A partnership distributes a 'hot asset' (unrealized receivable with Basis $0, FMV $10,000) to a partner in liquidation of their interest. The partner's outside basis is $15,000. What is the partner's basis in the receivable?

Answer options:

$10,000

$15,000

$5,000

How to approach this question

Rule: You can NEVER step up the basis of hot assets (receivables/inventory) distributed by a partnership. They keep their inside basis (or lower if outside basis is insufficient).

Full Answer

C.$0✓ Correct

IRC §732(c)(1). The basis of unrealized receivables and inventory distributed to a partner cannot exceed the adjusted basis of such property to the partnership. Since the partnership basis was $0, the partner's basis is $0. The partner recognizes a capital loss of $15,000 (remaining basis).

Common mistakes

Allocating the partner's excess outside basis to the receivable.

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