Martin has a basis in a partnership interest of $100,000. At the end of the current year, the partnership distributed to Martin, in a proportionate nonliquidating distribution, cash of $10,000, inventory (basis to the partnership of $6,000 and fair market value of $12,000), and land (basis to the partnership of $20,000 and fair market value of $15,000). In addition, Martin's share of partnership debt decreased by $10,000 during the year. What basis does Martin take in the inventory and land and in the partnership interest following the distribution?
A) $6,000 basis in inventory; $15,000 basis in land, $59,000 basis in partnership.
B) $6,000 basis in inventory; $20,000 basis in land, $54,000 basis in partnership.
C) $12,000 basis in inventory; $15,000 basis in land, $53,000 basis in partnership.
D) $12,000 basis in inventory; $20,000 basis in land, $53,000 basis in partnership.
E) $12,000 basis in inventory; $20,000 basis in land, $48,000 basis in partnership.

Question

Quizplus · Accepted Answer

First, we need to calculate Martin's adjusted basis in the partnership after the distribution:

Beginning basis: $100,000 
Plus share of partnership income: N/A 
Plus share of partnership debt decrease: $10,000 
Minus proportionate nonliquidating distribution (cash): $10,000 
Adjusted basis: $100,000 + $10,000 - $10,000 = $100,000

Next, we need to allocate the remaining $2,000 of the distribution (inventory and land) between the two assets based on their fair market values:

Total fair market value of assets received: $12,000 + $15,000 = $27,000 
Inventory as a percentage of total: $12,000 ÷ $27,000 = 44.4% 
Land as a percentage of total: $15,000 ÷ $27,000 = 55.6%

Using these percentages, we can allocate the remaining $2,000 of the distribution:

Inventory basis: $6,000 × 44.4% = $2,664 
Land basis: $20,000 × 55.6% = $11,120

So Martin's new basis in the partnership interest is $54,000 ($100,000 adjusted basis - $10,000 cash distribution + $10,000 share of debt decrease - $26,000 allocation of inventory and land).

Martin Has a Basis in a Partnership Interest of $100,000