ExpertMedium1 markMultiple Choice
CPA · Question 19 · Area II: Entity Tax Compliance
A partnership distributes cash of $10,000 and property with an adjusted basis of $20,000 (FMV $25,000) to a partner in a nonliquidating distribution. The partner's outside basis before the distribution is $22,000. What is the partner's basis in the received property?
A partnership distributes cash of $10,000 and property with an adjusted basis of $20,000 (FMV $25,000) to a partner in a nonliquidating distribution. The partner's outside basis before the distribution is $22,000. What is the partner's basis in the received property?
Answer options:
A.
$20,000
B.
$12,000
C.
$25,000
D.
$0
How to approach this question
Order of reduction: 1. Cash reduces basis. 2. Property reduces basis. Property basis cannot exceed the remaining outside basis.
Full Answer
B.$12,000✓ Correct
IRC §732(a)(2) limits the basis of distributed property to the adjusted basis of the partner's interest in the partnership reduced by any money distributed in the same transaction. Start Basis: $22,000. Less Cash: $10,000. Remaining Basis: $12,000. The property takes a basis of $12,000 (limited from $20,000).
Common mistakes
Assigning the full inside basis to the property even when outside basis is insufficient.
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