Question

David’s basis in the Jimsoo Partnership is $55,000. In a proportionate liquidating distribution, David receives cash of $7,400 and two capital assets: (1) land 1 with a fair market value of $20,800 and a basis to Jimsoo of $16,600, and (2) land 2 with a fair market value of $10,300 and a basis to Jimsoo of $16,600. Jimsoo has no liabilities. c1. If the two parcels of land had been inventory to Jimsoo, what are the tax consequences to David (amount and character of gain or loss)? c2. What is David's basis in distributed assets?

Answer 1

C1) If the Land given to david were inventory to jimsoo partnership, then Increasing the basis of distributed land will not be allowed for david.

David will have a capital loss of $14,400 [ $ 55,000-(16,600+16,600+7,400)] becasue of this distribution. On the Basis of Carryover david will have 16,600 in each land.

C2)The Sum of Cash and Two lands is less than the David's basis in jimsoo partnership by Amount $14,400 which needs to be allocated to the distributed assets i.e it need to be distributed between two lands. However $14,400 Would be reduced by the Unrealized appreciation which is $4,200 (20,800-16,600) . So Remaining 10,200 need to be distributed.

Land 1= 10,200*20800/31100= 6821.87

Land 2= 10,200*10300/31100=3378.13

After completing the allocation David’s bases in the distributed assets are:

Cash= 7,400

Land 1= 20,800+6821.87= 27,621.87

Land 2= 16,600+3378.13= 19,978.14