Question

Partner A received the following in a non-liquidating distribution:

Basis               FMV

Cash   $20,000           $20,000

Inventory Item 1                     $15,000           $18,000

Inventory Item 2                     $12,000           $4,000

Capital Asset 1                       $15,000    $8,000

Capital Asset 2 $10,000   $20,000

   $72,000           $70,000

Assume A’s basis in the partnership before the distribution was $35,000. What would the bases of the assets be to A?

Answer 1

The cash of $20,000 would reduce the basis available to the inventory to $20,000. However, since the inventory has total basis of $15,000 and $12,000 = $27,000, there is a $7,000 deficit. The deficit will first be allocated to the depreciated inventory (12000 - 4000 = 8000) (Item 2), to the extent of the depreciation. The other ($7000 - $8000 =$1,000 of deficit will be allocated to the inventory items according to their remaining bases:
Bitmap Bitmap Bitmap Item 1 = $1000 x $15000/$19000	$      789.47
Item 2= $1000 x $4000/$19000	$      210.53
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Item 1’s basis would be $15000 - $789.47	$ 14,210.53
Item 2’s basis would be $12000 - $8000 - $210.53	$   3,789.47