Question

Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and non-inventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

O $0 gain or loss; $0 basis in property.

O $0 gain or loss; $50,000 basis in property.

O $8,000 ordinary income; $0 basis in property.

O $8,000 capital gain; $10,000 basis in property.

O $8,000 capital gain; $0 basis in property.

Answer 1

Michelle does not recognize any gain or loss upon receiving the liquidating distribution from the partnership, and her basis in the distributed non-inventory property becomes $50,000, equal to her original basis in the partnership interest.

Step-by-step explanation:

Michelle recognizes $0 gain or loss and her basis in the distributed non-inventory property is $50,000. Since Michelle received a proportionate liquidating distribution, and the partnership has no hot assets, we can calculate the recognized gain or loss and her basis in the property distributed as follows:

• The total cash received is $58,000.
• The adjusted basis of the non-inventory property to the partnership is $10,000, with a fair market value of $12,000.
• Michelle's basis in her partnership interest before the distribution is $50,000.

Upon liquidation, the cash received is first applied against the basis of the partnership interest. So, $58,000 of cash is subtracted from the $50,000 basis, leaving a negative amount of $8,000. However, since there is additional property distributed, this amount is applied to the basis of the non-inventory property. Therefore, Michelle's basis in the non-inventory property becomes $50,000 (the remaining basis after cash distribution). There is no gain or loss to recognize because liquidation proceeds do not exceed her original basis.