ExpertHard1 markMultiple Choice
CPA · Question 62 · Area V: Entity Taxation
In a liquidating distribution of a partnership, Partner P receives cash of $10,000 and inventory with a basis to the partnership of $5,000. P's outside basis in the partnership was $8,000 prior to the distribution. What is P's recognized gain or loss?
In a liquidating distribution of a partnership, Partner P receives cash of $10,000 and inventory with a basis to the partnership of $5,000. P's outside basis in the partnership was $8,000 prior to the distribution. What is P's recognized gain or loss?
Answer options:
A.
$0
B.
$7,000 gain
C.
$2,000 gain
D.
$3,000 loss
How to approach this question
Rule: Gain is recognized ONLY if Cash received > Outside Basis. Basis of property received is irrelevant for gain recognition.
Full Answer
C.$2,000 gain✓ Correct
In a partnership distribution, gain is recognized only to the extent that money (cash) received exceeds the partner's outside basis. Cash received ($10,000) - Outside Basis ($8,000) = $2,000 Gain. The inventory takes a basis of zero in the partner's hands because basis is reduced to zero by the cash.
Common mistakes
Factoring in the property basis to calculate the gain (property just reduces remaining basis).
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