Victor is a one-third partner in the VRX Partnership, with an outside basis of $156,000 on January 1. Victor sells his partnership interest to Raj on January 1 for $200,000 cash. The VRX Partnership has the following assets and no liabilities as of January 1: Basis FMVCash$27,000 $27,000Accounts receivable -0- 18,000Inventory 103,500 121,500Equipment 270,000 337,500Stock investment 67,500 96,000Totals$468,000 $600,000 The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock was purchased seven years ago. What is the amount and character of Victor's gain or loss on the sale of his partnership interest?

Question

What will be an ideal response?

Answer 1

$9,500 capital gain and $34,500 ordinary income.

The total gain from the sale is $44,000 ($200,000 amount realized minus $156,000 outside basis). However, because VRX has hot assets (accounts receivable, depreciation recapture, and inventory), a portion of the gain will be ordinary income. The amount is equal to Victor's share of the ordinary income if VRX sold its assets for their fair value on January 1. Victor's share is one-third of the gain on the accounts receivable ($18,000), inventory ($18,000), and equipment ($67,500) for a total of 1/3 × $103,500 = $34,500 ordinary income. The capital gain from the sale ($9,500) is the difference between the total gain of $44,000 and ordinary income of $34,500.