Scott owns a 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate nonliquidating distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognizes no gain or loss and his basis in the land is $10,000.

Question

Quizplus · Accepted Answer

Since Scott's basis in the partnership interest is $40,000 and he owns a 30% interest, his share of the partnership's basis in its assets is $12,000. Therefore, his basis in the land received is $12,000 (his share of the partnership's basis in the land) minus the cash received of $30,000, for a resulting basis of negative $18,000. However, the basis in the land cannot be negative, so Scott's basis is adjusted to zero and any remaining amount is applied to reduce his share of the partnership's basis in its other assets, resulting in a basis in the land of $10,000. Since Scott recognized no gain or loss, his adjusted basis in the partnership interest after the distribution remains $40,000.

Scott Owns a 30% Interest in the Capital and Profits