DEF partnership is a calendar year, accrual method partnership in which each partner has a 1/3 interest in capital and profits, and each
partner has an “outside” basis in her partnership interest of $73,333. D sells her partnership interest to X for $95,000 cash.
Immediately prior to the sale, the balance sheet of the partnership was as follows:
Assets Adjusted Basis FMV
Cash 75,000 75,000
Accounts Receivable 30,000 30,000
Inventory 10,000 15,000
Building (no recapture) 55,000 70,000
Investment – Parcel X 40,000 90,000
Investment – Parcel Y 10,000 45,000
220,000 325,000
Liabilities and Capital
Liabilities 40,000 40,000
D 60,000 95,000
E 60,000 95,000
F 60,000 95,000
220,000 325,000
Determine the amount and character of any gain realized and recognized by D on the sale of her partnership interest to X. Assuming
that that the DEF partnership has a valid section 754 election in place, what would be the gross amount of X’s section 743(b)
adjustment, and how would it be allocated to the various assets of the DEF partnership. What consequences would result if the DEF
partnership sold the inventory for $15,000, immediately after X’s purchase of D’s partnership interest, assuming that a valid section
754 election was in place?