Federico is a 30percent partner in the FRM Partnership when he sells his entire interest to Maria for $98,000. At the time of the sale, Federico's basis in FRM is $74,000. FRM does not have any debt. In addition, FRM's assets include accounts receivable with zero tax basis and $21,000 fair market value at the date of the sale. The remaining assets of the partnership are capital and §1231 assets. Federico will recognize ordinary income of $24,000 on the sale of his partnership interest.

Question

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Federico will recognize a gain of $24,000 ($98,000 sale price - $74,000 basis), but this gain is generally considered capital gain, not ordinary income. The presence of accounts receivable with zero tax basis and $21,000 fair market value does not change the character of the gain on the sale of his partnership interest because these receivables would be considered hot assets only if Federico were selling his interest in an inventory-heavy business, such as a retail or manufacturing partnership, and even then, only the portion of the gain attributable to the receivables would be treated as ordinary income. Since the question does not specify that the partnership's primary business involves such inventory or that the gain is specifically attributable to the receivables, the default assumption is that the gain is capital in nature.

Federico Is a 30percent Partner in the FRM Partnership When