DANIELA IS A 25 % PARTNER IN THE JRD PARTNERSHIP. ON JANUARY, 1, JRD MAKES A PRO

Question

DANIELA IS A 25 % PARTNER IN THE JRD PARTNERSHIP. ON JANUARY, 1, JRD MAKES A PROPORTIONATE, LIQUIDATING DISTRIBUTION OF $16,000 CASH, INVENTORY WITH A $16,000 CASH, INVENTORY WITH A $16,000 fair value ( INSIDE BASIS $8,000), AND ACCOUNTS RECEIVABLE WITH A FAIR VALUE OF $8,000 (INSIDE BASIS OF $12,000) TO DANIELA.

JRD HAS NO LIABILITIES AT THE DATE OF THE DISTRIBUTION. DANIELA'S BASIS IN JRD IS $20,000.

WHAT IS THE AMOUNT AND CHARACTER OF DANIELA'S (GAIN OR LOSS) FROM THE DISTRIBUTION?

MULTIPLE CHOICE

1. $0

2. $16,000 ORDINARY INCOME

3. $16,000 CAPITOL GAIN

4. $20,000 CAPITOL GAIN

Explanation / Answer

Answer is option 1. $0

Daniela will not recognize any gain or loss on the distribution. She will instead reduce the basis of the inventory she receives in complete liquidation of her interest.

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