The RST Partnership makes a proportionate distribution of its assets to Ryan, 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 $30,000 and a fair market value of $48,000 . None of the payment is for partnership goodwill. At the time of the distribution, Ryan's partnership basis is $45,000 and

Question

the partnership has no liabilities and no "hot assets.". If the partnership makes an optional basis adjustment election on a timely filed return, the partnership recognizes:
a. Capital gain of $25,000 and increases the basis of its remaining assets by $12,500.
b. Capital loss of $5,000 and decreases the basis of its remaining assets by $5,000.
c. No gain or loss and increases the basis of its remaining assets by $25,000.
d. No gain or loss and decreases the basis of its remaining assets by $58,000.
e. None of the above.

Answer 1

c
RATIONALE: Under § 732(b), Ryan is limited to a basis of $5,000 in the capital assets received ($45,000 basis of partnership interest less $40,000 cash received). The partnership's $30,000 basis in the capital assets exceeds their $5,000 basis to Ryan by $25,000 . Thus, if a § 754 election is made, the partnership is entitled to increase the basis of its remaining property by $25,000 . No gain or loss is recognized by the partnership, because the liquidating distribution is proportionate.