In a proportionate liquidating distribution, Lina receives a distribution of $10,000 cash, accounts receivable (basis of $0 and fair market value of $12,000), and inventory (basis of $30,000 and fair market value of $40,000). Lina's basis in the entity immediately before the distribution was $80,000. As a result of the distribution, what is Lina's basis in the accounts receivable and inventory, and how much gain or loss does she recognize?
A) $0 basis in accounts receivable; $30,000 basis in inventory; $40,000 loss.
B) $0 basis in accounts receivable; $70,000 basis in inventory; $0 gain or loss.
C) $0 basis in accounts receivable; $40,000 basis in inventory; $50,000 loss.
D) $12,000 basis in accounts receivable; $30,000 basis in inventory; $28,000 gain.
E) $12,000 basis in accounts receivable; $40,000 basis in inventory; $18,000 gain.

Question

Quizplus · Accepted Answer

In a proportionate liquidating distribution, the fair market value of the distributed assets is taken into account for determining the amount of gain or loss recognized by the partner. As Lina's basis in the entity immediately before the distribution was $80,000 and the total fair market value of the distributed assets is $62,000 ($10,000 cash + $12,000 accounts receivable + $40,000 inventory), she must recognize a loss of $18,000 ($80,000 - $62,000). Her basis in the accounts receivable and inventory is equal to their fair market value at the time of the distribution, which are $12,000 and $40,000, respectively. Since Lina's basis in the inventory was higher than its fair market value, she must reduce her basis to the fair market value and recognize a loss of $10,000 ($30,000 - $40,000). Therefore, the correct answer is (A).

In a Proportionate Liquidating Distribution, Lina Receives a Distribution of $10,000