Nick sells 25% interest in LMNO Partnership to a new partner Katrina for $67500. The partnership assets of cash ($100000) land (basis$90000) fair market value of $110000 and inventory basis $40000 fair market value of $60000 nick basis in his partnership interest was $57000 on the sale nick will recognize income of $5000 and a capital gain of $5000. True or false?
False. Let's break down the situation to understand why: 1. **Nick's Basis in Partnership Interest**: $57,000 2. **Sale Price for 25% Interest**: $67,500 First, calculate the gain Nick recognizes from the sale: - Sale Price: $67,500 - Nick's Basis in 25% Interest: 25% of $57,000 = $14,250 - Gain: $67,500 - $14,250 = $53,250 Nick's total gain from the sale is $53,250, not $5,000. Next, we need to determine the character of the gain (capital vs. ordinary income). The partnership has "hot assets" (inventory and unrealized receivables) that can affect the character of the gain. **Hot Assets**: - Inventory Basis: $40,000 - Inventory FMV: $60,000 - Unrealized Gain in Inventory: $20,000 Nick's share of the unrealized gain in inventory (25% of $20,000) is $5,000. This portion is treated as ordinary income. **Capital Gain**: - Total Gain: $53,250 - Ordinary Income (from hot assets): $5,000 - Capital Gain: $53,250 - $5,000 = $48,250 So, Nick will recognize: - Ordinary Income: $5,000 - Capital
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