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rimi
Contributor

Joined: 28 Apr 2009
Online Status: Offline
Posts: 99

Posted: 10 Aug 2009 at 15:08 \| IP Logged

The personal service partnership of Alan, Baker and Carr had the following cash basis b/sheet on Dec 31st , yr1

Assets                        Adj. Basis per books          Market value
Cash                   102,000            $102,000
Unrealized Receivables      --             $420,000
                           _________________       _____________
Total                                 102,000                 522,000

Liabilities and Capital

Note Payable                       60,000                                 60,0000
Capital A/C
      Allen                              14,000                                 154,000
       Baker                            14,000                                 154,000
       Carr                              14,000                                 154,000
                                ___________                           __________
Total                                  102,000                                522,000

Carr was an equal partner , sold his partnership interest to Dole, an outsider for 154,000 cash on January 1, Yr 2. In additional Dole assumed Carr's share of the partnership liability. What amount of ordinary income should Carr report in his yr 2 income tax return on sale of partnership interest?

Answer to this qt is $140,000 is the ordinary income, which is the amount of the unrealized receivables.

My question is :-
The partner has received a total amount of = 174,000 (154,000 +20,000) of which 140,000 is the ordinary gain. Is the liability assumed of 20,000 a capital gain? So Carr will have both $140,000 (ordinary gain) plus $20,000 capital gain.

divyagovil1
Major Contributor

Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456

Posted: 11 Aug 2009 at 11:41 \| IP Logged

Rimi, there would be no capital gain here. All the gain is ordinary income in this question. Gain/loss on sale of partnership interest is calculated by comparing partnership "basis" vs consideration received.

Amount realized $174,000 (Cash 154000 + debt assumed 20,000)

less. Partnership interest basis (34,000)

Capital 14,000

Liabilities 20,000

Total gain realized 140,000

Share of unrealized receivables (420,000 x 1/3) = 140,000

Thus, the character of the gain is ordinary to the extent of unrealized receivables.

An interest in a partnership is generally a capital asset. However, any gain resulting from the sale of a partner's share of unrealized receivables and/or appreciated inventories (hot assets) is treated as ordinary income.

__________________
Divya - CO State

Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
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Ethics - 2011

rimi
Contributor

Joined: 28 Apr 2009
Online Status: Offline
Posts: 99

Posted: 11 Aug 2009 at 16:45 \| IP Logged

Thanks Divya, now I truly understand the meaning of that last statement in your reply which is mentioned in Becker.
Gosh .. I think Becker should have put in an example to make us understand that concept.

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