Which of the following statements regarding the sale of a partnership interest is FALSE?

• A. The new partner who acquires the interest assumes the rights and obligations of the selling partner.
• B. The sale of a partnership interest always results in the automatic dissolution of the partnership.
• C. The selling partner must allocate their share of partnership income or loss up to the date of sale.
• D. The sale of a partnership interest may result in the recognition of a gain or loss by the selling partner.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of partnership interest. A partnership interest represents a partner's ownership stake in a partnership, including their share of profits, losses, and obligations.
2. Step 2: Review the implications of selling a partnership interest. When a partner sells their interest, the buyer typically assumes the rights and obligations of the selling partner, including their share of profits and losses.
3. Step 3: Analyze the statement about automatic dissolution. The sale of a partnership interest does not always result in the automatic dissolution of the partnership. Dissolution typically occurs only under specific circumstances, such as when the partnership agreement specifies it or when all partners agree to dissolve.
4. Step 4: Consider the allocation of income or loss. The selling partner must allocate their share of partnership income or loss up to the date of sale, as this reflects their financial activity within the partnership during their ownership period.
5. Step 5: Evaluate the recognition of gain or loss. The sale of a partnership interest may result in the recognition of a gain or loss by the selling partner, depending on the difference between the sale price and the partner's basis in the partnership interest.