Question

Karli owns a 25% capital and profits interest in the calendar-year KJDV Partnership. Her adjusted basis for her partnership interest on July 1 of the current year is $200,000. On that date, she receives a proportionate current (nonliquidating) distribution of the following assets.

	Partnership’s Basis	FMV
Cash	$150,000	$150,000
Inventory	30,000	60,000
Land (held for investment)	70,000	100,000

         a. Calculate Karli’s recognized gain or loss on the distribution, if any.

         b. Calculate Karli’s basis in the inventory received.

         c. Calculate Karli’s basis in land received. The land is a capital asset.

         d. Calculate Karli’s basis for her partnership interest after the distribution.

Answer 1

a.)	Karli will not recognize any gain or loss on the distribution because the $150,000 cash distributed does not exceed her $200,000 outside basis.
b.)	The inventory has an adjusted basis of $30,000 to Karli. The partnership will distribute the $150,000 cash first, thereby reducing her outside basis for her partnership interest to $50,000 (200,000 – 150,000). The inventory will be distributed next, taking a carryover basis of $30,000 and reducing the adjusted basis for her partnership interest to $20,000
c.)	The land parcel is distributed last and takes a $20,000 substituted basis because the basis in the land cannot exceed Karli’s remaining basis in her partnership interest.
d.)	Karli’s basis for her partnership interest after the distribution is $0. Her entire $200,000 outside basis has been allocated to the distributed assets in the following amounts:

Cash	$150,000
Inventory	$30,000
Land	$20,000
Total	$ 200,000