Frank is a partner in a Partnership. On January 1, the partnership distributes $

Question

Frank is a partner in a Partnership. On January 1, the partnership distributes $15,000 cash, inventory with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of $5,000) to Frank in complete liquidation of his interest. The partnership has no liabilities at the date of the distribution. Frank’s basis in the partnership is $37,000. What is Frank’s basis in the distributed inventory and land?

A. $10,000 inventory, $10,000 land B. $10,000 inventory, $5,000 land C. $20,000 inventory, $10,000 land D. $10,000 inventory, $12,000 land

Explanation / Answer

SOLUTION

Correct Option is Option D i.e. $10,000 inventory, $12,000 land

Frank's bases in the distributed assets are $15,000 cash, $10,000 inventory, and $12,000

land. He first allocates his outside basis to the distributed assets in an amount equal to partnership's basis. He then allocates remaining basis to assets other than cash and hot assets with unrealized appreciation. Finally, the remaining basis is allocated to assets other than cash and hot assets.

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