Question

Parker’s basis in his PQ Partnership interest is $180,000. Parker receives a pro rata liquidating distribution consisting of $20,000 cash, land with a basis of $80,000 and a fair market value of $100,000, and his proportionate share of inventory with a basis of $60,000 to PQ and a fair market value of $75,000. Assume that PQ also liquidates.

1. How much gain or loss, if any, must Parker recognize on the distribution?

2. What basis will Parker take in the inventory and land?

3. What are the tax consequences to the partnership?

4. Would your answer to part (a) or (b) change if this had been a current distribution? Explain.

Answer 1

Answer:

a. How much gain or loss, if any, must Parker recognize on the distribution?

No gain or loss.

The cash is distributed first, followed by the inventory. The land is distributed last and absorbs Parker's remaining basis of $100,000 ($180,000 basis – $20,000 cash – $60,000 inventory).

b.What basis will Parker take in the inventory and land?

Parker’s basis in the inventory is a carryover basis of $60,000. His basis in the land is $100,000 (see calculation in a.).

c.What are the tax consequences to the partnership?

The partnership has no gain or loss.

d.Would your answer to (a) or (b) change if this had been a current distribution? Explain

If this had been a current distribution, Parker’s basis in the land would have been limited to the partnership’s $80,000 basis. Parker would have a remaining basis in the partnership interest of $20,000.