Before receiving a liquidating distribution, Kathy's basis in her interest in the KLM Partnership is $30,000. The distribution consists of $5,000 in money, inventory having a $1,000 basis to the partnership and a $2,000 FMV, and two parcels of undeveloped land (not held as inventory) having basis of $3,000 and $9,000 to the partnership with FMVs of $5,000 and $12,000, respectively. What is Kathy's basis in each parcel of land?

Question

Quizplus · Accepted Answer

The total FMV of the two parcels of land is $17,000 ($5,000 + $12,000). The total basis of the two parcels of land is $12,000 ($3,000 + $9,000). Therefore, the gain on the two parcels of land is $5,000 ($17,000 - $12,000).

The $5,000 cash distribution reduces Kathy's basis to $25,000 ($30,000 - $5,000). The $1,000 inventory distribution reduces Kathy's basis to $24,000 ($25,000 - $1,000).

To figure out the basis in each parcel of land, we need to allocate the remaining basis of $24,000 between the two parcels based on their relative FMVs. The total FMV of the two parcels is $17,000, so the first parcel represents 5/17 of the total FMV and the second parcel represents 12/17 of the total FMV.

To allocate the remaining basis, we multiply $24,000 by the percentage of the total FMV represented by each parcel:
- Basis in first parcel: $24,000 x 5/17 = $7,059
- Basis in second parcel: $24,000 x 12/17 = $16,941

Therefore, Kathy's basis in the first parcel is $7,059 and her basis in the second parcel is $16,941. The correct answer is C.

Before Receiving a Liquidating Distribution, Kathy's Basis in Her Interest