John has a basis in his partnership interest of $30,000. He receives a current distribution of $6,000 cash, unrealized receivables (FMV $11,000, basis $10,000), inventory (FMV $8,000, basis $4,000), and investment land (FMV $7,000, basis $6,000). The partners' relative interest in the Sec. 751 assets do not change as a result of the current distribution. His basis in the land is
A)$5,000.
B)$6,000.
C)$7,000.
D)$10,000.

Question

Quizplus · Accepted Answer

When a partner receives a current distribution of Sec. 751 assets (such as unrealized receivables, inventory, and investment land), the basis in the distributed assets is reduced by any built-in loss that existed in the hands of the partnership.

In this case, the unrealized receivables have a built-in loss of $1,000 ($11,000 FMV - $10,000 basis), which reduces John's basis in these assets to $9,000. The inventory has a built-in gain of $4,000 ($8,000 FMV - $4,000 basis), but since John's basis in the partnership interest (before the distribution) was only $30,000, he can only take a basis of $4,000 in the distributed inventory. The investment land has no built-in gain or loss and therefore maintains its basis of $6,000 in John's hands.

Taking into account the reduction in basis for the unrealized receivables and the limited basis available for the inventory, John's total basis in the distributed assets is $9,000 + $4,000 + $6,000 = $19,000. Since John's partnership interest (before the distribution) had a basis of $30,000, his remaining basis in the partnership interest after the distribution is $30,000 - $19,000 = $11,000. Therefore, the answer is B) $6,000, which is the unchanged basis in the investment land.

John Has a Basis in His Partnership Interest of $30,000