Question

15. Dalia has a 25% interest in the DQ partnership. Her outside basis is $500. The partnership liquidates distributing to Dalia $300 in cash and inventory with an inside basis of $125.

a. Does Dalia recognize gain or loss on the distribution? If yes, how much gain or loss and what is the character?

b. What Dalia’s basis is in the inventory

16. Suppose Dalia from the previous problem receives $300 in cash but the inside basis of the inventory is $250. Her outside basis is still $500. Does Dalia recognize gain or loss (if so how much) and what is her basis in the inventory?

Answer 1

15 a) A partner cannot recognize any gain from any distribution of cash or kind provided the distribution doesn’t exceed the partner’s outside basis.

In the given case, Dalia’s outside basis is $500

Dalia is in the receipt of Cash $300 and Inventory with inside basis of $125, totaling to $425. So there’s no gain recognized.

Loss = $500 - $425 = $75

A partnership distribution is not shown in the tax return. If any gain or loss arises out of it then it must be shown in the partner’s return.

b) Dalia’s basis in the inventory is $125

16) Dalia’s outside basis: $500. Basis on the transferred property: $300 (Cash) + $250 (Inventory) = $550

There is a gain of $50 ($550 - $500) to be recognized by Dalia in the year of receipt.

Her basis in the inventory: $250