The balance sheet of the ABC Partnership at December 31 of the current year is as follows:

All partners have an equal interest in the partnership. Allen sells his partnership interest to an outsider on December 31 of the current year for $40,000. Allen€™s basis in the partnership interest is $35,000 (which includes Allen€™s share of partnership liabilities).
a. What amount does Allen realize on the sale?
b. What are the amount and character of Allen€™s recognized gain or loss on the sale?

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Adjusted Basis FMV Assets: Cash Accounts receivable Inventory Land, buildings, and machinery $ 10,000 20,000 15,000 60,000 $105,000 $ 10,000 20,000 21,000 84,000* $135,000 Total Liabilities and capital: Accounts payable Notes payable Allen's capital account (%) Beth's capital account (%) Candace's capital account (%) $ 5,000 10,000 40,000 40,000 40,000 $135,000 $ 5,000 10,000 30,000 30,000 30,000 $105,000 Total