Catherine's basis was $50,000 in the CAR Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $40,000,fair market value of $60,000)and inventory (basis of $40,000,fair market value of $40,000).After the distribution,Catherine's bases in the land and inventory are,respectively:
A)$40,000 and $40,000.
B)$40,000 and $10,000.
C)$10,000 and $40,000.
D)$25,000 and $25,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Since the distribution is proportionate, we need to allocate the basis of the partnership interest between the land and the inventory based on their fair market values.

The total fair market value of the distribution is $60,000 + $40,000 = $100,000

The percentage of the fair market value represented by the land is 60% ($60,000/$100,000) and the percentage represented by the inventory is 40% ($40,000/$100,000).

To allocate Catherine's basis between the land and the inventory, we multiply each percentage by her original basis of $50,000:

Land basis = $50,000 x 60% = $30,000 
Inventory basis = $50,000 x 40% = $20,000

However, the basis of the land cannot exceed its fair market value, so Catherine's basis in the land is limited to $40,000 (its fair market value). Therefore, her bases in the land and inventory are $40,000 and $10,000, respectively.

Therefore, the correct answer is C, $10,000 and $40,000.

Catherine's Basis Was $50,000 in the CAR Partnership Interest Just