Question

The PW partnership's balance sheet includes the following assets immediately before it liquidates:

Basis FMV
Cash $10,000 $10,000
Unrealized receivables -0- 10,000
Total $10,000 $20,000

In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Pamela's recognized gain or loss?

a. $5,000 ordinary income.
b. $2,500 capital gain and $2,500 ordinary income.
c. $0.
d. $5,000 capital gain.

Answer 1

In a complete liquidation of PW partnership, Pamela recognizes a $5,000 capital gain, as she receives $10,000 in cash while her basis in the partnership is (D) $5,000, and the distribution is in cash which is a capital asset.

Step-by-step explanation:

The question is asking about the tax consequences of a partnership liquidation for the partner receiving cash. When PW partnership liquidates, it distributes $10,000 in cash to Pamela. Since Pamela's outside basis in PW is $5,000, she will recognize a gain on the liquidation. However, the character of the gain depends on the nature of the assets being distributed in relation to her basis in the partnership.

In this case, because Pamela is receiving cash which is a capital asset, the gain is the difference between the cash received ($10,000) and her basis in the partnership ($5,000), resulting in a $5,000 gain. Since the cash does not transform into ordinary income, the correct answer is that the gain is a capital gain. Hence, Pamela's recognized gain is a $5,000 capital gain.