Jack has a basis in a partnership interest of $300,000, including his $80,000 share of partnership debt. At the end of the current year, the partnership pays off its liabilities and makes a proportionate current (nonliquidating) distribution to its partners. Jack receives a parcel of land (partnership basis = $120,000, value = $135,000) and inventory (partnership basis = $160,000, value = $180,000). Following the distribution, what is Jack's basis in the land, inventory, and the partnership interest?
A) $120,000 basis in land, $160,000 basis in inventory, $20,000 basis in partnership interest.
B) $40,000 basis in land, $180,000 basis in inventory, $0 basis in partnership interest.
C) $60,000 basis in land, $160,000 basis in inventory, $0 basis in partnership interest.
D) $135,000 basis in land, $165,000 basis in inventory; $0 basis in partnership interest.
E) $60,000 basis in land, $160,000 basis in inventory; $80,000 basis in partnership interest.

Question

Quizplus · Accepted Answer

Jack's basis in the partnership interest is reduced by the basis of the distributed property. His initial basis is $300,000. The land has a basis of $120,000, and the inventory has a basis of $160,000. Jack's basis in the land is limited to the remaining basis after accounting for the inventory, which is $300,000 - $160,000 = $140,000. Since the land's basis is $120,000, Jack's basis in the land is $60,000, and his basis in the inventory is $160,000, leaving him with a $0 basis in the partnership interest.

Jack Has a Basis in a Partnership Interest of $300,000