Question

Please explain step by step the liquidating distribution below: problem Carlos receives a proportionate liquidating distribution consisting of $8000 cash and inventory with a basis to the partnership of $5,000 and a FMV of $6000. His basis in his partnership interest was $15,000 immediately before the distribution. Carlos assigns a basis of $7,000 to the inventory, and recognizes no gain or loss. True/False

Answer 1

False

Carlo's Distribution:

Basis of Interest 15000

Less: Cash received (8000)

Basis After Cash 7000

The cash distribution has reduced Carlo's outside basis in his partnership interest to $7000.

Loss is recognized if the assets received include only cash, unrealized receivables & inventory and the outside basis exceeds partnership's inside basis in distributed property.

Here, Carlo cannot increase the basis of inventory above $5000.Therefore he will take $5000 as substituted basis i.e, carry over for the inventory and recognize a $2000 as capital loss.