Problem 3

SEJ is an equal three-person partnership in which S, E, and J each have an outside basis of $300. The partnership uses the accrual method of accounting. On January 1 of the current year, J sold her interest to X for $750. The partnership has the following assets and no liabilities.

The machinery was purchased for $150; therefore, the entire $75 gain would be depreciation recapture under section 1245. The building was purchased several years ago for $600 therefore $300 of the $450 gain would be section 1250 capital gain. The stock was purchased by the partnership 10 months ago.

a. Calculate Js overall gain on the sale of her partnership interest.

b. Identify the Partnerships section 751 assets.

c. Calculate the gain that would be allocated to J in a hypothetical sale of its 751 assets.

d. Calculate Js gain broken down between ordinary income and capital gain.