Question

Kathy is a 25 percent partner in the KDP Partnership and receives a parcel of land with a fair value of $157,000 (inside basis of $114,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $207,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. What is KDP's special basis adjustment from the distribution?

Multiple Choice

a) $93,000 positive basis adjustment.

b) $0.

c) $43,000 positive basis adjustment.

d) $93,000 negative basis adjustment.

Answer 1

Option B ($0)

Rule:

Distributions involving a disproportionate distribution of IRC Sec. 751 "hot assets" and 2) payments considered as a distributive share of income or as a guaranteed payment under IRC Sec. 736(a), any gain or loss recognized by the partner is treated as having resulted from a sale or exchange of the partner's partnership interest (i.e., generally capital gain). IRC Sec. 736(a) payments generally include payments (determined with or without regard to the income of the partnership) which are paid for either 1) unrealized receivables, or 2) partnership goodwill where payments for goodwill are not called for in the partnership agreement. However, the Omnibus Budget Reconciliation Act of 1993 (OBRA '93) precludes IRC Sec. 736(a) treatment for liquidation payments where capital is a material income producing factor. Such payments must be treated as made in exchange for the partner's interest in partnership property under IRC Sec. 736(b). Finally, except for disproportionate distributions under IRC Sec. 751(b), no gain or loss is recognized by the partnership in connection with a distribution to a partner.