Question

Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership. Marco, Jaclyn, and Carrie each have an outside basis in his/her partnership interest of $104,000. On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000. The partnership has the following assets and no liabilities as of the sale date:
Tax Basis FMV

Cash $ 18,000 $ 18,000

Accounts receivable 0 12,000

Inventory 69,000 81,000

Equipment 180,000 225,000

Stock investment 45,000 75,000

Totals $ 312,000 $ 411,000

The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago

Required information

a. What are the hot assets $ 751(a)] for this sale?

i. Accounts receivable

ii. Inventory

iii. Stock investment

iv. Potential depreciation recapture in the equipment

b. What is Marcoâs gain or loss on the sale of his partnership interest?

c. What is the character of Marcoâs gain or loss?

i. $23,000 ordinary income and $10,000 capital gain

ii. $10,000 ordinary income and $23,000 capital gain

iii. $33,000 ordinary income

iv. $33,000 capital gain

v. None of these

Answer 1

a. The hot assets per Section 741(a) for this sale are as follows:

i. Accounts receivable

ii. Inventory

iv. Potential depreciation recapture in the equipment

b. Marco's gain or loss on the sale of his partnership interest is $33,000.

c. The character of Marco's gain or loss is iv. $33,000 capital gain.

What is a partnership interest?

A partnership interest refers to a partner's ownership and benefits that accrue from the partnership.

The partnership interest entitles the partner to participate in the distribution of profits and losses arising from the partnership business.

Data and Calculations:

Each partner's outside basis = $104,000

Sale proceeds of Marco's partnership interest = $137,000

Gain = $33,000 ($137,000 - $104,000)

Thus, Marco, who sold his partnership interest to Ryan, had a capital gain of $33,00 because of the difference between the sale proceeds and the partner's adjusted basis in the partnership interest.

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