Question

Paula's basis in her partnership interest is $60,000. in liquidation of her interest, the partnership make...

Paula's basis in her partnership interest is $60,000. in liquidation of her interest, the partnership make a proportionate distribution to paula of $20,000 of cash, and inventory (basis of $5,000 and value of $7,000). (Assume the partnership also liquidates.)

a. How much gain or loss, if any, will Paula recognize on the distribution?

b. What basis will Paula take in the inventory?

c. What are the tax consequences to the partnership?

d. Can you recommend an alternative distribution? Explain.

e. Would your answer to part (a) or (b) change if this had been nonliquidating distribution? Explain.

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Answer #1

A LOSS TO PAULA= $60000-20000-7000= $33000

B PAULA WILL TAKE $ 7000 IN INVENTORY AS MARKET VALUE IS CONSIDERED AT THE TIME OF LIQUIDATION.

C THE BUSINESS IS NOT ABLE TO CARRY FORWARD BUSINESS LOSSES IN THE FUTURE AS THE FIRM IS LIQUIDATED. THE BUSINESS IS LIABLE TO PAY THE AMOUNT OF TAX ON THE BALANCE AMOUNT REALISED AFTER SETTINNG THE LIABLITY

D THE PARTNERSHIP MAY GIVE AMOUNT TO THE PAULA WITHOUT LIQUIDATING THE BUSINESS AND REDUCE THE AMOUNT FROM CAPITAL ACCOUNT.

E IF IT HAS BEEN NON LIQUIDATING

A LOSS = $60000-20000-5000=35000

B PAULA WILL TAKE $ 5000 IN INVENTORY AS COST IS CONSIDERED AT THE TIME OF LIQUIDATION  

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