Question

Victor is a one-third partner in the VRX Partnership, with an outside basis of $236,800 on January 1. Victor sells his partnership interest to Raj on January 1 for $287,000 cash. The VRX Partnership has the following assets and no liabilities as of January 1: (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Basis FMV Cash $ 38,800 $ 38,800 Accounts receivable 0 20,400 Inventory 125,500 147,100 Equipment 299,250 373,950 Stock investment 69,600 101,700
Totals $ 533,150 $ 681,950
The equipment was purchased for $399,000 and the partnership has taken $99,750 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?

Answer 1

To calculate Victor's gain or loss, we estimated his share of the partnership's FMV, adjusted for hot assets consisting of ordinary income, and then determined his capital gain. Victor ends up recognizing an ordinary income of $55,833.33 and incurring a capital loss of $5,633.33 from the sale of his partnership interest.

Step-by-step explanation:

The student is asking how to calculate the amount and character of Victor's gain or loss on the sale of his partnership interest. To calculate his gain or loss, we must first determine the total amount Victor is entitled to from the sale and then compare it to his outside basis in the partnership.

Step 1: Calculate Victor's share of partnership's FMV

The total fair market value (FMV) of the partnership's assets is $681,950. Victor owns a one-third interest, so his share of the FMV is 681,950 * 1/3 = $227,316.67.

Step 2: Adjust for hot assets

Accounts receivable and inventory are considered hot assets, which are subject to ordinary income taxation. One-third of the accounts receivable ($20,400) and inventory ($147,100) FMVs are included in this calculation. These amounts are $6,800 and $49,033.33, respectively. The ordinary income portion is $55,833.33.

Step 3: Calculate Victor's capital gain

Subtract the ordinary income from the selling price to find the remaining capital gain. Then, subtract Victor's outside basis from this number to find the total capital gain. $287,000 (selling price) - $55,833.33 (ordinary income) = $231,166.67 (potential capital gain). Victor's capital gain is $231,166.67 - $236,800 (outside basis) = -$5,633.33. Since this number is negative, Victor has no capital gain and instead has a capital loss of $5,633.33.

Step 4: Summarize Victor's gain/loss

Victor has an ordinary income of $55,833.33 recognized from the hot assets and a capital loss of $5,633.33. Therefore, Victor's total gain on the sale is $55,833.33, and he suffers a capital loss of $5,633.33.