The Olive Partnership makes a proportionate distribution of its assets to Jerry,

Question

The Olive Partnership makes a proportionate distribution of its assets to Jerry, in complete liquidation of his partnership interest. The distribution consists of $40,000 in cash and capital assets with a basis to the partnership of $150,000 and a fair market value of $160,000. None of the payment is for partnership goodwill. At the time of the distribution, Jerry's partnership basis is $150,000 and the partnership has no liabilities and no “hot assets.” If the partnership makes an optional basis adjustment election on a timely filed return, it recognizes: pls including calculation process

a. Capital gain of $40,000 and increases the basis of its remaining assets by $40,000.

b. Capital loss of $40,000 and decreases the basis of its remaining assets by $40,000.

c. No gain or loss and increases the basis of its remaining assets by $40,000.

d. No gain or loss and decreases the basis of its remaining assets by $40,000.

e. None of the above.

Explanation / Answer

The correct option is d.) No gain or loss and decreases the basis of its remaining assets by $40,000.

In complete liquidation of partner's interest, the distribution of money in excess of partnership basis is to be recognised as gain or loss otherwise no gain or loss is recognized and the basis to a partner of property distributed in kind is equal to adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction.

Therefore in the given case the money distributed is $40,000 which is less than the partnership basis of $150,000, thus there will be no gain or loss. The adjusted basis of capital asset is to be reduced by cash received of $40,000.

Thus the basis of remaining assets will be decreased by $40,000

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