ExpertMedium1 markMultiple Choice
CPA · Question 19 · Area II: Entity Tax Compliance
A partnership distributes cash of $10,000 and property (Basis $15,000, FMV $20,000) 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 and the remaining outside basis?
A partnership distributes cash of $10,000 and property (Basis $15,000, FMV $20,000) 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 and the remaining outside basis?
Answer options:
A.
Property Basis: $15,000; Outside Basis: ($3,000)
B.
Property Basis: $15,000; Outside Basis: $0
C.
Property Basis: $12,000; Outside Basis: $0
D.
Property Basis: $20,000; Outside Basis: $0
How to approach this question
Ordering Rule: 1. Reduce outside basis by Cash. 2. Remaining basis is allocated to Property (limited to the partnership's basis in the property). 3. Outside basis cannot go below zero.
Full Answer
C.Property Basis: $12,000; Outside Basis: $0✓ Correct
IRC §732(a)(2). Start Basis: $22,000. Less Cash: $10,000. Remaining Basis: $12,000. The property has a basis of $15,000, but the partner can only take a basis equal to their remaining outside basis ($12,000). The partner's basis in the property is $12,000, and outside basis becomes $0.
Common mistakes
Reducing basis by property first; allowing negative basis; using FMV of property.
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