Question

1. In complete liquidation of her interest in the Buyers Partnership, Sarah received a cash distribution of $40,000. Her basis in the partnership interest prior to receipt of the liquidating distribution was $48,000.

a). How much gain or loss must Sarah recognize on receipt of the liquidating distribution? b). Assume that Sarah received cash of only $25,000, and property worth $15,000 in complete liquidation of her interest in the partnership. How much gain or loss would she recognize? What would be her basis in the property received?

2. In complete liquidation of his interest in the KD Partnership, Scott received adistribution consisting of $38,000 cash and property valued at $62,000. The partnership’s tax basis in the property, which was not inventory or unrealized receivable,was $22,000. Scott’s basis in his partnership interest prior to receipt of the liquidating distribution was $35,000. The distribution was not a disproportionate distribution.

a) Will Scott be required to recognize any gain or loss for tax purposes upon receipt of the liquidating distribution?

b) What will be his tax basis in the property received from the partnership?

Answer 1

Since, multiple questions have been posted, I have answered the first one.

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1.

Part a)

In the given case, the total amount of liquidating distribution of $40,000 is less than the Sarah's adjusted basis prior to the distribution which is $48,000. Therefore, Sarah will recognize capital loss equal to the value determined as below:

Loss to be Recognized = Adjusted Basis - Amount Received = 48,000 - 40,000 = $8,000

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Part b)

As per the applicable rules, in a liquidation distribution, a loss is recognized only if the partner receives cash, unrealized receivables or inventory. In case, any other property is received, no loss will be recognized by Sarah.

Loss to be Recognized = $0

The adjusted basis of the property is determined as below:

Adjusted Basis of Property = Outside Basis - Cash Received = 48,000 - 25,000 = $23,000