ExpertHard1 markMultiple Choice
CPA · Question 52 · Area 4: Entity Taxation
Partner Y has an outside basis of ,000. In a complete liquidation of the partnership interest, Y receives cash of ,000 and inventory with a basis of ,000. No other assets are received. What is Y's recognized gain or loss?
Partner Y has an outside basis of ,000. In a complete liquidation of the partnership interest, Y receives cash of ,000 and inventory with a basis of ,000. No other assets are received. What is Y's recognized gain or loss?
Answer options:
A.
No Gain or Loss
B.
Capital Loss of ,000
C.
Ordinary Loss of ,000
D.
Capital Gain of ,000
How to approach this question
Liquidation Loss Exception: You can ONLY claim a loss if you receive ONLY Cash, Inventory, and Receivables, AND your basis exceeds their basis.
Full Answer
B.Capital Loss of ,000✓ Correct
A loss on liquidation is recognized if the partner receives only money, unrealized receivables, or inventory, and the partner's basis exceeds the sum of money plus the basis of the assets received. ,000 (Basis) - ,000 (Cash) - ,000 (Inventory) = ,000 Loss.
Common mistakes
Thinking you can attach the extra basis to the inventory (you can't step up inventory in liquidation).
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