Cliff’s basis in his Aero Partnership interest is $18,500. Cliff receives a dist

Question

Cliff’s basis in his Aero Partnership interest is $18,500. Cliff receives a distribution of $24,100 cash from Aero in complete liquidation of his interest. Aero is an equal partnership with the following balance sheet:

a-1. What is the amount and character of Cliff’s recognized gain or loss?
a-2. Will the distribution have any effect on the partnership assets?

b. If Aero has a §754 election in place, what is the amount of the special basis adjustment?

Tax Basis FMV Assets: Cash $ 24,100 $ 24,100 Investment 28,800 28,800 Land 2,600 36,700 Totals $ 55,500 $ 89,600 Liabilities and capital: Capital – Chris 18,500 – Cliff 18,500 – Cooper 18,500 Totals $ 55,500

a-1. What is the amount and character of Cliff’s recognized gain or loss?
a-2. Will the distribution have any effect on the partnership assets?

b. If Aero has a §754 election in place, what is the amount of the special basis adjustment?

Explanation / Answer

Part 1 (a) - Recognition of 'Capital gain'

Cliff is receiving only money and such receipt is more than his Partnership Interest or outside basis hence 'Capital Gain' will be recognised

Part 1 (b) - Such distribution does not has any effect on the partnership assets since aero will not recognise any gain/(loss) on distribution

Part b - Special basis adjustment

In such cases, special basis adjustment is required since aero has §754 election in place.

Since cliff has recognised the gain of $5600 on liquidation distribution hence aero will have special basis adjustment of $5600 basis increase.

Particulars Amount Cash Received on liquidation $24100 Cliff's basis in Partnership $18500 Capital Gain $5600

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