On July 1, Joseph, a 10% Owner, Sells His Interest

question 501

Multiple Choice

On July 1, Joseph, a 10% owner, sells his interest in ABC Partnership to Andy, an outsider, for $165,000 cash and the release from $20,000 of partnership liabilities. Joseph's partnership interest at the beginning of the year was $120,000. The partnership earned income through June 30 of $100,000. Joseph's share of partnership liabilities increased by $5,000 from January 1 to June 30. What are the tax consequences to Joseph on the sale of his partnership interest (assume the partnership does not hold any inventory or unrealized receivables) ?

• A) $55,000 capital gain
• B) $65,000 capital gain
• C) $50,000 capital gain
• D) $45,000 capital gain

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Definitions:

Dissociate

In a legal or business context, to terminate one's association or involvement with a business entity or partnership.

Lease Agreement

A contractual arrangement where one party (lessor) grants another party (lessee) the right to use a property for a specified period in exchange for payment.

Voluntarily

Done, given, or acting of one's own free will without coercion or expectation of reward.

Nonwrongful Dissociation

Occurs when a member exits a partnership or limited liability company without violating the agreement terms or causing harm.