Question

David’s basis in the Jimsoo Partnership is $57,000. In a proportionate liquidating distribution, David receives cash of $7,800 and two capital assets: (1) land 1 with a fair market value of $21,600 and a basis to Jimsoo of $17,200, and (2) land 2 with a fair market value of $10,600 and a basis to Jimsoo of $17,200. Jimsoo has no liabilities.

c1. If the two parcels of land had been inventory to Jimsoo, what are the tax consequences to David (amount and character of gain or loss)?

c2. What is David's basis in distributed assets?

Answer 1

Solution -c2)

David assigns a basis of :

Cash	7,800
First parcel of land	17,200
Second parcel of land	17,200
	42,200

As the amount of $42,200 of the bases is less than David’s basis in Jimsoo thus will be required for the allocation of the excess amount outside basis to the basis in the distributed assets. David has a remaining outside basis of 57,000 - 42,200 = 14,800.

David will increases the basis of the first parcel land by $14,400 to $21,600.

Thus will be left with $400 remaining to be allocated

Land 1: Basis allocation = 400 * 21,600 / 32,200 = 268.32

Land 2: Basis allocation = 400 * 10,600 / 32,200 = 131.68

David’s bases in the distributed assets

Land 1: Basis allocation = 17,200 + 14,400 + 268.32 = 31,868.32

Land 2: Basis allocation = 17,200 + 131.68 = 17,331.68

　

Solution -c1)

David would have been disallowed to increase the basis of the distributed land in case land were inventory to Jimsoo. In that scenario David was allowed to recognize a capital loss of $14,800 on the distribution. Thus would have been allowed a basis of $17,200 in each parcel of land (carryover basis).