Advanced Analysls of Partnershlp Taxatlon Exam Question 26 of 35 Select the best

Question

Advanced Analysls of Partnershlp Taxatlon Exam Question 26 of 35 Select the best answer. A is a retired partner of ABC, a personal service partnership. A has notrendered services to ABC since her retirement. Under the provisions of A's retirement agreement, ABC is obligated to pay A 10% of the partnership's net income each year. In compliance with this agreement, ABC paid A $25,000 during the current year. The partnership earned ordinary income of $200,000 and capital gains of $50,000 during the current year. How should A treat this $25,000? O A. As $20,000 ordinary income and $5,000 capital gain O B. As capital gain O C. As not taxable O D. As ordinary income am, Question Q 26 00% Complete Exit & Resume Later

Explanation / Answer

Answer : (A) As $ 20,000 ordinary income and $ 5,000 capital gain.

Explaination : As per the provisions of A's retirement agreement, ABC (a personal service partnership) is obligated to pay a 10 % of the partnership's net income each year. ABC paid A $25,000 during the current year. In the current year the Partnership earned ordinary income of $ 200,000 and capital gain of $50,000 during the current year.

So out of $25,000 received by A from Partnership. $20,000 will be treated as an ordinary income because according to agreement he was entitled to received 10% of ordinary income of the partnership that is( $200,000 x 10/100 ) = $20,000. And amount received above this amount will be treated as capital gain for A. So capital gain will be for A $ 5,000.

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