ExpertHard1 markMultiple Choice
CPA · Question 53 · Area 4: Entity Taxation
Partner Z sells their 30% interest in a partnership for ,000 cash. Z's outside basis was ,000. The partnership has no liabilities but has 'Hot Assets' (Unrealized Receivables) of ,000. What is the character of Z's gain?
Partner Z sells their 30% interest in a partnership for ,000 cash. Z's outside basis was ,000. The partnership has no liabilities but has 'Hot Assets' (Unrealized Receivables) of ,000. What is the character of Z's gain?
Answer options:
A.
,000 Capital Gain
B.
,000 Ordinary Income; ,000 Capital Gain
C.
,000 Ordinary Income
D.
,000 Ordinary Income; ,000 Capital Gain
How to approach this question
1. Calculate Total Gain. 2. Calculate Share of Hot Assets (Inventory/Receivables). 3. Hot Asset Share = Ordinary Income. 4. Remainder = Capital Gain.
Full Answer
B.,000 Ordinary Income; ,000 Capital Gain✓ Correct
,000 Ordinary Income; ,000 Capital Gain
Under Section 751, the amount of money received attributable to unrealized receivables or substantially appreciated inventory ('Hot Assets') results in ordinary income. Z's share of receivables is ,000 (30% * ,000). Total gain is ,000. ,000 is ordinary, ,000 is capital.
Common mistakes
Treating the entire sale of partnership interest as capital gain.
Practice the full CPA REG Practice Exam
72 questions · hints · full answers · grading
More questions from this exam
Q01Under Circular 230, which of the following scenarios represents a permissible contingent fee arra...HardQ02A CPA is preparing a tax return for a client who wishes to take a position that the CPA believes ...MediumQ03Regarding the retention of client records under Circular 230, which of the following statements i...HardQ04Under the Ultramares rule regarding accountant liability to third parties for negligence, which o...MediumQ05Taxpayer A filed their Year 1 tax return on April 15, Year 2. The return omitted ,000 of gross in...Medium