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Quenton received a proportionate nonliquidating distribution of $8,000 cash, inventory with a $5,000 basis and a fair market value of $7,000, and a Section 1231 asset with a $7,000 basis and a fair market value of $15,000.

1. What are the tax effects of these distributions if his partnership basis is $24,000?

2. How would your answer change if his partnership basis is $16,000?

3. How would your answers to a. and b. change if this was a proportionate liquidating distribution?

Explanation / Answer

1.) In a proportionate nonliquidating distribution, gain is recognized to the extent the distributed cash exceeds the partner's basis in the partnership interest. Thus in this case no gain is recognized as only cash of $8,000 is received. The basis in non cash property is the lesser of the partnership's inside basis in the property or the partner's outside basis before distribution.

In this case after receiving cash of $8,000, Quenton's basis in partnership reduced to $16,000 ($24,000-$8,000) and the total basis in non cash property received by him is $12,000 ($5,000+$7,000).Thus Quenton's total basis in inventory and section 1231 asset should be lower of $16,000 or $12,000 (i.e. $12,000)

2.) If his partnership basis is $16,000, then also no gain will be recognised because cash of only $8,000 is received by him. But in this case his basis in partnership will reduced to $8,000 ($16,000-$8,000) and the partnership's basis in inventory and section 1231 asset is $12,000($5,000+$7,000). Thus in this case his basis in inventory and 1231 asset will be $8,000 (lesser of $8,000 or $12,000)

3.) a.) In a proportionate liquidating distribution, loss can be recognised only to the extent cash and inventory received exceeds partner's outside basis in partnership.This in this case loss of $11,000 ($24,000-$8,000- $5,000) will be recognised and the Quenton's basis in section 1231 asset will be $7,000.

b.) In this case loss of $3,000 ($16,000-$8,000-$5,000) will be recognised and partner's basis in section 1231 asset will be limited to $3,000 ($16,000-$8,000-$5,000).

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