Question

As of the end of the current tax year, Valerie Fleming’s tax basis in her partnership interest was $45,000. At that time she received a $60,000 non-liquidating cash distribution. Assume that all other partners also received proportionate cash distributions, so that the provisions of §751(b) do not apply to the distribution. Immediately following the distribution, the partnership had the following assets:

Basis                                     FMV

Cash                                     $ 10,000         $ 10,000

Accounts Receivable                        0            45,000

Depreciable Equipment           50,000             80,000

Land (§1231 Asset)                 25,000           145,000

Building                                   65,000           105,000

                                             $140,000         $385,000

Assume that the partnership originally purchased the depreciable equipment for $100,000. The original purchase price of the building was $80,000. The equipment is being depreciated using accelerated depreciation, while the straight-line method is used for the building. The partnership had a §754 election in effect at the date of the distribution.

i.    By how much will the partnership be required to adjust its tax basis in its remaining assets under §734(b) in connection with the distribution to Valerie?

i.To which class(es) of assets will the adjustment be allocated?

iii. How will the adjustment be allocated among the partnership’s remaining assets?

Answer 1