Question

miles received a current distribution of property. His outside basis in the partnership was less than the partnership's adjusted basis in the property. His adjusted basis in the distributed property will:
A be the same as the partnership adjusted basis just before distribution
B include any gain recognized in the distribution
C be the same as the FMV of the property
D be the same as his outside basis in the partnership just before the distribution

Answer 1

The correct answer is "D" : "Be the same as his outside basis in the partnership just before the distribution"

This is because his outside basis in the partnership was less than the partnership's adjusted basis in the property and hence his adjusted basis in the distributed property will only be upto his outside basis in the partnership before distribution and he will have to report a gain for the balance amount.

This can be explained with the help of example below:

Let's assume the following facts in accordance with our question -

a) Outside basis in partnership = $10,000

b) Partnership's adjusted basis in the property = $15,000

Now in the above case the adjusted basis in distributed property will be $10,000 which is same as the outside basis in partnership and a gain of $5,000 (15,000-10,000) will have to be reported by the partner.