Question

Required information The following information applies to the questions displayed below.] Megan and Matthew are equal partners in the J &J Partnership (calendar year-end entity). On January 1 of the current year, they decide to liquidate the partnership. Megan's basis in her partnership interest is $116,000 and Matthew's is $41,400. The two partners receive identical distributions, with each receiving the following assets Tax Basis FMV Cash Inventory Land Totals $34,000 $34,000 7,400 8,560 1,480 900 $42,300 $44,040 (Leave no answer blank. Enter zero if applicable.) a. What is the amount and character of Megan's recognized gain or loss? Neither gain nor loss recognized $72,200 ordinary loss $2,080 ordinary income $72,200 capital loss $2,080 capital gairn b. What is Megan's basis in the distributed assets? Basis Cash Inventory Land c1. What is the amount and character of Melissa's recognized gain or loss if her outside basis is $11,810 rather than $26,755? c2. What is Melissa's basis in the distributed assets if her basis in Opto Partnership is $11,810 rather than $26,755? Complete this question by entering your answers in the tabs below. Req C1 Req C2 What is the amount and character of Melissa's recognized gain or loss if her outside basis is $11,810 rather than $26,755? Neither gain nor loss recognized 55,177 ordinary income $18,977 ordinary income $5,177 capital gain $18,977 capital gain Req C1 Req C2 What is Melissa's basis in the distributed assets if her basis in Opto Partnership is $11,810 rather than $26,755? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) Basis Cash Accounts receivable Stock investment Land

Answer 1

a. The correct answer is "Neither gain nor loss recognized".

Megan does not recognizes any gain or loss on the distribution although she realizes a loss on the distribution.

b. Megan uses a three step process to determine her basis in the distributed property.

1. Megan assigns a carryover basis of $34,000 to the cash, $7,460 to the inventory, and $900 to the land. The sum ($42,300) of the basis is less than her basis in J & J so she will need to allocate the excess basis to the basis in the distributed assets other than property (i.e the land). Megan has a remaining basis of $73,700 ($116,000-42,300) among the cold assets.

2. Megan allocates the required increase to the cold assets with unrealized appreciation to the extent of the appreciation. Therefore, Megan increases the basis of land by $900 to $1,480. This leaves $ 73,120 remaining to be allocated.

3. Since Megan only receives one cold asset in the distribution, all of the required increase must increase the basis of the land. Megan increases the basis of the land by the remaining $ 73,120 required increase.

After completing the allocation, Megan's bases in the distribution assets are -

Cash $34,000

Inventory 7,400

Land 74,600

   $116,000

The application of these rules demonstrates the sometimes strange results from the allocation process. In the case Megan now has a parcel of land with a basis of $74,600 even though its fair market value is only $1,480. When she sells the land, she will recognize a capital loss equal to the difference between the sale price and her extremely large basis.