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Basis in partnership interest; taxability on distributions

Betty's basis in her partnership interest is $90,000 and she receives distributions of $35,000 cash and inventory (basis to the partnership of $22,000 and a fair market value of $28,000). No land is distributed.

(A) How much gain or loss, if any, must Betty recognize as a result of the distribution.
(B) What basis will Betty take in the inventory?
(C) What are the tax consequences to the partnership.
(D) Can you recommend an alternate distribution?
(E) Would your answer to (A) or (B) change if this had been a nonliquidating distribution?

Solution Preview

(a) No gain or loss is recognized on the transaction. Betty's basis was $90,000 and now is reduced by a $35,000 distribution. That cash distribution is never taxable until it exceeds her basis, or the partnership is in liquidation, or she loses her investment for some reason. The inventory is received by her at the partnership basis and there is no or gain or loss until she sells or otherwise disposes of the inventory.

(b) Betty has a carryover basis from the ...

Solution Summary

In a 319 word solution, the questions are answered with enough detail for full understanding. References to Code section are cited to explain the tax treatment of the various scenarios. Discussion about basis for distributions of cash and inventory are explained as well as the taxable event, if applicable.

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