Retiring Partner

[Snaggletooth]

I have asked a similar question for this, but let me ask from a different perspective:

Two partners have struggled for 3 years. They have gone through $150,000 in bank loans, which have been guaranteed by both partners (and spouses of both partners). They have about 80,000 in assets and 70,000 in losses.

One of the partners wants out. Easy enough just to get out and dissolve the partnership. Depending upon the settlement, she will have a capital gain or loss.

But the bank will not let either party out of responsibility for the loan unless it is paid off.

Here is the question: terms of the dissolution state that the retiring partner is absolved from half the debt. When reporting the sale, does the retiring partner:

1) Include the debt relief of $75,000 as proceeds, even though the bank has not
relieved the partner?
2) NOT include the debt relief as proceeds, because the partner is still legally responsible
to the bank.

Remember either answer may be affected at a later date by subsequent events, but the question is "Which of the above is reported with respect to capital gains on the retiring partner's return on disposal of that share?" If partner is later exonerated, or later has to pay up, that is a different discussion.

Thanks in advance -

[JON]

Gain or loss

is computed utilizing debt relief as sales proceeds. Also so remember 1245 recap and "hot assets" (A/R if cash basis) are ordinary income gain not a capital gain.

IF subsquently you are forced to make payments on the business loan-then those become a "capital Loss" at that time. I am not sure about the capital loss, but that is how I remember it.

My best guess.

[Snaggletooth]

Jon in Minnesota

First of all, stay warm!!

Thanks for taking a shot at my question. This is a "real world" encounter, and has happened to a few other clients in the past.

I haven't seen a reference book of any kind provide an answer for this situation. Textbook questions and examples all seem to present scenarios which evoke definitive answers. We encounter many client problems which are ambiguous as to their closure, and this is a perfect example.

I remember my teacher telling me about a man disembarking a train. If he pets the dog, then he is good -- If he has a black mustache then he is bad. The old 12-mm film showed a guy with a black mustache petting a dog...

[JON]

I do not think

there any exceptions to what I said. I think that is the way you are suposed to go unless there is some exception to the general rules. What you have for the liqquidating offset to is your partnership basis.