Josh owns a 25% capital and profits interest in the calendar year GDJ Partnership. His adjusted basis for his partnership interest on October 15 of the current year is $300,000. On that date, the partnership liquidates and makes a proportionate distribution of the following assets to Josh.
Partnership’s Basis in Asset
Asset’s Fair Market Value
CashInventory$ 70,000 120,000
$ 70,000 150,000
?
a.Calculate Josh’s recognized gain or loss on the liquidating distribution, if any, and his basis in the distributed inventory. b.How would your answer to a. change if the partnership also distributed a small parcel of land it had held for investment to Josh? Assume the land has a $5,000 adjusted basis (FMV is $8,000) to the partnership.?
What will be an ideal response?
| a. | Josh takes a carryover basis of $120,000 in the distributed inventory and recognizes a $110,000 capital loss on the distribution. The loss is the difference between his $300,000 adjusted basis and the $190,000 ($70,000 + $120,000) inside basis of the cash and inventory distributed to him. |
| b. | Josh would not recognize any loss on the distribution and the land would take a $110,000 adjusted basis. A loss cannot be recognized if any assets other than cash, unrealized receivables, and inventory are received in the distribution. Because land is generally a capital asset, it will absorb all of the remaining basis of $110,000. The capital loss would be deferred until the land is sold. If, however, the land is converted to business use, its later sale would result in a § 1231 loss, which is generally an ordinary loss. |
Business
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