The XYZ Partnership owns the following assets on December 31:
$\begin{array}{|l|l|l|}
\hline& \text { Basis } & \text { FMV } \
\hline \text { Cash } & \$ 10,000 & \$ 10,000 \
\hline \text { Unrealized receivables } & 0 & 10,000 \
\hline \text { Inventory } & \$ 25,000 & 30,000\\hline
\end{array}$ A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating distribution
$10,000 cash. XYZ Partnership has no liabilities. His recognized gain is

Question

The XYZ Partnership owns the following assets on December 31:
$\begin{array}{|l|l|l|} 
\hline& \text { Basis } & \text { FMV } \
\hline \text { Cash } & \$ 10,000 & \$ 10,000 \
\hline \text { Unrealized receivables } & 0 & 10,000 \
\hline \text { Inventory } & \$ 25,000 & 30,000\\hline
\end{array}$ A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating distribution
$10,000 cash. XYZ Partnership has no liabilities. His recognized gain is

Quizplus · Accepted Answer

The partner's basis in the partnership is $6,000. The liquidating distribution is $10,000. The gain recognized is $4,000 ($10,000 - $6,000). The gain is allocated between ordinary income and capital gain based on the character of the assets distributed. The cash distribution is a return of capital and is not taxable. The unrealized receivables are ordinary income and are taxed at a rate of 20%. The inventory is a capital asset and is taxed at a rate of 15%. The partner's recognized gain is $3,000 ordinary income ($10,000 x 20%) and $1,000 capital gain ($10,000 x 15%).

The XYZ Partnership Owns the Following Assets on December 31