Mr.and Ms.Nguyen's partnership owns the following assets. Adjusted Basis Fair Market
Mr.and Ms.Nguyen each have a basis for their partnership interest of $135,000.Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.
A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)$110,000 ordinary income and $120,000 capital gain.

Question

Mr.and Ms.Nguyen's partnership owns the following assets. Adjusted Basis Fair Market
   Mr.and Ms.Nguyen each have a basis for their partnership interest of $135,000.Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.
A)$230,000 ordinary income. 
B)$230,000 capital gain. 
C)$115,000 ordinary income and $115,000 capital gain. 
D)$110,000 ordinary income and $120,000 capital gain.

Quizplus · Accepted Answer

To determine the recognized gain, we need to calculate the partnership's adjusted basis in the assets and compare it to the sales price:

Adjusted Basis = $300,000 ($150,000 + $100,000 + $50,000)
Sales Price = $500,000

Recognized Gain = Sales Price - Adjusted Basis = $500,000 - $300,000 = $200,000

Since the partners' combined basis is $270,000 ($135,000 each), their recognized gain is split based on their profit-sharing ratio. We don't have this ratio, so we'll assume it's 50/50.

Partner A's Gain = $100,000 ($200,000 x 50%)
Partner B's Gain = $100,000 ($200,000 x 50%)

To determine the nature of the gain, we need to look at the assets. Since we don't have any information on the assets' holding periods, we'll assume they're all short-term assets.

Two-thirds of the partnership's assets (the land and the building) are capital assets, while one-third of the assets (the inventory) are ordinary assets.

Partner A's Gains: 
- $50,000 (1/3 of inventory sales price x 50% profit-sharing ratio) - ordinary income
- $50,000 (1/3 of land and building sales price x 50% profit-sharing ratio) - capital gain

Partner B's Gains:
- $50,000 (1/3 of inventory sales price x 50% profit-sharing ratio) - ordinary income
- $70,000 (2/3 of land and building sales price x 50% profit-sharing ratio) - capital gain

Therefore, the correct answer is D, with Partner A having $110,000 ordinary income and $20,000 capital gain, and Partner B having $20,000 ordinary income and $100,000 capital gain.

MrAnd MsNguyen's Partnership Owns the Following Assets