Reference no: EM131571259

Problem - A subsidiary of Corporation A, an electrical utility located in Springfield, and a subsidiary of Corporation B, a diversified manufacturer also located in Springfield, formed a joint venture under the general partnership laws of their state. The partnership was formed to construct and ultimately operate another electrical generating plant. Sufficient excess space was provided at the plant site to accommodate substantial future additions to the initial generating equipment. Three years after construction of the generating equipment had been started and was 50 percent complete, the partnership on the advice of its financial counselors, began negotiations with a consortium of businessmen for the possible sale and leaseback of the generating equipment. Thirteen months later, when the plant was complete, the deal was finalized with the consortium for the sale and leaseback of the generating equipment. The sale resulted in a gain of $500,000 that the partnership treated as $250,000 of Section 1231 gain and $250,000 as ordinary income. Was the partnership correct in its determination of the type of gain recognized?