Maggie has a 25% interest in the JW partnership. Her outside basis is $500. The

Question

Maggie has a 25% interest in the JW partnership. Her outside basis is $500. The partnership liquidates distributing to Maggie $300 in cash and inventory with an inside basis of $125. How does Maggie report this transaction for tax purposes in the year she receives the distributions? Include whether Maggie recognizes gain or loss, and what Maggie’s basis is in the inventory. A: Suppose Maggie from the previous problem receives $300 in cash but the inside basis of the inventory is $25. Her outside basis is still $500. Does Maggie recognize gain or loss (if so how much) and what is her basis in the inventory? B: Suppose Maggie receives $300 in cash, inventory with an inside basis of $150, and a plot of land in a swamp with an inside basis of $50. Her outside basis is still $500. Does Maggie recognize gain or loss (how much?) on the distribution, and what is her basis in the inventory and in the land? C: Suppose Maggie outside basis is still $500. She receives cash of $300, and inventory with an inside basis of $225. Does Maggie recognize gain or loss (how much?) and what is her basis in the inventory?

Explanation / Answer

If the amount of money distributed plus the partner's basis in the distributed hot assets is less than the partner's outside basis, the distributee partner will recognized a loss. In this case, the loss is to be recognized by Maggie is calculated as follows:-

Loss = Maggie's Outside basis - (cash + Inside basis of inventory).

Loss = $500 - ($300+$125) = $500-$425 = $75

The basis of Maggie in inventory will be $125

A) In this case the loss will be

Loss = $500 - ($300+$25) = $500-$325 = $175

The basis of Maggie in inventory will be $25

B) There will be no gain or loss because the total amount realized is $500 ($300+$150+$50) is equal to partner's outside basis of $500. The Maggie's basis in inventory and the land will remains same at $150 and $50 respectively.

C) As the value of assets received ($300+$225 = $525) is more than outside basis ($500) by $25, the gain should be recognized by Maggie of $25. The basis of Maggie in inventory is $200 ($225-$25) or (target basis = $500-$300 = $200).

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