Beth sold her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year. Katie also assumed Beth's share of the partnership's liabilities. Beth's basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities. The partnership's income for the entire year was $100,000, and Beth's share of partnership debt
was $10,000 as of the date she sold the partnership interest. Assume the calendar-year partnership has no hot assets, all of its income is earned evenly throughout the year, and the partnership uses the daily proration method to allocate its income among the partners. Beth recognizes a gain of $12,500 on the sale.
a. True
b. False
Indicate whether the statement is true or false
True
RATIONALE: Beth's $40,000 basis is reduced by the $5,000 decrease in her share of partnership debt and is increased by her $12,500 share of partnership income for one-half of the tax year ($100,000 × 25% × 1/2 year) to become $47,500 . Thus, $60,000 (cash of $50,000 + $10,000 share of liabilities) – $47,500 (adjusted basis) equals $12,500 gain on the sale.
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