Daniela is a 25percent partner in the JRD Partnership. On January 1, JRD makes a proportionate liquidating distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000)to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is the amount and character of Daniela's gain or loss from the distribution?
A)$0.
B)$14,000 ordinary income.
C)$4,000 capital loss.
D)$4,000 capital gain.

Question

Quizplus · Accepted Answer

Daniela's basis in her partnership interest is $21,000. The total distribution she receives is $35,000 ($20,000 cash + $15,000 inventory fair value). However, for tax purposes, the basis of the property received (inventory) is its inside basis in the hands of the partnership prior to distribution, which is $5,000, not its fair market value. Thus, the total basis to be considered for the distribution is $25,000 ($20,000 cash + $5,000 inventory basis). Since Daniela's basis in her partnership interest ($21,000) is less than the basis of the distributed assets ($25,000), she recognizes no gain or loss on the distribution. The excess basis of the distributed assets over her partnership interest basis is disregarded in a liquidating distribution.

Daniela Is a 25percent Partner in the JRD Partnership