Choice "b" is correct. A partner who sells his interest in a partnership has a recognized gain or loss that is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. If there are any partnership liabilities allocated to the interest and transferred to the buyer, they are considered part of the amount realized. Any gain that represents a partner's share of "hot assets" (unrealized receivables of appreciated inventory) is treated as ordinary income if cash is taken. Clark's capital gain on the sale is calculated as follows:

* Note: The facts tell us that the partnership had no unrealized receivables or substantially appreciated inventory; therefore, there are no "hot assets" to cause Clark to categorize any of the gain as ordinary income. The entire gain is capital gain.

Choice "d" is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. Further, as the partnership has no unrealized receivables or appreciated inventory, ordinary income recognition is not applicable.

Choice "a" is incorrect. This answer option correctly calculates the gain on the sale as $15,000, but it incorrectly categorizes the gain as ordinary, when there are no unrealized receivables or appreciated inventory items that would cause ordinary income recognition to be applicable.

Choice "c" is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. However, the classification of the gain as capital is correct because the partnership has no unrealized receivables or appreciated inventory that would cause ordinary income recognition to be applicable.