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The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31 of the current year:
Adjusted basis Market value
Cash $ 102,000 $ 102,000
Unrealized accounts receivable − 420,000
Total $ 102,000 $ 522,000
LIABILITY AND CAPITAL
Note payable 60,000 60,000
Allen 14,000 154,000
Baker 14,000 154,000
Carr 14,000 154,000
Totals $ 102,000 $ 522,000
Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1 of the following year. In addition, Dole assumed Carr’s share of the partnership’s liability.
What amount of ordinary income should Carr report on the following year’s income tax return on the sale of his partnership interest?
Choice “a” is correct. Carr should report ordinary income of $140,000.
Rule: 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 is treated as ordinary income
Share of unrealized receivables (420,000 x 1/3) = 140,000
Why is this not capital gain? Could I have just taken the share of unrealized receivables (420K x 1/3) and get the answer without going through the first step?
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