Mark receives a proportionate nonliquidating distribution. At the beginning of the partnership year, the basis of his partnership interest is $100,000. During the year, he received a cash distribution of $40,000 and a property distribution (basis of $30,000, fair market value of $25,000). In addition, Mark's share of partnership liabilities was reduced by $10,000 during the year. How much gain or loss does Mark recognize; what is his basis in the property he received; and what is his remaining basis in the partnership interest?
A)$25,000 loss; $25,000 basis in property; $0 remaining basis.
B)$30,000 loss; $30,000 basis in property; $0 remaining basis.
C)$0 gain or loss; $25,000 basis in property; $25,000 remaining basis.
D)$0 gain or loss; $30,000 basis in property; $20,000 remaining basis.
E)$0 gain or loss; $30,000 basis in property; $30,000 remaining basis.

Question

Quizplus · Accepted Answer

To calculate Mark's gain or loss, we must calculate the amount realized and compare it to the adjusted basis of his partnership interest.

Amount realized = cash received + FMV of property received - decrease in liabilities
Amount realized = $40,000 + $25,000 - $10,000
Amount realized = $55,000

Adjusted basis of partnership interest = beginning basis - cash received - decrease in liabilities
Adjusted basis of partnership interest = $100,000 - $40,000 - $10,000
Adjusted basis of partnership interest = $50,000

Since the amount realized is greater than the adjusted basis of the partnership interest, Mark recognizes a loss. The amount of the loss is:

Loss = adjusted basis of partnership interest - amount realized
Loss = $50,000 - $55,000
Loss = $5,000

Mark's basis in the property he received is equal to its fair market value at the time of distribution, which is $25,000.

Mark's remaining basis in the partnership interest is calculated by subtracting the amount of the nonliquidating distribution from the adjusted basis of the partnership interest:

Remaining basis = adjusted basis of partnership interest - amount of nonliquidating distribution
Remaining basis = $50,000 - $65,000
Remaining basis = -$15,000

This remaining basis is negative, which means that Mark has no remaining basis in the partnership interest after the distribution. However, he must still report any future distributions as gain.

Mark Receives a Proportionate Nonliquidating Distribution