On December 31 of last year, Alex and Jackson become equal partners in the AJ Partnership with assets having a tax basis and FMV of $120,000. The partnership, which deals in securities, had no liabilities at the end of last year. In January of this year, Franklin contributes his investment securities with an FMV of $60,000 (purchased two years ago at a cost of $45,000) to become an equal partner in the new AJF Partnership. The securities, which are inventory to the partnership, are sold on December 15 of the current year for $90,000. What amount and character of gain from the sale of these securities should be allocated to Franklin?

Question

Quizplus · Accepted Answer

Franklin's contribution of securities to the partnership is treated as a contribution of inventory. When the partnership sells the securities, the gain is treated as ordinary income because the securities are considered inventory. The gain is calculated as the sale price ($90,000) minus Franklin's basis ($45,000), resulting in a $45,000 gain. However, since Franklin's contribution was $60,000 FMV, the gain allocated to him is $25,000 as ordinary income.

On December 31 of Last Year, Alex and Jackson Become