Barney,Bob,and Billie are equal partners in the BBB Partnership.The partnership balance sheet reads as follows on December 31 of the current year:

Partner Billie has an adjusted basis of $40,000 for her partnership interest.If Billie sells her entire partnership interest to new partner Janet for $60,000 cash,how much capital gain and ordinary income must Billie recognize from the sale?
A)$20,000 ordinary income.
B)$20,000 capital gain.
C)$10,000 ordinary income; $10,000 capital gain.
D)$30,000 ordinary income; $10,000 capital loss.
E)None of the above.

Question

Barney,Bob,and Billie are equal partners in the BBB Partnership.The partnership balance sheet reads as follows on December 31 of the current year:

Partner Billie has an adjusted basis of $40,000 for her partnership interest.If Billie sells her entire partnership interest to new partner Janet for $60,000 cash,how much capital gain and ordinary income must Billie recognize from the sale?
A)$20,000 ordinary income. 
B)$20,000 capital gain. 
C)$10,000 ordinary income; $10,000 capital gain. 
D)$30,000 ordinary income; $10,000 capital loss. 
E)None of the above.

Quizplus · Accepted Answer

Billie had a $40,000 adjusted basis for her partnership interest that must be subtracted from the $60,000 proceeds.Section 751 requires the selling partner to recognize ordinary income when the partner effectively sells her proportionate share of partnership unrealized receivables.Billie recognizes $10,000 of ordinary income and $10,000 of capital gain,calculated as follows:Ordinary income is $10,000.($10,000 proceeds received for 1/3 share of unrealized receivables less $0 share of Billie's basis for the unrealized receivables.)
Capital gain is $10,000.($50,000 remaining proceeds received on the sale less $40,000 remaining outside basis for the interest.)

Barney,Bob,and Billie Are Equal Partners in the BBB Partnership