Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000. His basis in his partnership interest was $15,000 immediately before the distribution. Carlos assigns a basis of $7,000 to the inventory and recognizes no gain or loss.

Question

Quizplus · Accepted Answer

In a liquidating distribution, Carlos must first allocate his basis in the partnership ($15,000) to the cash received ($8,000), reducing his remaining basis to $7,000, which then gets allocated to the inventory. However, the basis assigned to the inventory should be based on his remaining basis in the partnership interest, not the fair market value of the inventory. Therefore, the correct basis for the inventory would be $7,000 (his remaining basis after receiving cash), not assigning a new basis. Carlos recognizes no gain or loss because the total distribution ($14,000 in value) does not exceed his basis in the partnership interest ($15,000).

Carlos Receives a Proportionate Liquidating Distribution Consisting of $8,000 Cash