Archie sells his 50% interest in XYZ Partnership to Hal for $5,000 cash. His outside basis in the partnership is $3,500. The partnership has inventory and a capital asset with respect to basis of $6,000 and $2,000, respectively. The respective fair market values of the inventory and capital asset are $8,000 and $1,000. Archie should properly recognize

1. Ordinary income of $2,000 and a capital loss of$500.
2. None of the answers are correct.
3. Capital gain of $1,500 on the sale of his partnership interest.
4. Ordinary income of $1,500, the amount of cash he received.

Answer A is incorrect!