Question

M had an adjustment basis in a partnership interest of $39,000 before receiving a current distribution. In the current distribution (to which IRC Section 751 does NOT apply), M received the following: Cash basis $3,000 FMV $3,000 Inventory basis $15,000 FMV $17,000 Land 1 basis $10,000 FMV $15,000 Land 2 basis $20,000 FMV $25,000 What is M's basis in each of the items received? A. Cash $3,000, Inv $12,000, Land 1 $12,000, Land 2 $12,000 B. Cash $3,000, Inv $15,000, Land 1 $10,000, Land 2 $20,000 C. Cash $3,000, Inv $15,000, Land 1 $10,500, Land 2 $10,500 D. Cash $3,000, Inv $15,000, Land 1 $7,000, Land 2 $14,000

Answer 1

The correct answer is "C" : Cash - $3,000 Inventory - $15,000 Land 1 - $10,500 Land 2 - $10,500

Reason : First of all, we will calculate M's remaining basis after reduction of money received which is as follows :

Current Basis - $39,000

Money received - $3,000

Adjusted Basis after reducing money received = $36,000

Now M also receives Inventory and 2 properties. Since value of Inventory is less than the above calculated adjusted basis (15,000<36,000), Inventory's basis will remain as $15,000.

Now M has a left basis of $21,000 and the total basis combined for Land 1 and Land 2 is $30,000 (Land 1 - $10,000 & Land 2 - $20,000). So we need a basis reduction of $9,000. But we will have to first allocate $10,000 of basis reduction to Land 2 to the extent of its unrealized depreciation of $10,000 (20,000-10,000).

Hence we are now left with a need for $1,000 increase in basis for Land 1 and Land 2 which we will do by allocating $500 to each of them in equal proportion.

Hence the final answer has been clearly explained with the help of table below :

Particulars	Cash	Inventory	Land 1	Land 2
Original Basis	3,000	15,000	10,000	20,000
Reduction for adjustment of unrealized depreciation				-10,000
Allocation of $1,000 basis required to complete $39,000 basis in ratio of 1:1 among Land 1 and 2			500	500
M's basis in each item	3,000	15,000	10,500	10,500