Question

1. In a proportionate liquidating distribution in which the partnership is liquidated, Bill received cash of $120,000, inventory (basis of $6,000, fair market value of $8,000), and a capital asset (basis and fair market value of $16,000). Immediately before the distribution, Bill’s basis in the partnership interest was $90,000.

a. How much gain or loss will Bill recognize on the distribution?

b. What is Bill’s basis in the inventory and the capital asset?

CLUES:

a. Bill will recognize a gain to the extent cash distribution exceeds basis.

b. Cash distribution is greater than his basis so nothing left to allocate to other assets.

Answer 1

ANSWER:

a).Bill recognizes a capital gain of $30,000 on the liquidation of his partnership interest  This equals the excess of the cash distribution over Bill’s basis in his partnership interest before the distribution ($120,000 cash – $90,000 basis)

.b.Bill’s bases in the inventory and capital asset are both $0. His basis is reduced to $0 by the cash distribution, so he has no remaining basis to allocate to other properties.