Michelle receives a proportionate liquidating distribution when the basis of her

Question

Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and non-inventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

$0 gain or loss; $0 basis in property.

$0 gain or loss; $50,000 basis in property.

$8,000 ordinary income; $0 basis in property.

$8,000 capital gain; $10,000 basis in property.

$8,000 capital gain; $0 basis in property.

Explanation / Answer

There would be capital gain of 8000 (58000 - 50000) since the interest in the partnership was only 50,000 but Michelle receives 58000 which is 8000 in excess.

The basis would be 0 in property. Since this is non inventory property which a partnership holds for sale to the customer in ordinary course of the business. There fore will have only fair value but with zero basis.

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