I:17-52 Sale of a Partnership Interest. The balance sheet of the ABC Partnership at December 31 of the current year is as follows:

Adjusted Basis FMV Assets:

Cash $ 10,000 $ 10,000 Accounts receivable 20,000 20,000 Inventory 15,000 21,000 Land, buildings, and machinery 60,000 84,000a Total $105,000 $135,000 Liabilities and capital:

Accounts payable $ 5,000 $ 5,000 Notes payable 10,000 10,000 Allen’s capital account (1⁄3) 30,000 40,000 Beth’s capital account (1⁄3) 30,000 40,000 Candace’s capital account (1⁄3) 30,000 40,000 Total $105,000 $135,000 aAssume that $3,000 would be ordinary income under the depreciation recapture rules and $5,400 would be unrecaptured Sec. 1250 gain if the partnership sold the assets.

All partners have an equal interest in the partnership. Allen sells his partnership interest to an outsider on December 31 of the current year for $40,000. Allen’s basis in the partnership interest is $35,000 (which includes Allen’s share of partnership liabilities).

a. What amount does Allen realize on the sale?

b. What are the amount and character of Allen’s recognized gain or loss on the sale?