Question

Petra's basis was $50,000 in the PAM Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $40,000, fair market value of $60,000) and inventory (basis of $40,000, fair market value of $40,000). After the distribution, Petra's bases in the land and inventory, respectively, are:a.$40,000 and $0.

b.$10,000 and $40,000.

c.$25,000 and $25,000.d.$40,000 and $10,000.

e.$40,000 and $40,000.

Answer 1

b.$10,000 and $40,000.

Step-by-step explanation:

Under the ordering rules for distributions, cash is distributed first, then followed by unrealized receivables and inventory; other assets are distributed last.

For Petra, the inventory is distributed first and takes a carryover basis of $40,000.

This reduces Petra's basis to $10,000. The land is distributed next and takes the $10,000 remaining basis

$50,000 (partnership interest) – $40,000 (inventory) = $10,000 (land distribution)