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Partnership ABCD is an equal partnership between partners A, B, C, and D. It has the...

Partnership ABCD is an equal partnership between partners A, B, C, and D. It has the following assets: $30,000 in cash, inventory worth $40,000 in which the partnership has a basis of $20,000, and a capital asset worth $20,000 in which the partnership has a basis of $12,000. The partnership distributes $22,500 in cash to partner A in liquidation of A’s interest in the partnership when A has a basis of $15,500. What are the tax consequences?

A.

Partner A recognizes a capital gain of $7,000. The partnership does not adjust the basis of any of its assets.
B.

Partner A recognizes an ordinary gain of $5,000 and a capital gain of $2,000. The partnership does not adjust the basis of any of its assets unless an election under Section 754 is in effect.
C.

Partner A recognizes an ordinary gain of $5,000 and a capital gain of $2,000. The partnership’s overall basis in inventory is increased by $5,000.
D.

Partner A recognizes a capital gain of $7,000. The partnership increases its basis in property by $7,000 due A’s recognition of gain.
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Answer #1

Basis in partnership is only $15,500. Cash received is $22,500. Gain on distribution = $22,500 - $15,500 = $7,000

Correct option is A.

Partner A recognizes a capital gain of $7,000. The partnership does not adjust the basis of any of its assets.

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