The SSC Partnership balance sheet includes the following assets on December 31 of the current year: $$\begin{array} { | l | r | r | }
\hline & \text { Basis } & \underline { \text { FMV } } \
\hline \text { Cash } & \$ 180,000 & \$ 180,000 \
\hline \text { Accounts receivable } & - 0 - & 60,000 \
\hline \text { Land } & 90,000 & 120,000 \
\hline \text { Total } & \underline { \$ 270,000 } & \underline { \$ 360,000 } \
\hline
\end{array}$$ Susan, a 1/3 partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

Question

The SSC Partnership balance sheet includes the following assets on December 31 of the current year: $$\begin{array} { | l | r | r | } 
\hline & \text { Basis } & \underline { \text { FMV } } \
\hline \text { Cash } & \$ 180,000 & \$ 180,000 \
\hline \text { Accounts receivable } & - 0 - & 60,000 \
\hline \text { Land } & 90,000 & 120,000 \
\hline \text { Total } & \underline { \$ 270,000 } & \underline { \$ 360,000 } \
\hline
\end{array}$$ Susan, a 1/3 partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

Quizplus · Accepted Answer

Susan's share of the Partnership's assets (before selling her interest) based on her adjusted basis of $90,000 is one-third of the total basis, or $90,000. The amount realized from the sale is $120,000, resulting in a capital gain of $30,000 ($120,000 - $90,000).

However, Susan must also recognize ordinary income for her share of the Partnership's accounts receivable, as these are considered earned income. Susan's share of the accounts receivable is $20,000 ($60,000 × 1/3), so she must recognize ordinary income of $20,000. Therefore, the total recognized gain is $50,000 ($30,000 capital gain + $20,000 ordinary income).

The correct answer is D, $10,000 capital gain and $20,000 ordinary income, which is the reverse of the answer given.

The SSC Partnership Balance Sheet Includes the Following Assets on December