Question

7. A, B, and C form an equal partnership. A contributes land worth S30,000 with an adjusted basis of $10,000, B contributes artwork with a value and basis of $30,000, and C contributes $30,000 cash. Three years later, the land is worth $210,000 and the artwork is worth $20,000. The partnership makes a current distribution to A of the artwork at a time when his basis for his partnership interest is $15,000. At that time, the land was still held by the partnership. What result if the artwork had been worth $45,000?

Answer 1

The value of the artwork is $20,000 & A's basis for partnership interest is $15,000. However adjusted basis of Artwork is $10,000.

Hence when A takes over Artwork as a distribution, his basis for partnership is reduced by $10,000. Hence his revised basis for partnership interest would be $5,000 ($15,000 - $10,000).

If the artwork had been worth $45,000, still revised basis for partnership interest would be $5,000 ($15,000 - $10,000), because the gain on current distribution is calculated basis the adjusted basis of the asset & not the Fair market Value.

However, the capital account of A would be reduced by $20,000 & $45,000 each in respective above cases.