Asked by Giovanni Montano on May 01, 2024
Verified
Upon the sale of a partnership interest,a partner must recognize ordinary income if the partnership has substantially appreciated inventory or unrealized receivables.
Substantially Appreciated Inventory
Inventory items whose market value exceeds their basis significantly, affecting tax considerations during their sale or donation.
Unrealized Receivables
Amounts owed to a business for goods or services delivered but not yet paid for, which have not been recognized as income.
Ordinary Income
Income earned from normal business operations or employment, subject to regular income tax rates, excluding capital gains or dividends.
- Recognize ordinary and capital gains and losses in the context of partnerships.
Verified Answer
MC
Mahak ChhajedMay 05, 2024
Final Answer :
True
Explanation :
According to the Internal Revenue Code, when a partner sells his or her interest in a partnership, any gain from the sale is generally treated as capital gain. However, if the partnership owns substantially appreciated inventory or unrealized receivables, the partner must recognize ordinary income to the extent of the appreciation at the time of the sale. This is known as the inventory and receivables rule. Therefore, the statement is true.
Learning Objectives
- Recognize ordinary and capital gains and losses in the context of partnerships.