Randolph is a 30percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, inventory with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of $5,000)to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $37,000. What is Randolph's basis in the distributed inventory and land?
A)$10,000 inventory, $10,000 land.
B)$10,000 inventory, $5,000 land.
C)$20,000 inventory, $10,000 land.
D)$10,000 inventory, $12,000 land.

Question

Quizplus · Accepted Answer

Randolph's basis in the distributed inventory and land is determined by first allocating his basis in the partnership interest ($37,000) to the cash received ($15,000), reducing his remaining basis to $22,000. This remaining basis is then allocated to the inventory and land based on their inside basis, not their fair market value. The inside basis of the inventory is $10,000 and the land is $5,000, totaling $15,000. Since the total inside basis of the distributed assets is less than Randolph's remaining basis in the partnership interest, the excess basis of $7,000 ($22,000 - $15,000) is allocated proportionally to the inventory and land based on their inside basis. Therefore, the basis in the inventory is $10,000 and the basis in the land is increased by the entire excess of $7,000, resulting in a basis of $12,000 for the land.

Randolph Is a 30percent Partner in the RD Partnership