ExpertHard1 markMultiple Choice
CPA · Question 51 · Area II: Entity Tax Compliance
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?
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:
A.
$10,000
B.
$15,000
C.
$0
D.
$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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