Last year, Jose contributed nondepreciable property with a basis of $35,000 and a fair market value of $45,000 to the Starling Partnership in exchange for a 25% interest in the partnership. In the current year, he receives a nonliquidating distribution from the partnership of other property with a basis to the partnership of $28,000 and a fair market value of $36,000. The basis in his partnership interest at the time of the distribution was $30,000. How much gain or loss does Jose recognize on the distribution? (Assume no other distributions have been made to Jose, the property he originally contributed is still owned by the partnership, and this is not a disguised sale transaction.)
A) $0 gain or loss.
B) $2,000 loss.
C) $6,000 gain.
D) $8,000 gain.
E) $10,000 gain.

Question

Quizplus · Accepted Answer

To calculate the gain or loss on the distribution, we need to compare the basis in the partnership interest before the distribution ($30,000) to the portion of the basis in the distributed property attributed to Jose ($28,000 x 25% = $7,000).

Since the portion of the basis in the distributed property attributed to Jose is less than his basis in the partnership interest, he will recognize gain equal to the difference between the two ($30,000 - $7,000 = $23,000).

However, we also need to take into account the fair market value of the distributed property, which is $36,000. Since the fair market value is greater than the adjusted basis in the property ($28,000), the Starling Partnership will have a built-in gain of $8,000 ($36,000 - $28,000).

The gain recognized by Jose is therefore reduced by his share of the built-in gain in the distributed property, which is 25% of $8,000, or $2,000.

Therefore, Jose will recognize a gain of $23,000 - $2,000 = $21,000 on the distribution, which is answer choice C.

Last Year, Jose Contributed Nondepreciable Property with a Basis of $35,000