Question

1.Partner X is distributed the following in complete liquidation of her partnership interest:

Basis                      FMV

Cash                      $30,000                       $30,000

Inventory              $30,000                       $40,000

Land A                  $35,000                       $20,000

                              $95,000                       $90,000

X had a basis in her partnership interest of $75,000, so the land’s basis was reduced $20,000 and had only a $15,000 basis in X’s hands. The remaining YZ partnership (which did have a Code Sec. 754 election in effect) had the following remaining assets:

Basis                                  FMV

Cash                                  $40,000                       $40,000

Inventory                          $30,000                       $45,000

Unrealized Receiv.            $50,000                       $45,000

Land B                              $25,000                       $40,000

Building                            $45,000                       $10,000

i.How much of an adjustment to basis would each of the partnership assets have?

ii.   How much of an adjustment to basis would each of the partnership assets have if X’s basis in her partnership interest had been $140,000?

Answer 1

i.How much of an adjustment to basis would each of the partnership assets have?
Answer:-

Since the source of adjustmentis not a gain or a loss to the distributor partner,
the adjustmet will be made to same class of property whose basis in the hands of the
partner was different than in the hands of the partnership.since the land had its basis
decreased,the bais decreased ,the capital assets owned by the partnership will be increased.
Since the adjustment is an increase ,it will be made first to the capital assets with
unrealized appreciation, then to all of the capital assets based on their fair market values.
The basis of land B would be increased by $15,000, its unrealised appreciation. The rest
of the $20,000 basis increase ($5,000)would be allocated to land B and the buildig based
on relative fair market values, are

Land B=$5,000*$40,000/$50,000 Building=$5,000*$10,000/$50,000
=$5,000*0.8 =$5,000*0.2
=$4,000. =$1,000.

The Land B and Building would have bases to the partnership of
($25,000+$15,000+$4,000)$44,000 and ($45,000+$1,000)$46,000 respectively.

ii. How much of an adjustment to basis would each of the partnership assets have
if X’s basis in her partnership interest had been $140,000?

Answer:-
Since the source of the adjustment is not a gain or a loss of the distributor partner
the adjustment will be made to same class of property whose basis in the hands of the
partner was different than in the hands of the partnership. Since the basisof the land
would be increasedby $45,000 to $80,000, the basis of the capital assets owned by the
partnership will be decreased. Since the adjustment is a decrease, it will be made first
to the capita assets with unrealised depreciation, then to all of the capital assets based
on their remaining bases.

The basis of the building would be decreased by $35,000, its unrealised depreciartion.
The rest of the $45,000 basis decrease ($10,000)would be allocated to land B and the
building based on their relative bases are

Land B- $10,000*$25,000/$35,000 Building=$10,000*$10,000/$35,000
= $10,000*0.7143 =$10,000*0.2857
= $7,143 =$2,857

The Land B and Building would have bases to the partnership of
$17,857 ($25,000 - $7,143) and $7,143 ($45,000 - $35,000 - $2,857), respectively.