In a proportionate liquidating distribution, Sam receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $50,000), and land (basis of $20,000, fair market value of $50,000). In addition, the partnership repays all liabilities of which Sam's share was $40,000. Sam's basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sam's basis in the accounts receivable and land, and how much gain or loss does he recognize?
A) $0 basis in accounts receivable; $50,000 basis in land; $0 gain or loss.
B) $0 basis in accounts receivable; $90,000 basis in land; $0 gain or loss.
C) $50,000 basis in accounts receivable; $40,000 basis in land; $0 gain or loss.
D) $50,000 basis in accounts receivable; $50,000 basis in land; $50,000 gain.
E) $0 basis in accounts receivable; $70,000 basis in land; $30,000 loss.

Question

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In a proportionate liquidating distribution, the partner's basis in the distributed property is determined after considering any cash received and any relief from liabilities. Sam's initial basis in the partnership is $120,000. After receiving $30,000 in cash and being relieved of $40,000 in liabilities, Sam's basis is reduced by $70,000 ($30,000 + $40,000), leaving a basis of $50,000 to allocate to the distributed properties. The accounts receivable with a basis of $0 and fair market value of $50,000 cannot increase Sam's basis in the partnership (as it's a hot asset), so the entire remaining basis of $50,000 is allocated to the land. There is no gain or loss recognized on the distribution itself, as the basis adjustments account for the changes in value.

In a Proportionate Liquidating Distribution, Sam Receives a Distribution of $30,000