The December 31,2012 balance sheet of GRT Services,LLP reads as follows: The partners share equally in partnership capital,income,gain,loss,deduction,and credit.Capital is not a material income-producing factor to the partnership,and all partners are active in the business.On December 31,2012,general partner Ronda receives a distribution of $190,000 cash in liquidation of her partnership interest under § 736.Ronda's outside basis for the partnership interest immediately before the distribution is $140,000.How much is Ronda's gain or loss on the distribution and what is its character?
A)$50,000 ordinary income.
B)$40,000 ordinary income;$10,000 capital gain.
C)$40,000 capital gain;$10,000 ordinary income.
D)$50,000 capital gain.
E)None of the above.

Question

The December 31,2012 balance sheet of GRT Services,LLP reads as follows:  The partners share equally in partnership capital,income,gain,loss,deduction,and credit.Capital is not a material income-producing factor to the partnership,and all partners are active in the business.On December 31,2012,general partner Ronda receives a distribution of $190,000 cash in liquidation of her partnership interest under § 736.Ronda's outside basis for the partnership interest immediately before the distribution is $140,000.How much is Ronda's gain or loss on the distribution and what is its character?
A)$50,000 ordinary income. 
B)$40,000 ordinary income;$10,000 capital gain. 
C)$40,000 capital gain;$10,000 ordinary income. 
D)$50,000 capital gain. 
E)None of the above.

Quizplus · Accepted Answer

To determine Ronda's gain or loss on the distribution, we need to compare the cash received with her outside basis immediately before the distribution. Ronda received $190,000 in cash, and her outside basis was $140,000, resulting in a realized gain of $50,000. 
Under § 736, liquidating distributions are treated as payments for the partner's interest in the partnership. Because Ronda's interest was not a capital interest, the entire $50,000 gain is ordinary income. Therefore, the correct choice is B.

The December 31,2012 Balance Sheet of GRT Services,LLP Reads as Follows