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SEE 2005 part 2 question 70

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"Linda sold her partnership interest for $25000. Her adjusted basis at the time of the sale is $22500, which includes her $12500 share of the partnership liabilities. When she initially invested in the partnership, she contributed $10000 worth of equipment. There was no profit or loss at the partnership level at the time she sold her interest. What is the amount and nature of her gain or loss from the sale of her partnership interest?

A. $7500 ordinary loss
B. $10000 capital gain
C. $12500 ordinary gain
D. $15000 capital gain"

The sale of partnership interest is usually a capital transaction unless there's unrealized receivables which are attributable to the basis, in which case the gain or loss is part capital and part ordinary.

The wording "which includes" would lead me to believe that her$22500 basis is the total basis among which the $12500 share of liabilities is part - therefore meaning her total basis is in fact $22500. As it turns out this is wrong, and the $12500 liability is added to the $25000 cash received to determine the amount realized ($37500). Then you subtract the $22500 basis to find the answer of $15000 capital gain.

This pisses me off. In consulting the answer to this in my books, it appears this phrasing has been used several times throughout the years, and I can't think of any other type of question asked in the exam where they state that someone's basis of $X includes a share of $Y where $Y is separate from $X. Couldn't they have said "Her adjusted basis is $22500, and Linda also has a $12500 share of partnership liabilities"? Would that be so fucking hard?

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  1. Josh's Avatar
    ITB: Boo Hoo Brigade.
  2. Dunlap's Avatar
    I... I don't know?

    But yes, fuck their wording.


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