Mega Partnership distributed inventory (FMV $50,000 and basis $19,000) to partner Q in complete liquidation of her interest in Mega.Immediately prior to the distribution, Q's outside basis in her interest was $27,500.If Mega has a § 754 election in effect, which of the following statements is accurate?

Question

Quizplus · Accepted Answer

Since Q's outside basis of her interest is greater than her share of the partnership's basis in the inventory, the basis in the distributed inventory will "leapfrog" to Mega under section 732(d). Mega's basis in the inventory becomes $27,500, which is the basis that Q had in her partnership interest. Thus, Mega has a built-in gain of $31,000 ($50,000 - $19,000 - $27,500). Because Mega has a § 754 election in effect, Mega must adjust the basis of its other assets to reflect this gain. Specifically, Mega's basis in its capital and § 1231 assets must be decreased by the excess of the gain over the adjustment to the inventory's basis, or $8,500 ($31,000 - $22,500). Therefore, choice C is the correct answer.

Mega Partnership Distributed Inventory (FMV $50,000 and Basis $19,000) to Partner