[jgmart04]

NINJA Question –

I may be mistaken… but the math on this answer doesn’t add up… 174,000 less 34,000 is not 144,000. How is the ordinary income calculated here. I see the math below, but it’s just adding up. Thanks!

The personal service partnership of Allen, Baker & Carr had the following cash-basis balance sheet at December 31, Year 1:

Adjusted Basis Market

Assets per Books Value

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Cash $102,000 $102,000

Unrealized accounts receivable — 420,000

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Totals $102,000 $522,000

Liability and Capital

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Note payable $60,000 $ 60,000

Allen, capital 14,000 154,000

Baker, capital 14,000 154,000

Carr, capital 14,000 154,000

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Totals $102,000 $522,000

Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, Year 2. In addition, Dole assumed Carr’s share of the partnership’s liability.

What amount of ordinary income should Carr report in his Year 2 income tax return on the sale of his partnership interest?

When a partner sells his interest in a partnership and he is relieved from his share of partnership liabilities, then the amount realized is the amount of cash received plus his share of liabilities. Carr’s amount realized will be $174,000. Carr’s adjusted basis of $34,000, which also includes his share of the partnership liabilities, is subtracted from the amount realized. This leaves a realized gain of $144,000.

To the extent any of the realized gain is attributable to unrealized receivables or substantially appreciated inventory, there will be gain recognized as ordinary income. In this case, there are unrealized receivables with an adjusted basis of $0 and a fair market value of $420,000. Carr’s share of the $420,000 is $140,000 ($420,000 ÷ 3). Carr will have ordinary income of $140,000 and capital gain of $4,000 from the sale of his partnership interest.

Amount realized: Cash received $154,000

+ Liability relief ($60,000 ÷ 3) 20,000

= Total amount realized $174,000

Less: Adjusted basis: Carr, capital account $ 14,000

+ Carr’s share of partnership liabilities 20,000

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= Carr’s adjusted basis in the partnership (34,000)

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Realized gain $144,000

Gain recognized as ordinary income due to unrealized

receivables ($420,000 ÷ 3) $140,000

Gain recognized as capital gain 4,000

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Total realized and recognized gain $144,000

[Pinback14]

I think you're correct. Looks like it should be $140,000 realized and recognized, all ordinary due to the unrealized receivables.

F - 96
A - 99
R - 95
B - 95

[jgmart04]

Thanks for the response. Anyone else have any input? I am having a difficult time understanding/memorizing the partnership income items. This questions highlights the topic very well and I think it is confusing me.

Thnks

[Author]

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