The RBD Partnership balance sheet on August 31 of the current year is as follows:

On that date,Rachel sells her one-third partnership interest to Bill for $300,000,including cash and relief of Rachel's share of the nonrecourse debt.The nonrecourse debt is shared equally among the partners.Rachel's outside basis for her partnership interest is $250,000.How much capital gain and/or ordinary income will Rachel recognize on the sale?
A)$20,000 capital gain; $30,000 ordinary income.
B)$30,000 capital gain; $20,000 ordinary income.
C)$50,000 capital gain; $0 ordinary income.
D)$0 capital gain; $50,000 ordinary income.
E)None of the above.

Question

The RBD Partnership balance sheet on August 31 of the current year is as follows:

On that date,Rachel sells her one-third partnership interest to Bill for $300,000,including cash and relief of Rachel's share of the nonrecourse debt.The nonrecourse debt is shared equally among the partners.Rachel's outside basis for her partnership interest is $250,000.How much capital gain and/or ordinary income will Rachel recognize on the sale?
A)$20,000 capital gain; $30,000 ordinary income. 
B)$30,000 capital gain; $20,000 ordinary income. 
C)$50,000 capital gain; $0 ordinary income. 
D)$0 capital gain; $50,000 ordinary income. 
E)None of the above.

Quizplus · Accepted Answer

Realized gain is $50,000 ($300,000 received - $250,000 outside basis).As the receivables are a § 751 "hot asset," Rachel is treated as having sold her 1/3 share and,therefore,will recognize $30,000 ordinary income.The rest of the sale is taxed under the general rule of § 741 and generates a recognized capital gain of $20,000.

The RBD Partnership Balance Sheet on August 31 of the Current