On December 31 of last year, Alex and Jackson become equal partners in the AJ Partnership with assets having a tax basis and FMV of $120,000. The partnership, which deals in securities, had no liabilities at the end of last year. In January of this year, Franklin contributes his investment securities with an FMV of $60,000 (purchased two years ago at a cost of $45,000)to become an equal partner in the new AJF Partnership. The securities, which are inventory to the partnership, are sold on December 15 of the current year for $90,000. What amount and character of gain from the sale of these securities should be allocated to Franklin?
A)$10,000 ordinary income
B)$15,000 capital gain and $10,000 ordinary income
C)$25,000 capital gain
D)$25,000 ordinary income

Question

Quizplus · Accepted Answer

Franklin should be allocated $25,000 of ordinary income from the sale of the securities. Since the securities are considered inventory to the partnership, the gain from their sale is treated as ordinary income. Franklin's basis in the contributed securities was $45,000, and they were sold for $90,000, resulting in a $45,000 gain. However, because Franklin became an equal partner by contributing securities valued at $60,000 when the partnership's assets were valued at $120,000, his share of the gain is one-third of $75,000 (the total gain from the sale), which equals $25,000 of ordinary income.

On December 31 of Last Year, Alex and Jackson Become