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's capital gain/loss is calculated as the difference between the sales price and her adjusted basis. Thus, Billie has a capital gain of $20,000 ($60,000 - $40,000). Since Billie held her partnership interest for more than one year, the gain is long-term. However, since the sale is of a partnership interest, Billie must also recognize ordinary income equal to her share of the partnership's unrealized receivables and inventory if any. Since there is no information provided regarding these items, we assume zero. Thus, Billie recognizes $20,000 of long-term capital gain and zero ordinary income.

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