In a proportionate liquidating distribution in which the partnership is also liquidated, Macy received cash of $10,000 and inventory (basis of $18,000 and fair market value of $32,000). Immediately before the distribution, Macy's basis in the partnership interest was $40,000. Macy recognizes no gain or loss, and her basis in the inventory is $30,000.

Question

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Macy's basis in the inventory should be $18,000, not $30,000, because in a liquidating distribution, the basis of the distributed property is limited to the partner's basis in the partnership interest. Macy's total basis of $40,000 is reduced by the cash received ($10,000), leaving $30,000 to be allocated to the inventory, but it cannot exceed the inventory's basis of $18,000.

In a Proportionate Liquidating Distribution in Which the Partnership Is