Question

Sarah is a 50% partner in the SF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Sarah receives a proportionate operating distribution of $20,000 cash. What is the amount and character of Sarah's recognized gain or loss and what is her basis in her partnership interest?

A) $0 gain, $36,000 basis.

B) $20,000 ordinary income, $56,000 basis.

C) $0 gain, $56,000 basis.

D) $20,000 ordinary income, $36,000 basis.

Answer 1

A) $0 gain, $36,000 basis.

Step-by-step explanation:

Any type of money that a partner receives from the partnership reduces the partner's basis in the partnership. Even when the partner receives a salary from the partnership it is called drawing, it is not considered salary expense.

Cash distributions reduce the partner's basis = basis - cash distribution = $56,000 - $20,000 = $36,000

Since the distribution is less than Sarah's basis, they are not taxable (Section 731)