Kenya sells her 20% partnership interest having a $28,000 basis to Ebony for $40,000 cash.At the time of the sale,the partnership has no liabilities and its assets are as follows: $$\begin{array} { | l | r | r | }
\hline & \text { Basis } & { \text { FMV } } \
\hline \text { Cash } & \$ 20,000 & \$ 20,000 \
\hline \text { Unrealized receivables } & 0 & 40,000 \
\hline \text { Inventory } & 10,000 & 40,000 \
\hline \text { Land (Sec. 1231) } & 110,000 & 100,00 \
\hline
\end{array}$$ Kenya and Ebony have no agreement concerning the allocation of the sales price.Ordinary income recognized by Kenya as a result of the sale is

Question

Kenya sells her 20% partnership interest having a $28,000 basis to Ebony for $40,000 cash.At the time of the sale,the partnership has no liabilities and its assets are as follows: $$\begin{array} { | l | r | r | } 
\hline & \text { Basis } & { \text { FMV } } \
\hline \text { Cash } & \$ 20,000 & \$ 20,000 \
\hline \text { Unrealized receivables } & 0 & 40,000 \
\hline \text { Inventory } & 10,000 & 40,000 \
\hline \text { Land (Sec. 1231) } & 110,000 & 100,00 \
\hline
\end{array}$$ Kenya and Ebony have no agreement concerning the allocation of the sales price.Ordinary income recognized by Kenya as a result of the sale is

Quizplus · Accepted Answer

Kenya's share of the partnership's unrealized receivables is $8,000 (20% x $40,000).  Her share of the inventory is $8,000 (20% x $40,000).  Her share of the land is $22,000 (20% x $110,000).  Her total share of the partnership's assets is $38,000.  Since she sold her interest for $40,000, she has a gain of $2,000.  However, since the land is a Sec. 1231 asset, the gain on the land is taxed at a maximum rate of 25%.  Therefore, Kenya's ordinary income from the sale is $14,000 ($2,000 + $12,000).

Kenya Sells Her 20% Partnership Interest Having a $28,000 Basis