Chen Industries, a general partnership, had the following balance sheets at Dece
ID: 2577632 • Letter: C
Question
Chen Industries, a general partnership, had the following balance sheets at December 31:
Basis FMV
Cash $50,000 $50,000
Inventory 15,000 30,000
Property 2 (Sec. 1231 asset) 20,000 100,000
Property 3 (Sec. 1231 asset) 50,000 75,000
$135,000 $255,000
Liabilities 75,000 75,000
Capital, Sue 30,000 30,000
Captial, Pan 20,000 60,000
Capital, June 10,000 30,000
$135,000 $255,000
Pan owns a one-third interest in partnership capital and profits. His adjusted basis in his partnership interest is $32,500. If he sells his interest to an unrelated buyer for $60,000 cash, how much ordinary income will he recognize on the sale under Code Sec. 751(a)?
a. zero
b. $5,000
c. $10,000
d. $27,500
e. None of the above
Explanation / Answer
Whichever is lower needs to be used from above, $150,000 is low so Interest capitalization is $150,000
As per IRS, when an partner sells his interest to an outsider or to unrelated buyer (other than partnership). that partner is entitled to capital gain, out of any income recognized on that sale.
Pan will recognize $27,500 ($60,000-$32,500) as income.
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