Question

Tyson is a 25% partner in the KT Partnership. On January 1, KT makes a proportionate, liquidating distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT partnership interest is $20,000. What is the amount and character of Tyson's gain or loss from the distribution?

a. $12,000 ordinary income.
b. $4,000 capital gain.
c. $12,000 capital gain.
d. $0.

Answer 1

Tyson's gain from the distribution is $8,000 and it is a capital gain.

Step-by-step explanation:

The amount and character of Tyson's gain or loss from the distribution can be calculated using the calculation of adjusted basis. Adjusted basis is the basis of an asset in the hands of the distributee partner immediately before the distribution, increased by any gain recognized on the distribution and decreased by any money received and the partner's share of the partnership's liabilities assumed by the distributee partner.

In this case, Tyson's basis in his KT partnership interest is $20,000. The fair value of the proportionate, liquidating distribution is $16,000 cash and land with a $16,000 fair value. The inside basis of the land is $8,000. The amount of gain recognized is $16,000 - $8,000 = $8,000. Therefore, Tyson's gain from the distribution is $8,000 and it is a capital gain.