The RST Partnership makes a proportionate distribution of its assets to Ryan in complete liquidation of his partnership interest. The distribution consists of $40,000 in cash and capital assets with a basis to the partnership of $30,000 and a fair market value of $48,000. None of the payment is for partnership goodwill. At the time of the distribution, Ryan's partnership basis is $45,000 and the partnership has no liabilities and no hot assets. If the partnership makes an optional basis adjustment election on a timely filed return, the partnership recognizes:
A) Capital gain of $25,000 and increases the basis of its remaining assets by $12,500.
B) Capital loss of $5,000 and decreases the basis of its remaining assets by $5,000.
C) No gain or loss and increases the basis of its remaining assets by $12,500.
D) No gain or loss and increases the basis of its remaining assets by $25,000.
E) No gain or loss and decreases the basis of its remaining assets by $58,000.

Question

Quizplus · Accepted Answer

In a proportionate distribution to a partner in complete liquidation of their partnership interest, the partnership generally does not recognize gain or loss. The optional basis adjustment allows the partnership to adjust the basis of its remaining assets. The adjustment is equal to the difference between the partner's outside basis in the partnership ($45,000) and the partnership's basis in the distributed assets ($30,000) plus cash ($40,000), which totals $70,000. The difference is $25,000 ($45,000 - $70,000), which is the amount by which the partnership can increase the basis of its remaining assets.

The RST Partnership Makes a Proportionate Distribution of Its Assets