Question

Lonnie Davis has been a general partner in the Highland Partnership for many years and is also a sole proprietor in a separate business. To spend more time focusing on his sole proprietorship, he plans to leave Highland and will receive a liquidating distribution of $50,500 in cash and land with a fair market value of $115,500 (tax basis of $145,250). Immediately before the distribution, Lonnie’s basis in his partnership interest is $412,000, which includes his $57,000 share of partnership debt. The Highland Partnership does not hold any hot assets.

a. What is the amount and character of any gain or loss to Lonnie?

b. What is Lonnie’s basis in the land?
c. What is the amount and character of Lonnie’s gain or loss if he holds the land for 13 months as investment property and then sells it for $161,000?
d. Assume there are no gains from the sale of other Section 1231 in the same tax year. What is the amount and character of Lonnie’s gain or loss if he places the land into service in his sole proprietorship and then sells it 13 months later for $161,000?

Answer 1

a. What is the amount and character of any gain or loss to Lonnie?

No gain, no loss.

No gain because cash received + debt relief = $ 50,500 + 57,000 = $ 107,500 < Lonnie’s basis in his partnership interest = $ 412,00

No loss because the assets have been received in distribution

b. What is Lonnie’s basis in the land?

Land basis = Lonnie’s basis in his partnership interest - Cash received - debt relief = 412,000 - 50,500 - 57,000 = $ 304,500

c. What is the amount and character of Lonnie’s gain or loss if he holds the land for 13 months as investment property and then sells it for $161,000?

Gain / (Loss) = Sale value of land - Land basis = 161,000 - 304,500 = - $ 143,500

Since investment was held for more than a year, this is a long term capital loss in nature.

d. Assume there are no gains from the sale of other Section 1231 in the same tax year. What is the amount and character of Lonnie’s gain or loss if he places the land into service in his sole proprietorship and then sells it 13 months later for $161,000?

Since the land was held as an asset into service for more than a year, the loss calculated in part (c) will also be the loss under section 1231.

Hence, amount = Loss of $ 143,500 and character will be Sec 1231 loss