Daniela is a 25percent partner in the JRD Partnership. On January 1, JRD makes a proportionate, liquidating distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000)to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is the amount and character of Daniela's gain or loss from the distribution?
A)$0.
B)$16,000 ordinary income.
C)$16,000 capital gain.
D)$20,000 capital gain.

Question

Quizplus · Accepted Answer

Daniela does not recognize any gain or loss on a proportionate, liquidating distribution as her basis in the partnership interest ($20,000) is greater than the fair market value of the assets received ($16,000 cash + $16,000 inventory + $8,000 accounts receivable = $40,000 total, of which she receives 25%, equaling $10,000). Her basis is first allocated to the cash received, then to the inventory (with a basis adjustment to match the inside basis to the partner's outside basis), and finally to the accounts receivable, if necessary. Since her outside basis is sufficient to cover the distribution, there is no gain or loss recognized.

Daniela Is a 25percent Partner in the JRD Partnership