Upon the sale of a partnership interest,a partner must recognize ordinary income if the partnership has substantially appreciated inventory or unrealized receivables.

Question

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According to the Internal Revenue Code, when a partner sells his or her interest in a partnership, any gain from the sale is generally treated as capital gain. However, if the partnership owns substantially appreciated inventory or unrealized receivables, the partner must recognize ordinary income to the extent of the appreciation at the time of the sale. This is known as the inventory and receivables rule. Therefore, the statement is true.

Upon the Sale of a Partnership Interest,a Partner Must Recognize