Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?
A) $0 gain or loss? $0 basis in property.
B) $0 gain or loss? $50,000 basis in property.
C) $8,000 ordinary income? $0 basis in property.
D) $8,000 capital gain? $10,000 basis in property.
E) $8,000 capital gain? $0 basis in property.

Question

Quizplus · Accepted Answer

Michelle recognizes an $8,000 capital gain because the cash received ($58,000) exceeds her basis in the partnership ($50,000) by $8,000. Since the cash distribution exceeds her basis, she has no remaining basis to allocate to the noninventory property, resulting in a $0 basis in the property.

Michelle Receives a Proportionate Liquidating Distribution When the Basis of Her