ExpertHard1 markMultiple Choice
CPA · Question 40 · Area II: Entity Tax Compliance
A partner receives a liquidating distribution consisting of Cash ($10,000) and Inventory (Basis $20,000, FMV $25,000). The partner's outside basis is $40,000. What is the partner's recognized loss?
A partner receives a liquidating distribution consisting of Cash ($10,000) and Inventory (Basis $20,000, FMV $25,000). The partner's outside basis is $40,000. What is the partner's recognized loss?
Answer options:
A.
$0
B.
$10,000 Capital Loss
C.
$10,000 Ordinary Loss
D.
$5,000 Capital Loss
How to approach this question
Liquidating Loss Rule: Allowed ONLY if distribution is solely Cash, Inventory, and Unrealized Receivables AND Outside Basis > Sum of Inside Bases distributed.
Full Answer
B.$10,000 Capital Loss✓ Correct
IRC §731(a)(2). Loss is recognized if (1) only money, unrealized receivables, and inventory are received, and (2) the partner's basis exceeds the sum of money and the partnership's basis in those assets. <br/>Loss = $40,000 - ($10,000 + $20,000) = $10,000. Character is Capital Loss.
Common mistakes
Thinking losses are never recognized on distribution, or treating it as ordinary.
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