Kathy Is a 25% Partner in the KDP Partnership and Receives

Kathy is a 25% partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. Which of the following statements is true?

A) KDP will step up the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.
B) KDP will step down the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.
C) KDP will step up the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.
D) KDP will step down the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.