The Crimson Partnership is a service provider. Its assets consist of unrealized receivables (basis of $0, fair market value of $400,000), cash of $300,000, and land (basis of $200,000, fair market value of $300,000). Assume 20% general partner Jana has a basis in her partnership interest of $100,000 . If the ongoing partnership distributes $200,000 of cash to Jana in liquidation of her interest
in the partnership, she will recognize ordinary income of $80,000 and a capital gain of $20,000.
a. True
b. False
Indicate whether the statement is true or false
True
RATIONALE: Section 736 applies to this transaction. Because capital is not a material income-producing factor in the partnership and because Jana is a general partner, the cash payment for her $80,000 share of the unrealized receivables is classified as a guaranteed payment under § 736(a), and Jana will recognize $80,000 of ordinary income. The rest of the payment will be a § 736(b) payment, and Jana will recognize $20,000 ($120,000 – $100,000) of capital gain.
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