Misha receives a proportionate nonliquidating distribution when the basis of his partnership interest is $60,000 . The distribution consists of $80,000 cash and inventory (adjusted basis to the partnership of $10,000, fair market value of $20,000). How much gain or loss does Misha recognize, and what is his basis in the distributed inventory and in the partnership interest following the
distribution?
a. $0 gain or loss; $10,000 basis in inventory; $0 basis in partnership interest.
b. $0 gain or loss; $20,000 basis in inventory; $50,000 basis in partnership interest.
c. $20,000 capital gain; $0 basis in inventory; $0 basis in partnership interest.
d. $20,000 capital gain; $10,000 basis in inventory; $0 basis in partnership interest.
e. $20,000 ordinary income; $0 basis in inventory; $20,000 basis in partnership interest.
c
RATIONALE: Because Misha received a cash distribution in excess of his basis in the partnership interest before the distribution, he must recognize a capital gain in the amount of that excess, or $20,000 ($80,000 distribution – $60,000 basis before distribution). His basis in the inventory is limited to the amount of the basis in the partnership interest following the cash distribution, or $0 . The basis in the partnership interest following all distributions remains $0.
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