis. Neither the
partners nor the partnership recognize any gain or loss. pp. C:10-12 through C:10-14.

C:10-16
C:10-34 a, b, c, and d. Larry’s basis in his partnership interest:
Part a Part b Part c Part d
Basis before distribution $ 40,000 $46,500 $46,500 $34,500
Minus: Cash distribution ( 2,500) ( 2,500) ( 2,500) ( 2,500)
Basis to be allocated $.37,500 $44,000 $44,000 $32,000
Minus: Basis allocable to inventorya ( 8,000) ( 8,000) ( 8,000) ( 8,000)
Basis to be allocated to capital assetsb $ 29,500 $36,000 $36,000 $24,000
a
Inventory is not substantially appreciated. Therefore, Sec. 751 does not apply.
b
See Parts a – d below for remaining allocations. Also see summary of bases after Part d.
a.
Capital Asset 1 Capital Asset 2 Total
FMV of asset $ 15,000 $ 17,500 $ 32,500
Difference $ 5,000 $ 2,500 $ 7,500
for the asset $ 10,000 $15,000 $ 25,000
Minus: Larry’s basis to be allocated ( 29,500)
Increase to allocate $ 4,500
Step 2: Basis after Step 1 $ 10,000 $15,000 $ 25,000
Allocate the $4,500 increase to assets
that have increased in value* 3,000 1,500 4,500
Larry’s basis in the capital assets $13,000 $16,500 $ 29,500
*Based on relative unrealized appreciation: Capital Asset 1, $5,000/$7,500 x $4,500;
Capital Asset 2, $2,500/$7,500 x $4,500
b.
FMV of asset $ 15,000 $ 17,500 $32,500
Difference $ 5,000 $ 2,500 $ 7,500
for the asset $10,000 $15,000 $25,000
Increase to allocate $11,000
Step 2: Basis after Step 1 $10,000 $15,000 $25,000
Allocate the increase to assets
that have increased in valuea 5,000 2,500 7,500
Basis after Step 2 $15,000 $17,500 $32,500
Step 3: Allocate the remaining $3,500
increaseb 1,615 1,885 3,500
Larry’s basis in the capital assets $16,615 $19,385 $36,000

C:10-17
a
But not more than the unrealized appreciation.
b
Based on relative FMV: Capital Asset 1, $15,000/$32,500 x $3,500;
Capital Asset 2, $17,500/$32,500 x $3,500
c.
FMV of asset $15,000 $17,500 $32,500
Minus: Partnership’s basis for the asset ( 10,000) ( 20,000) (30,000)
Difference $ 5,000 ($ 2,500) $ 2,500
for the asset $10,000 $20,000 $30,000
Increase to allocate $ 6,000
Step 2: Basis after Step 1 $10,000 $20,000 $30,000
Allocate the increase to assets
that have increased in valuea 5,000 -0- 5,000
Basis after Step 2 $15,000 $20,000 $35,000
increaseb 462 538 1,000
Larry’s basis in the capital assets $15,462 $20,538 $36,000
a
But not more than the unrealized appreciation.
b
Based on relative FMV: Capital Asset 1, $15,000/$32,500 x $1,000;
Capital Asset 2, $17,500/$32,500 x $1,000
d.
FMV of asset $15,000 $17,500 $32,500
Difference $ 5,000 ($ 2,500) $ 2,500
for the asset $10,000 $20,000 $30,000
Decrease to allocate ($ 6,000)
Step 2: Basis after Step 1 $10,000 $ 20,000 $30,000
Allocate the decrease to assets
that have decreased in valuea -0- ( 2,500) ( 2,500)
Basis after Step 2 $10,000 $ 17,500 $27,500
decreaseb ( 1,273) ( 2,227) ( 3,500)
Larry’s basis in the capital assets $ 8,727 $ 15,273 $24,000

C:10-18
a
But not more than the unrealized depreciation.
b
Based on relative adjusted bases after the Step 2 adjustments:
Capital Asset 1, $10,000/$27,500 x ($3,500)
Capital Asset 2, $17,500/$27,500 x ($3,500)
Summary of asset bases: Part a Part b Part c Part d

Cash $ 2,500 $ 2,500 $ 2,500 $ 2,500
Inventory 8,000 8,000 8,000 8,000
Capital Asset 1 13,000 16,615 15,462 8,727
Capital Asset 2 16,500 19,385 20,538 15,273
Total $40,000 $46,500 $46,500 $34,500
pp. C:10-12 through C:10-14.
C:10-35 a. Kelly’s January 1 basis $35,000

Plus: Share of January income [($15,000 + $6,000) x ⅓] 7,000
Kelly’s February 1 basis $42,000
b. Kelly recognizes $20,000 of ordinary income, $1,333 of unrecaptured Sec. 1250 gain,
and a $1,667 capital gain. The partnership has inventory and Sec. 1250 property . Accordingly, the
sales transaction must be analyzed as follows:
Application of step 1 yields the following gain on Kelly’s sale of her partnership interest:
Amount realized on sale

($45,000 cash + $20,000 liabilities) $65,000
Deemed Sale
of Assets Partnership Gain Kelly’s Share (1/3)
Inventory $60,000 $20,000

Building 4,000 (all unrecaptured Sec. 1250 gain) 1,333
Land 5,000 1,667
Thus, on the sale of her partnership interest, Kelly recognizes ordinary income of
$20,000 and an unrecaptured Sec. 1250 gain of $1,333.

C:10-19

Minus: Allocation to ordinary income and unrecaptured Sec. 1250 gain ( 21,333)
c. $65,000 = $45,000 cash paid + $20,000 share of partnership liabilities.

d. Unchanged from the basic facts. However, Margaret may have a special basis
adjustment in the assets if a Sec. 754 election is in effect.
pp. C:10-16 through C:10-19, C:10-26, and C:10-27.
C:10-36 a. Clay recognizes $9,000 of ordinary income and a $3,000 capital loss. The results of
the sale are determined as follows:
Application of step 1 yields the following gain on Clay’s sale of his partnership
interest:
($75,000 cash + $15,000 liabilities) $ 90,000
Minus: Adjusted basis of partnership interest
($168,000 x 0.50) ( 84,000)
Total gain realized $ 6,000
Partnership
Deemed Sale of Assets Gain (Loss) Clay’s Share (60% x 0.50)
Inventory $ 30,000 $ 9,000

Land ( 10,000) ( 3,000)
Thus, on the sale of his partnership interest, Clay recognizes ordinary income of $9,000.
Application of step 3 yields the following residual allocation to capital loss:

Minus: Allocation to ordinary income ( 9,000)
Capital loss recognized $( 3,000)
Also, Clay’s ending basis in his remaining partnership interest is $84,000

($168,000 × 0.50).
b. Steve’s basis is $90,000, his purchase price of $75,000 cash paid plus $15,000 in
liabilities assumed.
c. The partnership’s basis will not be affected. However, Steve may have a special basis
adjustment in the assets if a Sec. 754 election is in effect.

C:10-20
d. If Clay sold his entire interest to Steve, the partnership would not terminate on the
date of the sale because of the repeal of the technical termination rule. Thus, Clay’s gain is twice the
amounts shown in Part a ($18,000 ordinary income and $6,000 capital loss). Steve’s basis in the
partnership interest is $180,000 ($150,000 cash paid + $30,000 in liabilities assumed).
pp. C:10-16 through C:10-19 and C:10-23.
C:10-37 a. Alice recognizes $24,000 of ordinary income, $10,000 of unrecaptured Sec. 1250
gain, and a $16,000 capital gain. The result of the sale is determined as follows:
Application of step 1 yields the following gain on Alice’s sale of her partnership
interest:

Application of step 2 yields the following allocation of Sec. 751 property:
Partnership Alice’s
Deemed Sale of Assets Gain (Loss) Share (⅓)
Receivable $21,000 $ 7,000

Inventory 15,000 5,000
Machinery 42,000a 14,000a
Building 45,000b 15,000b
Land ( 6,000) ( 2,000)
Investments 33,000 11,000
a
Partnership depreciation is $36,000, and Alice’s share is $12,000.
b
Partnership unrecaptured Sec. 1250 gain is $30,000, and Alice’s share is $10,000.
Thus, on the sale of her partnership interest, Alice recognizes ordinary income of
$24,000 ($7,000 + $5,000 + $12,000 recapture). In addition, Alice’s unrecaptured Sec. 1250 gain is
$10,000.

Minus: Allocation to ordinary income
and unrecaptured Sec. 1250 gain (34,000)
Capital gain recognized $16,000

C:10-21
b. Darla’s basis in her partnership interest is $160,000 ($125,000 cash paid + $35,000
share of liabilities assumed). Also, Darla may have a special basis adjustment in the partnership
assets if a Sec. 754 election is in effect. pp. C:10-16 through C:10-19 and C:10-25 through C:10-27.
C:10-38 a. $30,000 capital gain and $15,000 ordinary income. Suzanne’s share of partnership
assets is $135,000 (1/3 x $405,000). Therefore, $135,000 of the $150,000 she receives ($130,000
cash + $20,000 release from liabilities) is a Sec. 736(b) payment. The Sec. 736(b) payment is
treated as a distribution, so Suzanne must recognize a $30,000 gain (cash distribution of $135,000
exceeding $105,000 basis). The gain is capital gain if Suzanne held the partnership interest as a
capital asset. The remaining $15,000 payment does not represent a payment for property. Because
the payment is not determined based on partnership income, it is a guaranteed payment. Thus, the
$15,000 payment is ordinary income to Suzanne. Note: Because of Suzanne’s recognized gain, the
partnership could adjust the basis of the land upward by $30,000 if a Sec. 754. election is in effect.
b. Suzanne’s capital account will be removed because she is no longer a partner. The
partnership gets no deduction for the payments taxed as Sec. 736(b) payments, but the partnership
can deduct the guaranteed payment of $15,000. The remaining partners’ bases in the partnership
must be increased to reflect the additional amount of liability each is allocated when Suzanne is no
longer a partner. pp. C:10-19, C:10-20, C:10-27, and C:10-28.
C:10-39 a. $9,600 capital gain, determined as follows:

Amount realized ($41,600 cash + $8,000 liability) $49,600
Minus: Sec. 736(b) payment = ($124,000 x 0.40) (49,600)
Sec. 736(a) payment $ -0-
Sec. 736(b) payment $49,600

Minus: Basis in partnership ( 40,000)
Capital gain $ 9,600
b. $8,400 ordinary income and $9,600 capital gain, determined as follows:

Amount realized ($50,000 cash + $8,000 liability) $58,000
Minus: Sec. 736(b) payment ($124,000 x 0.40) ( 49,600)
Sec. 736(a) payment (ordinary income) $ 8,400

Brian is taxed on the Sec. 736(a) payment as a guaranteed payment, and the partnership
deducts the payment. The guaranteed payment, however, will not be eligible for the qualified business
income deduction. (Note: The capital gains recognized in Parts a and b could create a basis adjustment
to the land if a Sec. 754 election is in effect.) pp. C:10-19, C:10-20, C:10-27, and C:10-28.

C:10-22
Amount realized ($65,000 cash + $25,000 liabilities) $90,000
Minus: Sec. 736(b) payment (FMV of property interest) ( 90,000)
Sec. 736(a) payment (ordinary income) $ -0-
Sec. 736(b) payments $90,000

Recognized gain $15,000
The character of the gain is capital because the partnership has no unrealized receivables or
substantially appreciated inventory.
b. $10,000 ordinary income and $15,000 capital gain, determined as follows:

Minus: Sec. 736(b) payment (FMV of property interest) ( 90,000)
Sec. 736(a) payment (ordinary income) $ 10,000
Sec. 736(b) payments $ 90,000

Recognized gain $ 15,000
The character of the gain is capital gain because the partnership has no Sec. 751 assets. The
Sec. 736(a) payment is treated as a guaranteed payment because it is determined without reference to
partnership income. It is ordinary income to Kim (but not eligible for the qualified business income
deduction) and deductible by the partnership. (Note: The recognized gains in Parts a and b could
create basis adjustment to the land if a Sec. 754 election is in effect.) pp. C:10-19, C:10-20, C:10-
27, and C:10-28.
C:10-41 a. $90,000 of ordinary income. The FMV of Jerry’s partnership interest at the date of his
death plus his share of partnership liabilities is $160,000 ($130,000 + $30,000). His estate will receive
payments totaling $250,000 ($220,000 cash + $30,000 release from liabilities) during the two-year
period following death. The payments are Sec. 736(b) payments up to the FMV of his partnership
interest plus his share of liabilities for a total of $160,000. See Reg. Sec. 1.736-1(b) (1). The basis of
his partnership interest to his successor-in-interest is $160,000 ($130,000 FMV on the date of Jerry’s
death + $30,000 share of liabilities). Accordingly, the first $160,000 of payments is treated as liquidating
distributions and will generate no gain. The remaining payments ($90,000) are Sec. 736(a) payments,
which are not tied to partnership income and therefore are taxed as guaranteed payments to the
successor-in-interest. These payments will be taxed as ordinary income to the successor-in-interest and
are not eligible for the qualified business income deduction.
b. The partnership gets no deduction for the Sec. 736(b) payments, but it can deduct the
Sec. 736(a) payments. Because this was a two-person partnership, the partnership will continue only
until the partnership makes the last payment to Jerry’s successor-in-interest. At the time the
partnership makes the last payment, the partnership will terminate unless a new partner(s) is
admitted. pp. C:10-19 and C:10-20.

C:10-23
C:10-42 a. Amount realized ($130,000 cash + $20,000 liabilities) $150,000
Minus: Adjusted basis
($130,000 FMV at date of death + $20,000 liabilities) (150,000)
Realized gain $ -0-
b. 10% of partnership income is treated as Bruce’s successor-in-interest’s distributive

share in each of the next three years. It is not deductible by the partnership.
c. When the partnership makes the final payment.
pp. C:10-19 and C:10-20.
C:10-43 a. Because the accounts receivable have a basis equal to their FMV and because the
building has no depreciation recapture potential, the partnership holds no unrealized receivables.
However, the building does have unrecaptured Sec. 1250 gain potential.
John’s sales: Each of the two sales (one to Stephen and one to Andrew) is as follows:
Total
Amount realized $222,000a
Minus: Adjusted basis ( 166,800)b
Recognized gain $ 55,200
a
$186,000 + $36,000 release from liabilities
b
($261,600 x 0.50) + $36,000 share of liabilities
John’s total gain from the two sales is $110,400, of which $60,000 is an unrecaptured Sec. 1250 gain
subject to the 25% capital gains tax rate, and $50,400 is a capital gain.
The sale of a 60% interest does not terminate the JAS Partnership, and the partnership remains intact
if Andrew and Stephen continue to operate as a partnership.
b. John’s distributions are Sec. 736(b) distributions. For distribution purposes, the
partnership holds no Sec. 751 assets. Thus, no Sec. 751 exchange occurs, and John will recognize
no gain or loss on the distribution. His basis in each asset is determined as follows:
Beginning basis in partnership interest
($261,600 + $72,000 share of liabilities) $333,600
Minus: Actual cash ( 24,000)
Deemed cash (liability relief) ( 72,000)
Receivables ( 60,000)
Basis allocable to land and building $177,600
Minus: Building (120,000)
Land ( 57,600)
Ending basis in partnership interest $ -0-

C:10-24
John holds the following assets after the distribution:
Adjusted Basis FMV
Cash $ 24,000 $ 24,000

Receivables 60,000 60,000
Building 120,000 180,000
Land 57,600 108,000
Total $261,600 $372,000
Notice that the built-in gain on these assets is $110,400 ($372,000 - $261,600). Thus, John’s total
gain is the same as in Part a, except here the gain is deferred rather than recognized immediately.
The partnership does not terminate and has the following postdistribution balance sheet:
Partnership’s Basis FMV
Assets:
Cash $136,000 $136,000
Receivables 40,000 40,000
Building 80,000 120,000
Land 38,400 72,400
Total $294,400 $368,000
Liabilities and Capital:
Liabilities $120,000 $120,000
Capital - Andrew 87,200 124,000
- Stephen 87,200 124,000
Total $294,400 $368,000
Andrew and Stephen each will have an outside basis of $147,200 ($87,200 + $60,000 share of
liabilities). pp. C:10-12 through C:10-19 and C:10-22 through C:10-24.

Sec. 736(b) property:
Cash $ 60,000
Receivables 20,000
Land 100,000
$180,000
The amount realized equals $160,000 cash + $20,000 release from liabilities, which is
allocated all to the Sec. 736(b) property.

Recognized gain or loss $ 60,000
The character of the gain is capital gain because the partnership has no Sec. 751 assets or
Sec. 1250 property.

C:10-25
b. $60,000 capital gain, determined as follows:
Amount realized ($160,000 cash and $20,000 liabilities) $180,000
Recognized gain or loss $ 60,000
The character of the gain is capital because the partnership has no Sec. 751 assets or Sec. 1250
property. Thus, in total, the results are the same as in Part a. pp. C:10-12 through C:10-19.
C:10-45 a. A taxable transaction occurs. The recognized gains for Josh and Diana are determined
as follows:
Josh: Amount realized $60,000

Minus: Adjusted basis (40,000)
Diana: Amount realized $60,000

All or part of the gains might be unrecaptured Sec. 1250 gain if the underlying real property was
subject to depreciation.
b. An exchange of a partner’s general partnership interest for a limited partnership

interest in the same partnership is treated much like a corporate recapitalization and is likely to be
nontaxable. See Rev. Rul. 84-52, 1984-1 C.B. 157. Similarly with conversion from a partnership to
an LLC. See Rev. Rul. 95-37, 1995-1 C.B. 130. pp. C:10-20 and C:10-21.
C:10-46 a. No. Sale of the partnership interest does not terminate the partnership.
b. No. Liquidating distributions do not terminate a partnership.
c. Yes. Only one member of the partnership continues as owner.
d. No. The the technical termination rule of Sec. 708(b)(1)(B) has been repealed.
e. The ABC Partnership terminates on December 30 of the current year. The WXY
Partnership is treated as having continued.
f. The WXY Partnership terminates on January 1 of the current year.
pp. C:10-22 through C:10-24.
C:10-47 a. The KL Partnership continues while the MN Partnership terminates.

b. The ABC Partnership continues while the CD Partnership terminates.
c. The YZ and WX Partnerships both terminate.
d. The DE Partnership is a continuation of the DEFG Partnership. The FG Partnership
is a new partnership.
e. The HIJK Partnership terminates.
pp. C:10-23 and C:10-24.

C:10-26
C:10-48 Amount realized $100,005a
Minus: Adjusted basis ( -0-)
a
$5 cash + release from $100,000 liability.
C:10-49 a. The total optional basis adjustment is $20,000, calculated as follows:
Cash purchase price $100,000

Minus: Patty’s share of partnership’s
basis in asset’s (1/3 x $240,000) ( 80,000)
Optional basis adjustment $ 20,000
b. The partnership recognizes a $60,000 ($220,000 - $160,000) gain.
c. Patty’s share of the gain is $20,000. However, she recognizes none of this gain
because of her $20,000 basis adjustment. pp. C:10-24 through C:10-27.
C:10-50 $110,000 loss to Latisha, made up of $90,000 of ordinary income and a $200,000 capital
loss. $110,000 downward mandatory basis adjustment to Larry. These results are determined as
follows:
Partnership Latisha’s
Assets Basis FMV Gain (Loss) Share
Inventory $ 800,000 $1,070,000 $ 270,000 $ 90,000

Land 1,600,000 1,000,000 (600,000) (200,000)
Total $2,400,000 $2,070,000 $(330,000) $(110,000)
Latisha’s loss recognized:

Cash received $ 690,000
Minus: Basis of partnership interest (800,000)
Loss on sale of partnership interest $(110,000)
Analysis of Latisha’s loss:

Total loss recognized $(110,000)
Minus: Allocation to ordinary income (90,000)
Capital loss recognized $(200,000)
Summary of loss:
Ordinary income $ 90,000
Capital loss (200,000)
Total loss $(110,000)

C:10-27
Computation of mandatory basis adjustment to Larry:
Larry’s cost basis in his partnership interest $ 690,000
Minus: Larry’s share of basis in partnership assets ($2,400,000 x 1/3) (800,000)
Mandatory downward basis adjustment $(110,000)
Although beyond the scope of the textbook, the allocation of the basis adjustment is as
follows:
Partnership Allocation to
Gain (Loss) Larry (1/3)
Allocation to inventory $270,000 $ 90,000

Allocation to land (600,000) (200,000)
pp. C:10-26 and C:10-27.
C:10-51 a. The ABC Company (an LLC) will be treated as a partnership. Alex will report his
one-third share of each income item reported by the LLC.
Ordinary income $10,000

Short-term capital gain 4,000
Long-term capital loss ( 2,000)
The distribution is not taxable because it does not exceed Alex’s basis in his ABC Company
interest.
b.Beginning basis $40,000
Plus: Share of ordinary income 14,000
Minus: Capital loss ( 2,000)
Distribution (12,000)
Ending basis $40,000
pp. C:10-29 and C:10-30.
Comprehensive Problems
C:10-52 a. Formation of Lifecycle Partnership:
Able, Baker, and Lifecycle Partnership recognize no gain or loss on the transfer of
land to the partnership. Lifecycle Partnership takes the following tax basis and book values in the
land:
Tax Basis Book Value
Land A $16,000 $30,000

Land B 22,000 20,000
The partnership’s tax holding period for the land includes Able’s and Baker’s holding periods prior
to the transfers. Able’s beginning basis in his partnership interest is $16,000, and Baker’s beginning
basis is $22,000.
C:10-28
b. (1) Partnership ordinary and separately stated items:
2018 2019 2020
Sales $964,000 $990,000 $500,000
Minus: Cost of goods sold (450,000) (500,000) (280,000)
Gross profit $514,000 $490,000 $220,000
Minus:
Depreciation ( 94,000) (150,000) (115,000)
Interest expense (140,000) (130,000) (125,000)
Salary expense (guaranteed payment) -0- ( 12,000) -0-
Operating expenses ( 30,000) ( 40,000) ( 60,000)
Partnership ordinary income (loss) $250,000 $158,000 $( 80,000)
Separately stated items:
Dividend income $ -0- $ 2,000 $ -0-
STCG; LTCG -0- 1,000 3,000
Tax-exempt interest -0- 1,500 -0-
Charitable contribution -0- ( 500) -0-
(2) Book capital accounts: Able Baker

Contribution of land (FMV) $ 30,000 $ 20,000
Plus: Partnership ordinary income 150,000 100,000
Balance 12/31/18 $180,000 $120,000
Short-term capital gain 600 400
Dividend income 1,200 800
Tax-exempt interest 900 600
Minus: Charitable contribution ( 300) ( 200)

Distributions to partners ( 42,000) ( 28,000)
Balance 12/31/19 $235,200 $156,800
Plus: Long-term capital gain 1,800 1,200
Minus: Partnership ordinary loss ( 48,000) ( 32,000)
Balance 12/31/20 $189,000 $126,000
(3) Basis in partnership interests: Able Baker
Contribution of land (tax basis) $ 16,000 $ 22,000

Plus: Increase in partnership liabilities 1,200,000 800,000
Partnership ordinary income 150,000 100,000
Balance 12/31/18 $1,366,000 $922,000
Short-term capital gain 600 400
Dividend income 1,200 800
Tax-exempt interest 900 600
C:10-29
Minus: Charitable contribution ( 300) ( 200)
Distributions to partners ( 42,000) ( 28,000)
Decrease in partnership liabilities ( 60,000) ( 40,000)
Balance 12/31/19 $1,361,200 $918,800
Plus: Long-term capital gain 1,800 1,200
Minus: Partnership loss ( 48,000) ( 32,000)
Decrease in partnership liabilities ( 18,000) ( 12,000)
Balance 12/31/20 $1,297,000 $876,000
c. (1) Results of asset sales:
Sale of assets for books:

Total Able Baker
Selling price $1,366,000

Minus: Total book value (1,191,000)
Book gain $ 175,000 $ 105,000 $70,000
Sale of assets for tax:

Total Able Baker
Selling price $1,366,000

Minus: Total adjusted basis (1,179,000)
Tax gain $ 187,000
Precontribution gain (loss) $ 12,000 $ 14,000 $( 2,000)

Postcontribution gain 175,000 105,000 70,000
Total $ 187,000 $ 119,000 $ 68,000
(2) Book capital accounts:

Able Baker
Balance 12/31/20 $ 189,000 $126,000
Plus: Book gain on asset sales 105,000 70,000
Balance before liquidating distributions $ 294,000 $196,000
(3) Basis in partnership interests:

Able Baker
Basis 12/31/20 $1,297,000 $876,000
Plus: Tax gain (loss) on asset sales:
Precontribution 14,000 ( 2,000)
Postcontribution 105,000 70,000
Minus: Decrease in partnership liabilities (1,122,000) (748,000)
Basis before liquidating distributions $ 294,000 $196,000

C:10-30
(4) Upon liquidation, Able receives $294,000, and Baker receives $196,000, which
are the amounts of their book capital accounts. Able, Baker, and Lifecycle
Partnership recognize no gain or loss on the liquidating distributions. The
partners have no basis in the partnership because it has terminated.
C:10-53
a. Anne must recognize a guaranteed payment of $28,640, other ordinary income of
$33,280, and capital gain of $69,280, determined as follows:
Cash payment $220,000

Liability relief 31,200
Total payment $251,200
Sec. 736(b) payment (52% of asset FMV) $222,560

Sec. 736(a) payment [Total - 736(b)] $ 28,640
This Sec. 736(a) payment of $28,640 is a guaranteed payment (ordinary income) to Anne, but
it does not qualify for the business income deduction.
Analysis of Sec. 736(b) payment ($222,560):

First separate out the Sec. 751 portion of the Sec. 736(b) payment. Assume the partnership first
distributed her share of these assets to Anne and then purchased her share of these assets for their
FMV.
Deemed distribution of Sec. 751 assets to Anne:

Anne’s basis before the Sec. 751 transaction $120,000
Basis of Sec. 751 assets deemed distributed 12,480
Anne’s basis after the Sec. 751 transaction $107,520
Deemed sale to the partnership at FMV:
FMV of 52% of Sec. 751 assets [0.52 x ($64,000 + $24,000)] $ 45,760
Adjusted basis of 52% of Sec. 751 assets 12,480
Ordinary income Anne must recognize $ 33,280
Analysis of remaining Sec. 736(b) payment ($222,560 - $45,760):
Anne’s basis after Sec. 751 transaction $107,520
Cash distribution ($222,560 - $45,760) 176,800
Cash distribution in excess of basis (capital gain) $ 69,280
Partnership tax results:
Deduct the guaranteed payment of $28,640 paid to Anne. (In addition, the partnership
would increase its basis in its accounts receivable to reflect the fact that some receivables were
deemed purchased from Anne for $33,280.)

C:10-31
b. On the sale of her partnership interest, Anne recognizes $33,280 of ordinary income
and a $97,200 capital gain, determined as follows:
Application of step 1 yields the following gain on Anne’s sale of her partnership interest:

Partnership gain on receivable = $64,000; Anne’s share = $64,000 x 0.52 = $33,280.
Thus, on the sale of her partnership interest, Anne recognizes ordinary income of $33,280.

Partnership tax results:
The ABC Partnership does not terminate because of the repeal of the technical termination
rule. Thus, the partnership remains intact.

C:10-32
Tax Strategy Problem
C:10-54 a. The three options are analyzed below.
Option 1 (disproportionate distribution of cash)
(1) (2) (3) (4) (5)

Daniel’s Daniel’s
Beginning Interest Interest Hypothetical
Partnership Before After Proportionate
Amount Distribution Distribution Distribution Actual Difference
(1/3) (-0-) (3)=(1)-(2) Distribution (5)=(4)-(3)
Sec. 751
Assets:
Receivables $ 60,000 $20,000 $ -0- $20,000 $ -0- ($20,000)
Other
Assets:
Cash $ 60,000 $20,000 $ -0- $20,000 $60,000 $40,000
Land 60,000 20,000 -0- 20,000 -0- (20,000)
Total $120,000 $40,000 $ -0- $40,000 $60,000 $20,000
Deemed distribution of receivables (adjusted basis) $ -0-

Daniel’s deemed sale of receivables for cash:
Minus: Adjusted basis of receivables ( -0-)
Daniel’s recognized gain (ordinary income) $20,000
Daniel’s basis in partnership interest:
Minus: Deemed distribution of receivables ( -0-)
Distribution of remaining cash ($60,000 - $20,000) (40,000)
Ending basis (but not less than zero) $ -0-
Because the $40,000 remaining cash distribution exceeds Daniel’s partnership basis
($30,000), he recognizes a $10,000 capital gain.
Summary of results:
Current ordinary income $20,000
Current capital gain 10,000

C:10-33
Option 2 (proportionate distribution of assets)
Daniel receives the following assets: Basis FMV
Cash $20,000 $20,000

Receivables -0- 20,000
Land A 10,000 20,000
Total $30,000 $60,000
Because Daniel’s partnership basis exceeds the amount of cash distributed, he recognizes
no gain on the distribution. His partnership basis is $10,000 after reduction for the cash
distribution. He takes a zero basis in the receivables and a $10,000 basis in Land A. Daniel
recognizes gain or income when he sells the assets.
Summary of results:
Deferred ordinary income $20,000

Deferred capital gain 10,000
Option 3 (sale of partnership interest)
The results of the sale are determined as follows:
Application of step 1 yields the following gain on Daniel’s sale of his partnership interest:
Amount realized on sale $60,000

Application of step 2 yields the following allocation of Sec. 751 property:
Partnership
Deemed Sale of Assets Gain (Loss) Daniel’s Share (1/3)
Receivables $60,000 $20,000*

Land A 10,000 3,333
Land B 10,000 3,333
Land C 10,000 3,333
*Thus, on the sale of his partnership interest, Daniel recognizes ordinary income of $20,000.

Capital gain recognized $10,000

C:10-34
Summary of results:
Current ordinary of income $20,000

Current capital gain 10,000
b. Options 1 and 3 yield the same results: current gain recognition, a disadvantage, and
current receipt of cash, an advantage. Conversely, Option 2 defers gain recognition and cash
collection until Daniel collects on the receivables and sells the land. Thus, if Daniel has immediate
need for cash, he should select Option 1 or Option 3. If he does not have immediate cash needs, he
should consider Option 2.
Case Study Problem

C:10-55 The points presented below are the major ones that should be covered in the memorandum
to the two brothers. This information should be incorporated by the student into a properly
structured memorandum using good form with proper grammar and punctuation. The analyses do
not take into account present values of the results.
Option 1: Michael’s purchase of interest.

Amount realized = ($120,000 cash + $330,000 installment note
+ $200,000 liabilities) $650,000
Minus: Adjusted ( 300,000)
Realized gain (LTCG) $350,000
Because the sale is an installment sale, Mark would recognize his gain on an installment
basis. In the first year, he would recognize gain of $93,333, calculated as follows:
Gain realized $350,000

x Installment = x $120,000 = $93,333
Contract price $450,000
Assuming an 18.8% capital gains tax rate (including the 3.8% net investment tax), the gain
would result in taxes of $17,547, leaving Mark $102,453 ($120,000 - $17,547) of after-tax proceeds
for the first year. In each of the following three years, he would recognize gain of $85,556,
calculated as follows:
Gain realized x Installment = $350,000 x $110,000 = $85,556

Contract price $450,000
Assuming an 18.8% tax rate on the capital gains each year, the gain would result in taxes of
$16,085, leaving Mark $93,915 ($110,000 - $16,085) of after-tax proceeds each year. Total
proceeds for Mark for the four years are $450,000, and total taxes are $65,800 ($350,000 x 0.188).
Thus, Mark’s total undiscounted after-tax proceeds are $384,200 ($450,000 - $65,800).
Note that Michael is using after-tax dollars to pay Mark each year. Because this transaction
is an installment sale between related parties, Mark would have to recognize any unrecognized gain
if Michael later resold this partnership interest to another partner.

C:10-35
If no other partner is admitted to the partnership, the partnership will terminate when Michael
buys Mark’s interest. Michael would receive all the partnership assets in a liquidating distribution.
The basis of the partnership assets would be changed as follows:
Michael’s partnership interest basis $ 300,000

Basis of partnership interest purchased from Mark ($450,000
installment sale + $200,000 share of liabilities) 650,000
Deemed cash contributed by Michael because
he assumes the partnership’s liability 400,000
Balance before distributions $1,350,000
Minus: Cash and deemed cash distributed ( 600,000)
Accounts receivable ( 90,000)
Remaining basis allocable to land $ 660,000
Notice that this basis adjustment has greatly decreased the potential capital gain that Michael will
recognize on the subsequent sale of the land investment.
Option 2A: Retirement from the partnership for $150,000 plus 50% of partnership profits for the
next three years.
Assuming the brothers correctly project income to be approximately $200,000 for each of the
next three years, Mark will receive a total of $450,000 over the four years. His gain will be
$350,000, calculated as follows:

Realized gain $350,000
In the initial year, Mark will receive $150,000 cash that he will treat as a normal partnership
distribution that reduces his basis. In future years, he will be allocated a 50% share of the
partnership earnings (with the character they have at the partnership level), which will increase his
basis. He also will receive a distribution from the partnership equal to the amount of income he
recognizes, and this distribution will reduce his basis by the same amount the income recognition
increases it. Accordingly, he will not be taxed on the distribution. After the final payment, Mark no
longer will be a partner, so his final payment will include the deemed cash from the release of his
liability share. Mark will report approximately $300,000 of income under this method, and the
character of the income is determined at the partnership level. Because the main source of
partnership income is the sale of investment land, most of the gain Mark will recognize also will be
capital gain.
Assuming all partnership income is capital gain for the three years, each year Mark will be
allocated $100,000 in capital gains and will pay taxes of $18,800 so that he has after-tax income of
$81,200. The first year’s payment is nontaxable so he has after-tax receipts of $150,000 for the first
year. Cash received over the four years is $450,000, and he will pay taxes of $56,400 ($18,800 x 3),
leaving undiscounted after-tax receipts of $393,600 ($450,000 - $56,400).

C:10-36
Michael’s share of income for the three years is reduced by the income allocated to Mark.
The partnership will continue in operation under this option until Mark receives his final payment
from the partnership.
Option 2B: Retirement from the partnership for $150,000 cash plus $100,000 guaranteed
payment for three years.
In this option, as in the preceding one, Mark’s first year payment is simply a distribution
from the partnership, which reduces his basis in the partnership interest. Likewise, in the final year
Mark will be deemed to receive cash equal to the share of liabilities that he no longer will be liable
for. Assuming the liabilities do not change, these two distributions will have the following results:

Minus: Year one cash (150,000)
Basis after cash distribution 150,000
Minus: Year four liability release (200,000)
Basis (but not less than zero) $ -0-
Mark will recognize a $50,000 long-term capital gain in year four. At an 18.8% capital gains
tax rate, he will owe taxes of $9,400. Because this gain is caused by the deemed cash distribution from
the liability release, Mark is not receiving any cash to pay these taxes. The $100,000 guaranteed
payment will be taxed as ordinary income in each of the next three years, but it will not qualify for the
business income deduction. Assuming Mark’s ordinary tax rate is 35% each year, he will pay $35,000
in taxes for an after-tax amount of $65,000. Over the four years, Mark will receive cash of $450,000
and will pay taxes of $114,400 [($35,000 x 3) + $9,400] for undiscounted after-tax receipts of
$335,600 ($450,000 - $114,400).
Option 3: Outside purchase of interest.
Under this option, Mark will report a $350,000 long-term capital gain determined as follows:

Realized gain (LTCG) $350,000
Assuming an 18.8% tax rate on capital gains, the gain would result in taxes of $65,800,
leaving Mark $384,200 ($450,000 cash - $65,800 taxes) of after-tax proceeds. (Mark receives the
same after-tax benefit that he receives if Michael is the purchaser, ignoring discounting.)
With this option, the partnership continues to remain in existence. This results contrasts with
Option 1, where the partnership goes out of existence. If Michael wants to continue the partnership
form of conducting the investment, he should consider this option. Also, unless the partnership has
made a Sec. 754 election, no increased basis for the investment land occurs under this option.

C:10-37
Summary: Mark’s after-tax receipts are highest for Option 2A -- the retirement from the
partnership for $150,000 cash plus a 50% distributive share for the next three years. The
memorandum should emphasize to Mark that this option is the only sales arrangement under which
uncertainty exists about what he will receive. If land sales are unusually slow for the three-year
payout period, Mark may receive little more than the $150,000 first year payment.
Accordingly, students may want to recommend the sale to John or the sale to Michael
depending on whether or not Michael wants to continue as a sole proprietor or as John Watson’s
partner.
Tax Research Problems
C:10-56
Tax Results:
Revenue Ruling 84-111, 1984-2 C.B. 88, requires that the tax results for incorporating a
partnership must follow the results generated by the form of the transaction. Accordingly, the
formation of the corporation is nontaxable to the transferor partnership under Sec. 351 and is
nontaxable to the transferee corporation under Sec. 1032. The liquidation of the partnership is
subject to the rules of Sec. 731, and the ex-partner’s basis in the new corporation’s stock is governed
by Sec. 732.
Asset and Liability Transfer:
Each asset will take a carryover basis from the partnership transferor under Sec. 362, so the
total basis of corporate assets will be $360,000. Under Sec. 358, the partnership, as the sole
shareholder, has a basis in its corporate stock equal to the carryover basis of its assets ($360,000)
reduced by the partnership’s liability assumed by the corporation ($100,000), or $260,000.
Partnership Liquidation:
Upon liquidation of the partnership, neither the partners nor the partnership recognize gain or
loss under Secs. 731(a) and (b). The partnership terminates under Sec. 708(b)(1). Under Sec.
732(b), the partners’ bases in the corporate stock distributed equals their basis in the partnership as
shown in the following table, and, under Sec. 1223(1), the holding period for the stock includes the
holding period of the partners’ interest in the partnership.
Partner Arnie Becky Clay Total
Basis in pshp. int. before transfer $120,000 $120,000 $120,000 $360,000

Minus: Liab. reduction (25,000) (25,000) (25,000) (75,000)
Basis in pshp. int. before distribution $ 95,000 $ 95,000 $ 95,000 $285,000
Basis in stock distributed $ 95,000 $ 95,000 $ 95,000

C:10-38
Financial Accounting Results:
Generally, when a business combination occurs, the acquiring entity records the assets
received at fair value. If the fair value differs from the tax basis, deferred tax assets and liabilities
may have to be recorded. However, Accounting Standard Codification (ASC) 805-50 provides
special rules for transactions between entities under common control. These rules lead to a different
recording measure than fair value.
ASC 805-50-15-6 provides several examples of common control transactions, one of which
includes an entity that “charters a newly formed entity and then transfers some or all of its net assets
to that newly chartered entity.” The incorporation of the ABC General Partnership falls into this
classification. ASC 805-50-30-5 provides the following:
When accounting for a transfer of assets … between entities under common

control, the entity that receives the net assets … shall initially measure the
recognized assets and liabilities transferred at their carrying amounts in the
accounts of the transferring entity at the date of transfer.
In the current situation, the assets transferred to ABC Corporation have carrying amounts
(book value) that are the same as their tax bases. Therefore, the corporation records the assets for
financial accounting purposes in the same amount as the tax bases, thereby negating the need for
deferred assets or liabilities.
If the assets had carrying amounts that differed from their tax basis, presumably, the entity
would record deferred tax assets and/or liabilities for the difference between the carrying amounts
and the tax bases. However, because of the common control transaction rule, the new entity still
would not record assets at their fair value.
C:10-57 Della’s share of property:
Sec. 736(b) property - Cash $16,667

Receivables 10,000
Equipment 16,667
Building 33,333
Land 13,333
Goodwill 7,000
Total $97,000
All payments based on partnership income also will be Sec. 736(a) payments taxed as distributive shares.
Total fixed payments = $20,000 x 5 = $100,000

Sec. 736(b) payments as portion of fixed payments: $97,000/$100,000 = 97%

C:10-39
Allocation of payments for years 1-5:
$20,000 payment: Sec. 736(b) (97%) $19,400a

Sec. 736(a) (3%) 600 guaranteed payment that
is taxed as ordinary income
5% of partnership income: Sec. 736(a) 5,000 distributive share
Total $25,000
a
Minus: One-fifth basis in partnership interest (14,000)
Taxation of the partnership is not affected by the payments made for Della’s interest in
property. It takes no deduction and does not reduce the continuing partners’ distributive share of the
payments made for the interest in property. The small guaranteed payment each year is deductible
by the partnership, but it does not qualify for the business income deduction for Della. The $5,000
distributive share results in a smaller distributive share for each of the remaining partners.
C:10-58 Transfer of an interest in a partnership by gift does not terminate the partnership tax year for
the donor. However, the donor must recognize income from the partnership up to the date of the gift.
Because the partnership tax year does not close on the date of the gift, the income is included in the
partner’s tax year that includes the normal partnership year-end (Reg. Sec. 1.706-1(c)(5)). On his tax
return for the tax year ending June 30 of the current year, Pedro will report partnership income from the
tax year that ended on December 31 of last year. He will report partnership income earned between
January 1 of the current year and his June 15 gift on his tax return for the tax year that ends on the next
June 30. Juan and the American Red Cross must report all partnership income earned after June 14 of
the current year.
Transfer of a majority interest by gift does not constitute a sale or exchange that can
terminate a partnership (Reg. Sec. 1.708-1(b)(1)(ii)). Although part-sale, part-gift transactions like
this one are not clearly covered by the Treasury Regulation, the sale portion of the transaction does
not appear to be a majority interest. This issue is probably moot now that the technical termination
rule has been repealed.
The transfer to Juan is a part-sale and part-gift. See Victor P. Diedrich v. CIR, 47 AFTR 2d
81-977, 81-1 USTC ¶9249 (8th Cir., 1981). The 30% interest transferred to Juan is considered sold
to him because the liability is one-half of the FMV ($50,000 liability  $100,000 FMV of partnership
interest transferred). Pedro must recognize gain on the sale of a 15% interest of $30,000 ($50,000
liabilities transferred - $20,000 basis). The remaining 15% interest is a gift to Juan. Pedro must
report the gift portion for gift tax purposes at its FMV of $50,000.
The transfer to the American Red Cross also is a part-sale and part-gift but the allocation of
basis to the sale and gift differ from the allocation above (Rev. Rul. 75-194, 1975-1 C.B. 80). Only a
pro rata portion of the basis is allocated to the sale transaction, so basis of $10,000 ([$50,000 liability 
$100,000 FMV] x $20,000 basis) is allocated to the sale, and the remaining $10,000 of basis is

C:10-40
allocated to the gift portion of the transaction. On the sale transaction, Pedro must recognize gain of
$40,000 ($50,000 liability transferred - $10,000 basis allocated to sale transaction). Pedro makes a
charitable contribution of the remaining partnership interest, which has a basis of $10,000 and FMV of
$50,000. The contribution is eligible for a charitable contribution deduction.
C:10-59 Helen’s Gain (Loss):
On the sale of her partnership interest, Helen recognizes $32,540 of ordinary income and
an $8,400 capital loss, determined as follows:
Application of step 1 yields the following gain on Helen’s sale of her partnership interest:
Amount realized on the sale $190,000

Application of step 2 yields the following allocation to Sec. 751 property under Reg. Sec.
1.751-1(a)(2):
Deemed Sale of Assets Gain (Loss) Helen’s Share (1/3)
Asset 1 (all Sec. 1245 recap.) $97,620 $32,540

Asset 2 ( 25,200) ( 8,400)
All the gain on Asset 1 is ordinary income under the Sec. 1245 recapture rules and is
therefore an unrealized receivable as defined in Sec. 751(c). Thus, Helen recognizes $32,540 of
ordinary income.
Application of step 3 yields the following residual allocation to capital loss:

Capital loss recognized $( 8,400)
Hank’s Optional Basis Adjustment and Allocation:
Hank’s optional basis adjustment under Sec. 743(b)(1) is $24,140, calculated as follows:
Initial basis in partnership (purchase price) $190,000

Minus: Share (1/3) of partnership’s basis in assets ( 165,860)
Optional basis (Sec. 743(b)) adjustment $ 24,140
Under Reg. Sec. 1.751-1(a), the Sec. 1245 recapture attributable to Asset 1 is ordinary
income property, and Asset 2 is capital gain property because it meets the definition of Sec. 1231
property. For purposes of allocating the Sec. 743(b) adjustment, Reg. Sec. 1.751-1(b)(1)(ii) requires

C:10-41
a hypothetical asset sale computation similar to the one shown in step 2 of Helen’s calculations
above. Regulation Sec. 1.751-1(b)(2) then requires that the Sec. 743(b) adjustment first be allocated
to ordinary income property to the extent of any hypothetical gain inherent in that property, in this
case, a positive $32,540. The total Sec. 743(b) adjustment minus the amount allocated to ordinary
income property then gets allocated to capital gain property. This calculation results in an $8,400
negative adjustment to Asset 2, specifically, $24,140 - $32,540.
Hank’s Allocable Depreciation Deductions in 2018:
Under Reg. Sec. 1.743-1(j)(2), a partnership first determines its items of income, deduction,
gain, or loss and allocates them among the partners in accordance with Sec. 704. The partnership
then adjusts a partner’s distributive share to reflect any Sec. 743(b) adjustments.
Under Reg. Sec. 1.743-1(j)(4)(i), the increased basis to depreciable property is treated as
newly purchased property while the unadjusted basis, or the partnership’s common basis, continues
to be depreciated as before the sale of the partnership interest. Accordingly, Hank’s share of 2018
depreciation on Asset 1 is as follows:
Partnership depreciation ($600,000 x 0.1249)* $74,940

Times: Hank’s percentage 1/3
Hank’s distributive share of common depreciation $24,980
Plus: Hank’s depreciation on Sec. 743(b) adjustment
(Year 1, $32,540 x 0.1429) 4,650
Hank’s total depreciation on Asset 1 in 2018 $29,630
*Appendix C, Table 1, Recovery Year 4
Under Reg. Sec. 1.743-1(j)(4)(ii), the negative Sec. 743(b) adjustment to depreciable
property decreases the partner’s allocable partnership depreciation according to the following
formula:
Partnership depreciation for the year

x Negative Sec. 743(b) adjustment
Adjusted basis at time of transfer
In Hank’s case, this formula results in a $3,360 reduction as follows:
$46,080 ($240,000 x 0.192)*

x $(8,400)
$115,200
Thus, Hank’s share of 2018 depreciation on Asset 2 is as follows:
Partnership depreciation ($240,000 x 0.192)* $46,080

Times: Hank’s percentage 1/3
Hank’s distributive share of common depreciation $15,360
Minus: Sec. 743(b) adjustment ( 3,360)
Hank’s total depreciation on Asset 2 in 2018 $12,000
*Appendix C, Table 1, Recovery Year 3
C:10-42
“What Would You Do In This Situation?” Solution
Ch. C:10, p. C:10-4. A New Kind of Tax-Free Exchange?
You probably should tell Betty and Thelma that the transaction will not be tax-free. First,
Sec. 704 requires that the contributing partner recognize any remaining precontribution gain (up to
the amount of precontribution gain that would be recognized if the property were sold on the
distribution date) when contributed property is distributed to another partner within five years of the
contribution. Therefore, both Betty and Thelma would recognize gain when the properties were
distributed unless the partnership held the property for more than five years.
Second, Treasury Regulations might prevent tax-free treatment even if the partnership held the
property for more than five years. Several years ago, the Treasury Department issued regulations to
stop the abusive use of the partnership form to get tax treatment that is not available otherwise.
These regulations require that all transactions be entered into for a substantial business purpose, and
Thelma and Betty have no apparent business purpose for contributing these properties to the
partnership or for distributing the properties from the partnership. Further, the regulations provide
that if the partnership is used to frustrate any IRC provision, the IRS can treat the partnership as an
aggregate of the partners. Because the exchange contemplated by Thelma and Betty clearly does not
qualify as a nontaxable like-kind exchange if the exchange were made directly between the two
women, it is unlikely that they can make it nontaxable by routing the exchange through their
partnership.

C:10-43
Another random document with
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which would make the monarch appear as the loved and cherished
father of his people.
It was, however, by the Liberals themselves the Camorra was first
introduced into political life, and Liberio Romano intrusted the
defence of the capital to these men as the surest safeguard against
the depredations of the disbanded soldiers of the King; and, strange
to say, the hazardous experiment was a perfect success, and for
several weeks Naples had no other protectors than the members of a
league who combined the atrocities of Thuggee with the shameless
rapine of the highwayman. The stern discipline of Piedmont would
not, however, condescend to deal with such agents; and Lamarmora
has waged a war, open and avowed, against the whole system of the
Camorra. Hundreds of arrests have been made, and the jails are
crowded with Camorrists; but men declare that all these measures
are in vain—that the magistracy itself is not free from the taint: and
certain it is that the system prevails largely in the army and navy,
and has its followers in what is called the world of fashion and
society.
The Mezzo Galantuomo is the most terrible ingredient in the
constitution of a people. The man who is too bad for society but a
little too good for the gallows, is a large element in this land, and it
will require something more than mere statecraft to deal with him.
A Parliamentary Commission is at present engaged in the
investigation of the whole question of Brigandage, and their “Report”
will probably be before the world in a few days. It is very doubtful,
however, if that world will be made much the wiser by their labours.
There is, in fact, no mystery as to the nature of this pestilence, its
source, or its progress.
It may suit the views of a party to endeavour to connect it with
Bourbonism, but it would be equally true to assert that the peasant-
murderers in Ireland were adherents of the Stuarts! The men who
take to the mountains in the Capitanata are not politicians. They
have no other “cause” at heart than their own subsistence, for which
they would rather provide at the risk of their heads than by the
labour of their hands. All that they know of civilisation is taxation
and the conscription. In these respects the old régime was less severe
than the present; neither the imposts were so heavy, nor the levies so
large; not to add that, under the Bourbons, soldiers led lives of
lounging indolence, and “no one was ever cruel enough to lead them
against the Austrians.”
The Bourbon Government of Naples had many faults, but the
Piedmontese rule has had no successes. There is that of ungeniality
in the Northern temperament that renders even favours at their
hands little better than burdens, and their justice has a smack of
severity in it that wonderfully resembles revenge.
What may be the future fate of Southern Italy it is not easy to say;
but one thing at least is certain, the influence of Piedmont has not
obtained that footing there which promises to make her cause their
cause, or her civilisation their civilisation. If the Bourbons governed
badly, their successors do not govern at all!
LUDWIG UHLAND.
Incontestably, since the death of Goethe, Ludwig Uhland has been,

at least in the hearts of the people, the Laureate of Germany. He is
not a poet who took the world by storm with his earliest productions;
but he has been gradually growing in favour and general acceptance,
until his death is now deplored as a national affliction. He died
quietly at Tübingen, the place of his birth, on the 13th of November
1862, in his seventy-sixth year, having been born on the 26th of April
1787. He was said never to have known a day’s illness until his last,
which was occasioned by his attending the funeral of a friend and
brother poet, Justin Kerner, in inclement weather.
The parents of the poet were Johann Friedrich Uhland, Secretary
to the University of Tübingen, and Elizabeth (born) Hoser, daughter
of one Hoser who held a similar office. He had a brother, Fritz, who
died in his ninth year, and a sister, Luise, who married Meyer, the
pastor of Pfullingen, near Reutlingen. His education conduced to
bringing out the talent that was latent in him, as it was the custom of
Kauffmann, the rector of the Tübingen school, to give free themes to
be worked out in prose or verse, according to the inclinations of his
scholars; and the young Uhland generally chose the latter, and was
early distinguished in his choice. Even at school he was known as an
enthusiastic student of German and Scandinavian antiquities. At the
age of sixteen and seventeen he produced many compositions of
merit, but only two, ‘Der Sterbender Held,’ and ‘Der Blinder König,’
found their way into that collection of his poems which was
published in 1815. At this time he was hesitating between the
professions of law and medicine. As a youth, though given to long
walks alone in the beautiful neighbourhood of Tübingen, he was
distinguished by his love of social manly exercises, particularly of
skating. Two of his earliest poetical friends were Schröder, who was
afterwards drowned in the Baltic, and Harpprecht, who fell in the
Russian campaign of Napoleon. This is the friend who is alluded to in
the exquisite poem of ‘Die Ueberfahrt’ as “brausend vor uns allen,”
while the fatherly friend spoken of there is Uhland’s maternal uncle,
Hoser, the pastor of Schmiden. He was also much influenced in his
tastes by Haug of Stuttgard, and Gortz, Professor of Ancient
Literature in Tübingen. Later he became acquainted with Justin
Kerner, whose talent he placed above his own, Oehlenschläger the
Danish poet, and Varnhagen von Ense the historian. Goethe he had
seen once when a boy in 1797, and he records his impressions in the
‘Münstersage.’ In 1810 Uhland went to Paris, in order to work at the
treasures of Romance literature contained in the Imperial Library.
On his return he applied himself to practice as an advocate at
Stuttgard, without remitting his poetic labours. His tragedy, ‘Herzog
Ernst von Schwaben,’ which belongs to this period, elicited the warm
admiration of Goethe. In 1819 he was elected a deputy of the
Würtemberg States. In 1820 he married Emma Vischer, a daughter,
by a former marriage, of a celebrated woman, Frau Emilie Pistorius,
to whose memory Rückert dedicated a poem called ‘Rosen auf das
Grab einer edlen Frau.’ In 1834 he was made Professor of German
Literature at Tübingen. He distinguished himself as a political
character in 1848, though without joining the extreme Liberal party,
and on one occasion presented an address to the King of
Würtemberg, praying for the restoration of the Constitution, the
prayer of which was immediately granted, as most prayers of the
kind were at that particular time, from prudential motives. He had
already resigned, in 1833, his office of deputy, finding it incompatible
with his professorship, and had returned to his residence at
Tübingen. His marriage with Emma Vischer was in many respects a
fortunate one. He appears to have lived with her in great harmony till
his death, and the dowry she brought him, though not large, was
sufficient to keep from his door the anxieties which usually beset a
priest of the Muses. On the other hand, the marriage was not blest by
children. There are old pictures extant of Uhland as a child, with a
fair honest face and powdered hair. His later face is now familiar to
the Germans. Its first impression is decidedly heavy. The upper-lip is
long, the cheekbones high, the eyes not large, the forehead broad
over the brows, and narrower above—altogether an ordinary honest
man’s face, nothing more. A phrenologist in a steamboat, to whom
the poet was unknown, once guessed him to be a watchmaker,
adding, to console him, that every one could not be a poet. Uhland’s
manners appear to have been plain and unpretending—rather those
of a man who makes friends than acquaintances. Yet those who knew
him, knew him as a hearty and even jovial companion. He was shy,
and shunned publicity, and could not bear to be treated as a literary
lion. On one occasion, when he was presented with a crown of laurel,
he hung it and left it on an oak beside the road. His habits were early
and healthy. In summer he lived in his open garden-house, and at
ten o’clock every morning used to go out for a long walk, prefaced by
a plunge in the Neckar when the weather was genial. At Tübingen,
which is a very pretty quaint little university town, lying in that
finely-broken country which intervenes between the Black Forest
and the Alps, he owned a plain house on the country side of the
Neckar bridge, only ornamented by Corinthian pilasters in front;
behind it was his garden, arranged in terraces, and his “Weinberg,”
from which he made his own ordinary supply of wine. He was of
social habits, but, at the same time, fond of musing and solitude. The
homely but intellectual society of Tübingen fully sufficed him. He
was not a man to care for that of those above him in station, as his
sterling independence shrank from patronage in the same way in
which his diffidence shrank from general notoriety.
Politically, Uhland was a people’s man without being a Radical.
His love of medieval literature imbued his mind with respect for
hereditary rank, station, and honours, while his love of freedom and
optimist views of the future of his country and mankind in general,
made him a sturdy opponent of any attempt to infringe on what he
called “the good old right.” In England he might have been a Tory or
Conservative Whig. In Germany, it has pleased the powers that be to
count him with the Democratic party; hence the admiration or policy
which prompted Louis Napoleon to make a national affair of the
funeral of Béranger, was wanting in the case of Uhland, who was
buried, as he had lived, in privacy. Although this does not tell well for
the temper of the Government of Würtemberg, and fully accounts for
the hatred of Englishmen which is said to be dominant at Stuttgard,
the deceased poet would probably not have wished it otherwise. No
doubt he was, as far as the honours that proceed from the great are
concerned, to the end of his life an unacknowledged and
unappreciated man. But he had all he wanted—robust health, self-
respect, and the respect of those he loved, sufficient worldly means,
and that divine gift which Homer himself thought a full
compensation even for blindness.
The uneventfulness of Uhland’s life, his unpretending presence,
his very look and bearing, his intense love for nature, the simplicity
of his habits, his steady domestic character, and unaffected religious
feeling, all bring to mind our own Wordsworth; and in his poems, as
in those of Wordsworth, the gems are to be sought among the shorter
compositions. But Wordsworth made it his business to sit down at
the Lakes and paint nature in words, as the pre-Raphaelite or
naturalistic school of landscape painters sit down and paint her in
colours. Wordsworth wooed the beauty of nature immediately and
for itself. His human figures are merely put in roughly to help out the
foreground. But Uhland rarely paints nature directly; he rather uses
natural scenery as a background to his “genre” pictures, which
interest chiefly by presenting the phases of human feeling, and the
joys and sorrows of mankind. All his poems are alive with the breath
of Spring—fresh, luminous, and joyous; but we are aware of his
surroundings rather from the effects they produce upon him than
from any actual descriptions. His poems have the ring of the true
singer; an internal melody permeates his verse, capricious rather
than monotonous, changing its airs and cadences like the voice of a
bird, rather than flowing on with the mechanical jingling of a musical
box. This is the quality which gives the bardic stamp to the
compositions of a Burns, a Béranger, a Tennyson, and a want of
which is felt in the glowing rhetoric of Byron, and in
“The beauty for ever unchangingly bright,
Like the soft sunny lapse of a summer day’s light,”
which belongs to the poetry of Moore. In matter and choice of

subject, and in some measure in respect of treatment, he has much in
common with Walter Scott. His preparatory studies were much of
the same nature, consisting in the history, scenery, and legends of his
own country. He has done for Germany what even Schiller and
Goethe with all their greatness omitted to do in the same degree. He
has immortalised her local recollections. Second only to the man who
leads an army to rescue his country from the stranger, such a man is
a patriot of the true kind, whatever the colour of his politics may be.
Some poems he has written are like those exquisite ancient
miniature pictures on a gold ground, best to be understood and
appreciated by the educated connoisseur, while others are so plain in
language and sentiment that they have sunk into the hearts of the
people, and will flow for ever from the lips of the people in the shape
of national songs. Uhland differs most from the twin stars of
Germany—Schiller and Goethe—in that his poetry is more
exclusively objective than theirs. Goethe was all wrapt in his glorious
self, and his all-absorbing devotion to art. Like Horace’s hero, a
world might have fallen in ruins about him and he would not have
quailed; and, indeed, all the crash of empires and clash of armies in
which he lived left his brow as serene as that of one of the gods of
Epicurus. But Uhland could not sing through the humiliation of his
country, and his voice sank within him through the French
occupation; but when Germany arose at length, and with incredible
hardihood pushed back the flood of invasion, Uhland, like Körner
and others, did manful service, not by fighting and falling among the
foremost, as Körner did, but with even better judgment, as
husbanding his gifts, becoming the Tyrtæus of the Liberation War.
His songs of that time have a deep and manly note peculiarly their
own, and they are such as no lesser circumstances could have called
forth. Uhland, again, as distinguished from Schiller and Goethe, was
the prominent poet of the Romantic school. But he was to them what
Socrates was to the Sophists—counted with them, but not of them.
From whatever source he derived his inspirations, he always
remained fast rooted in truth and nature. The unreal and morbid
sentimentality of Tieck and Novalis was unknown to him; nor did he
share the Romeward tendencies of Friedrich Schlegel, while fully
appreciating the beauty of the Roman Catholic ritual and
associations, and freely interweaving them with the golden tissue of
his compositions. On the whole, he is the most German of German
poets, as he owes none of his inspiration to “the gods of Greece,” and
little to any foreign source, except those old Romance writers whom
he studied at Paris; but then it must be borne in mind that the early
threads of history in France and Germany are closely interwoven,
and the empire of the Franks in particular belonged as much to one
as to the other.
In attempting to present to the English reader some of the best of
the poems of Uhland, we must premise that to translate a perfect
poem from one language into another is simply an impossibility, and
difficult exactly in proportion to the degree in which any poem
approaches perfection. The special difficulty of translating German
poetry into English, and vice versâ, consists in this, that though the
two languages are not in their basis much more than dialects of the
same original stock, yet German is as generally dissyllabic as English
is monosyllabic, owing in part to English having discarded inflection
where German retains it. We are aware that many of Uhland’s poems
are already known through very good translations, one of those most
highly spoken of being that of Mr Platt. Longfellow has also done
freely into English verse the ‘Castle by the Sea,’ ‘The Black Knight,’
the ‘Luck of Edenhall,’ and others, and has succeeded admirably in
catching the spirit of the original. Not having Mr Platt’s translations
before us, as we write in Germany, we must apologise, in our zeal for
Uhland’s memory, for attempts of our own in the same direction, in
which we have tried to reproduce as nearly as we can the ideas of the
original in the metres in which they appeared. It is impossible to find
a song in the whole collection more perfect than ‘Der Wirthin
Töchterlein.’ There is not a word or thought one would wish
changed. The pathos is expressed, without a single pathetic epithet,
solely by the situation. This poem has been interpreted politically, as
alluding to the different feelings with which three classes of patriots
regard the corpse of German liberty. But to our mind this spoils the
simplicity of the picture. It is more likely to be true that the poem
was occasioned by an incident of Uhland’s youth, since it is said that
he once stopped some students who were singing it under his
window, telling them not to end it, as the end had too close a
personal interest for him. If this be true, the poem is more
complimentary to the memory of the fair maid of the inn than to the
lady who became Frau Uhland. But poets will be poets, as boys will
be boys.
THE LANDLADY’S DAUGHTER.
Three students they hied them over the Rhine,
And there they turned in at a landlady’s sign.
“Landlady, hast thou good beer and wine?

And where is that beauteous daughter of thine?”
“My beer and wine are fresh and clear;

My daughter she lies on the funeral-bier.”
And when they did enter the inner room,

There lay she all white in a shrine of gloom.
The first from her face the veil he took,

And, gazing upon her with sorrowful look,
“Oh, wert thou living, thou fairest maid,

’Tis thee I would love from this hour,” he said.
The second let down on the face that slept

The veil, and turned him away and wept:
“Alas for thee there on the funeral-bier!

For thee I have loved full many a year.”
The third, he lifted again the veil,

And kissed her upon the mouth so pale:
“I loved thee before, I love thee to-day,

And I will love thee for ever and aye!”
The last line, “Und werde dich lieben in ewigkeit,” would be more
correctly rendered, “And I will love thee in eternity.” And we are
equally aware that our “landlady’s sign” is objectionable, as the
original is simply, “They turned in there to a landlady’s.” But it would
be hard to render it otherwise without losing the quadruple rhyme,
which has a certain mournful elegance. ‘The Landlady’s Daughter’
naturally leads us to ‘The Goldsmith’s Daughter.’ In this poem we
must not suppose that the hero and heroine meet for the first time.
The maiden has fallen in love with the knight, her superior in station,
but scarcely dares even confess it to herself, till the knight agreeably
surprises her by adorning her as his bride, taking her acceptance for
granted. We would not spoil the romance by hinting that it may not
have been an uncommon case in the middle ages for young
noblemen of small fortune to seek their brides from the rich
bourgeoisie of the Free Towns.
THE GOLDSMITH’S DAUGHTER.
A goldsmith stood within his stall,
Mid pearl and precious stone:
Of all the gems I own, of all,
Thou art the best, Heléna,
My daughter, darling one.
One day came in a knight so fine:

“Good morrow, maiden fair;
Good morrow, worthy goldsmith mine;
Make me a costly crownlet,
For my sweet bride to wear.”
The crown was made, the work was good,

It shone the eye to charm,
But Helen hung in pensive mood
(I trow, when none was by her)
The trinket on her arm.
“Ah! happy happy she to bear

This glittering bridal toy;
Would that true knight give me to wear
A crownlet but of roses,
How full were I of joy!”
Ere long the knight came in again,

Did well the crown approve:
“Now make me, goldsmith, best of men,
A ring with diamonds set,
To deck my lady-love.”
The ring was made, the work was good,

The diamonds brightly shone,
But Helen drew ‘t in pensive mood
(I trow, when none was by her)
Her finger half-way on.
“Ah, happy happy she to bear

This other glittering toy;
Would that true knight give me to wear
But of his hair a ringlet,
How full were I of joy!”
Ere long the knight came in again,

Did well the ring approve:
“Thou’st made me, goldsmith, best of men,
The gifts with rarest cunning,
For my sweet lady-love.
“Yet would I prove them how they sit;

So prithee, maiden, here
Let me on thee for trial fit
My darling’s bridal jewels:
In beauty she’s thy peer.”
’Twas on a Sunday morn betime;

It happed the maiden fair,
Expectant of the matin chime,
Had donned her best of raiment
With more than wonted care.”
With coyness all aglow, behold

The maid before him stand;
He crowns her with the crown of gold,
The ring upon her finger
He sets, then takes her hand.
“Heléna sweet, Heléna true,

I’ve ended now the jest;
That fairest bride is none but you,
By whom I would the crownlet
And ring should be possest.
“Mid gold and pearl and jewel fine

Hath been thy childhood’s home;
Be this to thee a welcome sign
That thou to heights of honour
With me shalt duly come.”
There is a great dramatic beauty in the accident of the girl having put
on her best apparel to make ready to go to church, so that the knight
has only to furnish her with the bridal accessaries to prepare her at a
moment’s notice to go to church with him.
A ferry-boat is a favourite subject for painters; and the navigation
of his native Neckar has been to Uhland the occasion of some of his
sweetest verse-pictures. In the poem called ‘The Boat’ he shows how
a freight of people, before unacquainted with each other, and
therefore silent, struck up an intimacy, and parted with regret, when
some improvised music had once furnished an introduction.
THE BOAT.
The boat is swiftly going,
Adown the river’s flowing;
No word beguiles the labour,
For no one knows his neighbour.
What pulls from coat the stranger,

The tawny forest-ranger?
A horn that sounds so mildly,
The stream-banks echo wildly.
Then haft and stopper screwing,

His staff to flute undoing,
Another, deftly playing,
Chimes with the cornet’s braying.
Shy sat the maid, self-chidden,

As speech were thing forbidden,
Now blend her accents willing
With flute and cornet’s trilling.
The rowers with new pleasure

Pull strokes that match the measure;
The boat the stream divideth,
And, lulled by music, glideth.
It strikes with shock the landing,

The folk are all disbanding;
“May we again meet, brother,
On board this boat or other!”
The companion to this little cabinet picture of the boat going with
the stream is the crossing of the ferry. The poet offers the ferryman
three times his fare, because the spirits of two friends, now dead,
who crossed the same ferry with him in past years, are supposed to
have gone with him.
THE FERRY.
Many years have passed for ever
Since I came across the river;
Here’s the tower, in evening’s blushing,
There, as erst, the weir is rushing.
Then with me the boat did carry

Two companions o’er the ferry,
One a friend, a father seeming,
One a youth with high hopes beaming.
That one lived a peaceful story,

And is gone in peace to glory;
This, of all most fiery-hearted,
Hath in fight and storm departed.
So when I, mid blessing cherished,

Dare to think on seasons perished,
Must I still to sorrow waken,
Missing friends that Death hath taken.
Friendship may not be united,

Save when soul to soul is plighted:
Full of soul those hours went by me,
Still to souls a bond doth tie me.
Ferryman, I gladly proffer

Thrice the fare that others offer,
Since two spirits thou didst carry
At my side across the ferry.
Longfellow, in his ‘Hyperion,’ has beautifully rendered the spirit of

this poem, if he has somewhat missed its cadence.
The fine elegy on the death of Tell belongs to Uhland’s ‘Songs of
Freedom,’ Tell’s death is undemonstrative, and he characteristically
comes by it, by rescuing a child from a torrent. ‘The Sunken Crown’
stands before it in the collection, probably by way of introduction:—
THE SUNKEN CROWN.
There, over on the hill-top,
A little house doth stand;
One gazes from the threshold
On all the lovely land.
There sits a free-born peasant
Upon the bench at even;
He whets his scythe so blithely,
And sings his thanks to Heaven.
There, under in the hollow,

Where glooms the mere of old,
There lieth deeply sunken
A proud rich crown of gold:
Though in it gleam at nightfall
Carbuncle and sapphire,
Since ages grey it lies there,
To seek it none desire.
In his neighbouring Switzerland the poet seems to see the image of

his ideal freedom, modest and self-respecting; founded on the laws
of decency and order; possessing its ancient charters and title-deeds;
no ephemeral offspring of democratic chaos; a gentle and serene
goddess of justice holding the exact balance between despotism and
universal suffrage. Such freedom as this, in many grand patriotic
strains, he desires for Würtemberg—a country whose praises he
enumerates in soil, products, climate, scenery, and manners, only
lamenting one want, without which it would be a paradise, the want
of “Good Right.” He is certainly justified in his praise of his country,
which, with the Grand-Duchy of Baden, forms a corner in the map of
Europe which is a garden of fertility, a museum of antiquities, and a
labyrinth of natural grandeur; but we question whether Uhland is
not over-sensitive as to its political misery.
When we pass from his ‘Songs of Freedom’ to his ‘Songs of the
Affections,’ we find the same moderation and purity of sentiment.
Uhland always seems afraid of saying too much. His exquisite taste is
a constant check upon him. He leaves the lines of his sketches to
speak for themselves, and shrinks from too much elaboration. The
imaginative reader may, if he pleases, supply for himself much of the
inessential detail. What a picture of a bashful old-world lover he
gives us in his poem called ‘Resolution!’
RESOLUTION.
She comes to walk in this sweet wild;
To-day I’ll banish all alarm;
Why should I tremble at a child
That does no living creature harm?
All give her greeting near and far;

I would, but dare not do the same;
And to my soul’s transcendent star
I cannot lift my eyes for shame.
The flowers that bend as she doth fare,

The birds with their voluptuous song,—
All these their love so well declare,
Why must I only feel it wrong?
To highest Heaven I oft prefer

Through livelong nights a bitter plaint;
Yet would I say three words to her,
“I love thee,” then my heart is faint.
In wait behind the tree I’ll stay

She passes in her daily walk,
And whisper “My sweet life” to-day,
As if in dreaming I did talk.
I will—but oh the fright I feel!

She comes, and she will see me sure;
So here into the bush I’ll steal,
And I shall see her pass secure.
For pathetic simplicity, perhaps none of his love-poems stands

higher than Die Mähderin—the ‘Female Mower.’ There is a pathos in
the very fact of the delicate girl—delicate at least in feeling—being
engaged in rude masculine toil, a case but too common in many
countries; then, again, in her hopeless attachment to the son of the
rich farmer; then in her overtasking her strength in mowing the
whole field without refreshment or repose, because the avaricious
and selfish old man has promised her his son’s hand as the price; and
again, in the killing deception at the close. She dies a martyr to the
combined effects of the labour and the disappointment, and the old
man has virtually murdered her to prevent her marrying his son and
for selfish gain. Another example of a deep and simple pathos,
produced by two pictures of the same place, is ‘The Castle on the
Sea;’ it is a dioramic change of effect produced by a dialogue. First
the castle stands superb in rising or setting sunlight, towering to
heaven and bowing to the deep; the king and queen walk on the
terrace in their royal insignia, and a beautiful princess walks with
them: the scene changes to a weird moonlight effect, where the castle
stands in ghostly grandeur; the king and queen are there on the
terrace, but without their robes or crowns; they are in mourning, and
the princess is no longer with them. This ballad has been effectively
translated by Longfellow. Though verging on the impossible in
subject, ‘The Mournful Tournament’ is a grand tragic sketch. Seven
knights came to joust for the favour of the king’s daughter, but as
they came in through the castle gate they heard the knell of her
funeral. They persist in the tournament; for the one who loves her
most truly, holds that still, though dead, she is worthy to be fought
for, the victor gaining her wreath and ring. All fall in the fight but he,
and he is mortally wounded, but, as the prize of victory, is buried
with his lady-love.
Similar in actual improbability of subject, but demonstrating its
bare possibility by its tragic truth, is the ballad of ‘Three Young
Ladies.’ The father brings to mind the Greek bandit, the hero of
About’s ‘Roi des Montagnes,’ who keeps his daughter at school at
Athens, and when she wants a new piano, harries a village. As he
returns from his rides, or raids, the three maidens ask this feudal
tyrant what he has brought for them. The first, he knows, loves gold
and finery; he has killed a knight for her, and brought her the spoil.
But the dead knight was her lover; she strangles herself with the
stolen chain, and dies beside his body. Two maidens only welcomed
the father on his next return. The second, he knows, loves the chase;
so he brings her a hunting-lance with a gold band, having killed a
wild huntsman to obtain it. The wild huntsman was her lover, and
she falls on the lance and dies beside him. One maiden only greets
him the next time. Flowers are her passion; so he brings her flowers,
having slain the bold gardener to obtain them. She takes the flowers
and seeks the body of the dead gardener, who was also her lover; but
flowers can inflict no wounds, so she stays beside him till the flowers
wither, and she withers with them. ‘The Black Knight’ has been done
full justice to by Longfellow. The practice of wearing visors in the
ages of chivalry made such tales a poetic possibility. Death comes to
joust in a king’s court, like a knight in black armour on black steed;
he kills all the champions, dances with the king’s daughter, pours out
a draught for the prince and princess, from which they quickly grow
pale and sink. The old king begs him to take him also, but he says
that “he only breaks flowers in spring,” and stalks away. In the ‘Luck
of Edenhall’ Uhland gets upon English ground. His own preserves
are so well stocked that he had no need to poach on those of the
minstrels of the Scottish Border. But the offence is a single one, and
may be forgiven for its admirable success and the world-wide
interest of the beautiful Cumbrian legend.
The trumpet-like bray and strange metre of this poem render it
one of the most difficult for a translator to grapple with; Longfellow,
however, has done it almost without fault, the only exception we
might take being to the repetition of the “crystal tall,” and the
expression “the cup to praise” instead of “the cup to honour.” But in
sonorous cadence his rendering equals the original. There is a
thrilling solemnity in the remark at the end, that the world will one
day be dashed to pieces like the shattered Luck of Edenhall. In a note
below Longfellow’s translation it is said, “The tradition on which this
ballad is founded, and the ‘shards of the Luck of Edenhall,’ still exist
in England. The goblet is in the possession of Sir Christopher
Musgrave, Bart. of Edenhall, Cumberland, and is not so entirely
shattered as the ballad leaves it.”
If not the very best of all the ballads, at least the most
characteristic of the poet’s ethical bent, is ‘The Singer’s Curse.’ With
this we may fitly conclude our specimens, as it is a declaration of the
greatness and holiness of the poet’s mission, and a prophecy of the
annihilation of all earthly pomp that is founded on injustice and
wrong, which it is the poet’s highest duty to raise his voice against. It
might also be entitled ‘The Martyr-Minstrel.’

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Special Partnership Issues

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Copyright © 2019 Pearson Education, Inc.

Issue Identification Questions

C:10-16 • Does Kayla recognize a gain or loss on the current distribution?

Copyright © 2019 Pearson Education, Inc.

pp. C:10-7 through C:10-11.

C:10-18 • Does the partnership have Sec. 751 assets?

Deemed Sale of Partnership Scott’s Share

Application of step 3 yields the following residual allocation to capital gain:

pp. C:10-16 through C:10-19 and C:10-25 through C:10-27.

Copyright © 2019 Pearson Education, Inc.

C:10-20• Should Krypton choose to be taxed as a partnership or as a corporation?

pp. C:10-28 and C:10-29.

Lisa recognizes no gain. Her basis in the land is $14,000.

b. Ending partnership interest basis is zero, determined as follows:

c. Ending partnership interest basis is zero, determined as follows:

d. Ending partnership interest basis is zero, determined as follows:

Copyright © 2019 Pearson Education, Inc.

One-half the $16,000 gain passes through to Lisa.

Lisa’s basis in S corporation stock:

pp. C:10-2 through C:10-7.

Copyright © 2019 Pearson Education, Inc.

Copyright © 2019 Pearson Education, Inc.

1. Land: Amount deemed realized $10,000

2. Inventory: Amount deemed realized $10,000

pp. C:10-2 through C:10-7.

Copyright © 2019 Pearson Education, Inc.

Sec. 751 Assets:

Sec. 751 Assets:

pp. C:10-7 through C:10-11.

Copyright © 2019 Pearson Education, Inc.

Sec. 751 Assets:

Deemed cash distribution $1,000

Beginning basis $25,000 $25,000 $25,000 $25,000

Paula’s basis in inventory:

a. -0- None Land $11,000a

Basis of property to partners: Land Machinery

First allocate to property basis $ 4,000 $ 3,000

Copyright © 2019 Pearson Education, Inc.

pp. C:10-12 through C:10-16.

Copyright © 2019 Pearson Education, Inc.

Copyright © 2019 Pearson Education, Inc.

Copyright © 2019 Pearson Education, Inc.

Copyright © 2019 Pearson Education, Inc.

Summary of asset bases: Part a Part b Part c Part d

pp. C:10-12 through C:10-14.

C:10-35 a. Kelly’s January 1 basis $35,000

Amount realized on sale

Application of step 2 yields the following allocation to Sec. 751 property:

Inventory $60,000 $20,000

Copyright © 2019 Pearson Education, Inc.

Total gain realized $23,000