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 $65,750 in cash and land with a fair market value of $113,500 (tax basis of $145,000). Immediately before the distribution, Lonnie’s basis in his partnership interest is $415,000, which includes his $85,000 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 $120,000?

d.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 $120,000?

Answer 1

a	Lonnie Basis in Partnership	$415,000
	Cash Received	65,750
	Partnership debt relief	85,000
		150,750
	No gain is recognized, since Lonnie cash or debt relief of $150,750 is no more than his Tax Basis of $415,000.
	Also No loss is recognized on distribution, since Lonnie receives assets other than cash and/or hot assets in the distribution (i.e. the land).
b	Lonnie Basis in Partnership	$415,000
	Less: Cash received	-65750
	Deemed Cash received(Debt relief)	-85000
	Land Basis	$264,250
c	Sell value of Land	$120,000
	Less: Substituted Land Basis	($264,250)
	Long Term capital loss	($144,250)
	The loss is a long-term capital loss because Lonnie held the land as a capital asset for more than one year.
d	Sell value of Land	$120,000
	Less: Substituted Land Basis	($264,250)
	Section 1231 loss	($144,250)
	The loss is a Section 1231 loss because Lonnie held the land as a trade or business asset for more than one year making the land Section 1231 property. Losses from the sale or exchange of Section 1231 property are treated as ordinary.