TO: File
FROM: Uduak Ekwere
RE: Wolford General Partnership (Tax Year 2015)

Facts
Wolford General Partnership also known as WGP, is an accrual method calendar year taxpayer, known for its reputation and reliability of service. It is an extremely profitable plumbing supply business with exclusive supplying for a wide range of successful construction firms.
WGP Is looking to make a change in their partners, selling Eli Wolfords partnership interest to Kevin Dole. Dole has offered total consideration of $550,000 bearing a 3.5% market rate of interest payable due January 1, 2016 of 10 equal annual principal payments of $50,000. At the date of sale Dole will also assume the liabilities outstanding of Eli’s share.
The allocation of profit ad losses …show more content…
Eli’s taxable gain from the sale is $190,000, Eli recognizes $67,800 of ordinary income and $122,200 of capital gain from the sale of his interest in WGP.
Analysis 1
To determine if the sale of his partnership interest is a gain, we must use the difference between the amount realized and the outside basis in the partnership. Eli’s amount realized was $580,000 from the payment received from Kevin of $550,000 plus Eli’s $30,000 share of partnership liabilities. Then subtracting Elis’s $390,000 basis in partnership interest recognizing a gain on sale of $190,000. However a portion of the gain is ordinary income attributable to unrealized receivables or inventory items, known as hot assets.
Since WGP is an accrual method taxpayer they do not consider accounts receivable as unrealized receivables since it has already been realized and recognized as ordinary income. The inventory defined as property held for sale to customers in the ordinary course of business
The hot assets are the inventory with a fair market value of $575,000 with an ordinary income of $67,800. With the $190,000 gain on sale minus the ordinary income $67,800 leading to a capital gain of