Final answer:
The categorization of the income from the transfer of a partnership interest as ordinary income or capital gain depends on the specifics of the transfer. Without further context, it is not possible to determine definitively if Kelly should categorize the $7,000 or $10,000 as ordinary income or capital gain.
Step-by-step explanation:
The student's question pertains to the tax treatment of the receipt of a partnership interest. When a partnership interest is transferred, the recipient must consider whether the amount received is categorized as ordinary income or capital gain. The specifics of the transfer, such as whether the interest was sold, if there were any payments for unpaid services, the presence of a substantial risk of forfeiture, or if the transfer represents payment for past services, will greatly influence this determination.
In the context provided (assuming the 10 amount mentioned is $10,000 and the options represent Kelly's potential tax implications), if Kelly received the partnership interest as compensation for services, it could be considered ordinary income. If the partnership interest was a capital asset held for more than a year and sold to Kelly, it might be treated as a capital gain. However, without additional context about the nature of the transaction, it is challenging to provide a definitive answer.
To accurately determine whether Kelly must include $7,000 or $10,000 as ordinary income or capital gain, more information would be necessary. It's recommended to refer to the Internal Revenue Code or seek the advice of a tax professional for specific cases.