Tax Consequences for Karla: 1. Capital Gain or Loss: Karla's sale will generally be treated as a capital gain or loss, depending on the difference between the sale price and her outside tax basis: Sale Price: $1,500,000 Outside Tax Basis: $1,000,000 Capital Gain: $500,000 ($1,500,000 - $1,000,000) 2. Ordinary Income from Section 751: Since JKL holds substantially appreciated inventory (FMV > Tax Basis), Section 751 comes into play. This section requires a portion of the sale proceeds to be treated as ordinary income, not capital gain. Unrealized Appreciation (Inventory): $600,000 ($1,500,000 FMV - $900,000 Tax Basis) Karla's Share (1/3 of Partnership): $200,000 ($600,000 / 3) Under Section 751, Karla will recognize $200,000 as ordinary income, not capital gain. 3. Adjusted Capital Gain: To determine Karla's final capital gain, we subtract the ordinary income portion: Adjusted Capital Gain: $300,000 ($500,000 Total Gain - $200,000 Ordinary Income) 4. Reporting Requirements for Karla: Karla needs to file the following tax forms: Form 8949: Report the sale and calculate the capital gain of $300,000. Schedule D: Report the capital gain from Form 8949. Tax Return: Report the ordinary income of $200,000 from Section 751. Impact of Section 754 Election: Mechanics: The Section 754 election