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David’s basis in the Jimsoo Partnership is $65,000. In a proportionate liquidating distribution, David receives cash of $9,400 and two capital assets: (1) Land A with a fair market value of $24,800 and a basis to Jimsoo of $19,600, and (2) Land B with a fair market value of $11,800 and a basis to Jimsoo of $19,600. Jimsoo has no liabilities.

1. c1. If the two parcels of land had been inventory to Jimsoo, what are the tax consequences to David (amount and character of gain or loss)?

2. c2. What is David's basis in distributed assets?

Basis 9,400 Cash $ Land 1 Land 2

Answer 1

Answer-c1:

David does not recognize any gain or loss on distribution.

Answer-c2:

Cash Land 1 Land 2 Basis $ 9,400 32,389 2 3,211

Explanation:

Out of $65,000 basis, David assign a basis of $9,400 to the cash, $19,600 to the first parcel of land, $19,600 to the second parcel of land. David has a remaining outside basis of $16,400 (i.e. $65,000 - 9,400 - 19,600 - 19,600) to allocate between two parcel of land. David increases the basis of the first parcel of land by $5,200 i.e. unrealized appreciation ($24,800 - 19,600). This leaves remaining $11,200 to be allocated. Hence David increases the basis of the two parcels of land in proportion to their relative fair market values calculated as below:-

Land-1: Land-2: $11,200 * (24,800/36,600) $11,200 * (11,800/36,600) $ 7,589 3,611 $ 11,200

After completing the allocation David's bases in the distributed assets are:-

$ Land-1: Land-2: (19,600 +5,200 + 7,589) (19,600 + 3,611) 32,389 23,211