Howard is a partner in the Smithton Partnership with a basis of $20,000. During the current year, the partnership is liquidated and the partnership distributes cash of $22,000 and property with a basis of $8,000 and a fair market value of $15,000 to each partner. What amount must Howard report as a gain from the liquidation?
A)$- 0 -
B)$2,000
C)$10,000
D)$15,000
E)$17,000

Question

Quizplus · Accepted Answer

In a partnership liquidation, partners are generally taxed on the difference between the cash and property received and their basis in the partnership. Howard received cash of $22,000 and property with a fair market value of $15,000, for a total of $37,000. His basis in the partnership was $20,000.

Therefore, his gain is ($37,000 - $20,000) = $17,000. However, $15,000 of this gain is due to the increase in value of the property received, which is unrealized gain that was not subject to tax until the property was sold. The realized gain from the liquidation is therefore only ($17,000 - $15,000) = $2,000, which Howard must report as a gain on his tax return.

Howard Is a Partner in the Smithton Partnership with a Basis