Question

Lucas is a 25% partner in the LCS Partnership. On January 1, LCS distributes $40,000 cash and land with a $32,000 fair value (inside basis $16,000). LCS has no liabilities at the date of the distribution. Lucas’ basis in LCS is $32,000. What is the amount and character of Lucas’ gain or loss on the liquidating distribution?

Multiple Choice $0. $8,000 capital gain. $24,000 capital gain. $40,000 capital gain.

Answer 1

In the case of Liquidating distribution to the partner the basis of asset distributed is adjusted to the basis of partner such that after this distribution basis of the partner in partnership becomes zero and it will not recognize any gain/loss.

Particulars	$
L Basis	$        32,000
Less Cash distribution ($40,000 x 25%)	$      (10,000)
	$        22,000
Less Land distributed basis adjusted	$      (22,000)
Basis in pertnership after distribution	$                -

Hence, option 1 is correct.

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