Question

Malcolm, a dealer in securities, is a 60 percent owner of the Real Partnership which on July 1, 2015, sold to him Acme Securities which it had held as an investment for three years. The basis of the securities to the Real Partnership was $40,000, and the sales price to Malcolm was $100,000.

On his 2015 federal income tax return, Malcolm should report income in the amount and character of:

a. $36,000 long-term capital gain.

b. $36,000 short-term capital gain.

c. $36,000 ordinary income.

d. $18,000 long-term capital gain.

e. $18,100 ordinary income.

Answer 1

c. $36,000 ordinary income.

Step-by-step explanation:

Data provided

Sales price to Malcolm = $100,000

Basis of the securities to the Real Partnership = $40,000

The computation of should report income in the amount and character of is shown below:-

The gain that arose = Sales price to Malcolm - Basis of the securities to the Real Partnership

= $100,000 - $40,000

= $60,000

But because Malcolm is the Real Partnership's 60 percent shareholder, he will declare income in the amount and character of $60,000 × 60% = $36,000 as ordinary income on his federal income tax return for 2015.