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?

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?

Quizplus · Accepted Answer

Billie's share of the gain on the sale of her partnership interest is calculated as follows:
Sale price of partnership interest: $60,000
Adjusted basis of partnership interest: $40,000
Gain on the sale of partnership interest: $20,000
Since Billie's partnership interest is a capital asset, the $20,000 gain is a capital gain. However, the BBB Partnership balance sheet shows that there is $5,000 of inventory that has been expensed for tax purposes but has not yet been sold. When Billie sells her partnership interest, she must recognize $5,000 of ordinary income as her share of the remaining inventory. Therefore, Billie must recognize $10,000 of ordinary income ($5,000 × 2 partners) and $10,000 of capital gain on the sale of her partnership interest to Janet.

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