The XYZ Partnership owns the following assets on December 31: A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating distribution of $10,000 cash. XYZ Partnership has no liabilities. His recognized gain is

Question

The XYZ Partnership owns the following assets on December 31:  A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating distribution of $10,000 cash. XYZ Partnership has no liabilities. His recognized gain is

Quizplus · Accepted Answer

The partner will recognize both ordinary income and capital gain due to the distribution being in excess of his basis. The total recognized gain is $4,000 ($10,000 - $6,000). The first $6,000 is applied to reduce basis to zero, and the remaining $4,000 is allocated as $3,000 ordinary income (to the extent of any unrealized receivables and inventory items) and $1,000 capital gain. Therefore, Option D is the correct answer.

The XYZ Partnership Owns the Following Assets on December 31