Question

Daniela is a 25% partner in the JRD Partnership. On January 1, JRD makes a proportionate liquidating distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD partnership interest is $21,000. What is the amount and character of Daniela's gain or loss from the distribution?

a. $4,000 capital loss.
b. 0.
c. $4,000 capital gain.
d. $14,000 ordinary income.

Answer 1

Daniela has a gain of $14,000 from the distribution, treated as ordinary income.

Step-by-step explanation:

Daniela's gain or loss from the distribution is determined by comparing the fair value of the assets received to her basis in the partnership. In this case, she receives $20,000 cash and $15,000 worth of inventory. The fair value of the inventory exceeds her inside basis, resulting in a gain. To calculate the gain, we subtract her basis in the partnership ($21,000) from the fair value of the assets received ($20,000 + $15,000), which is $35,000. Therefore, Daniela has a gain of $14,000 from the distribution.

The character of this gain is ordinary income because it is considered as a result of a liquidating distribution in exchange for Daniela's partnership interest.