Question

Kevin and Mary are 50/50 partners in ABC partnership with each having an outside basis in their partnership interest of $160,000. The partnership distributes cash of $80,000 to Kevin and Inventory with a basis of $40,000 and a FMV of $80,000 to Mary. Do Kevin or Mary have any gain or loss on the distributions? What basis does each take in the assets received?

Answer 1

In the given question Kevin and Mary are 50/50 partners in ABC partnership. This means that the profit in the company shall be distributed equally among the partners.

As per the information, Kevin is paid $ 80,000 in cash, while Mary is given an inventory costing $40,000 at Fair Market Value of $80,000.

Here the profit on the inventory is unrealized since it hasn't been sold to any outsider and is merely transferred to a partner. The value of inventory for Mary is $40,000 except in case she sells the inventory and realizes the fair market value of the inventory. Thus we can say that the distribution of compensation among partners is not equal and Mary is at a loss here since she receives a compensation lesser than she actually should. Unrealized profit can not be distributed to te partners.