Question

AJ is a 30 percent partner in the Trane Partnership, a calendar year-end entity. On January 1, AJ has an outside basis in his interest in Trane of $77,500, which includes his share of the $53,600 of partnership liabilities. Trane generates $43,800 of income during the year and does not make any changes to its liabilities. On December 31, Trane makes a proportionate distribution of the following assets to AJ to terminate his partnership interest: (Leave no answer blank. Enter zero if applicable.)

		Tax Basis		FMV
Inventory	$	59,500		$	70,400
Land		31,800			25,900
Totals	$	91,300		$	96,300

c. What is AJ’s basis in the distributed assets?

Inventory: 59,500

Land: ....

Need help figuring out basis after distribution

Answer 1

First, AJ must determine his basis in Trane as of the distribution. At the beginning of the year, his basis is $77,500. Trane earns $43,800 during the period of which 30% is allocable to AJ. He increases his basis by his $13,140 ($43,800*30%) share of Trane's income. Thus, as of the distribution, Aj's basis in Trane is $90,640 ($77,500+$13,140). Next, AJ accounts for the deemed cash distribution relating to his reduction of Trane debt. His 30% share of Trane's $53,600 debt is $16,080. AJ reduces his outside basis by the $16,080 leaving a basis of $74,560 to allocate to the distributed assets. He does not recognize any gain or loss on the distribution because the deemed cash distribution does not exceed his basis in Trane.

c-AJ calculates his basis in the distributed assets as follows:

1- First he assigns a carryover basis to the distributed assets:-

Inventory	$59,500
Land	$31,800

Since the sum of the adjusted basis of the distributed assets ($91,300) is greater than his basis in Trane after the deemed cash distribution ($74,560). He has a required decrease of $16,740.

2- AJ allocates his required decrease to the other property with unrealized depreciation . Since the distributed land has an inherent loss of $5,000. AJ allocates this amount of the required decrease to the land. Thus at the end of this step, the basis in the land is $25,900.

3- In the final step, AJ allocates the remaining required decrease $11,740 ($16,740-$5,000) to the land. After completing the allocation his basis in the distributed assets are:-

Inventory	$59,500
Land ($25,900 in step 2- $11,740)	$14,160