Question

Paula's basis in her partnership interest is $60,000. In liquidation of her interest, the partnership makes a proportionate distribution to Paula of $20,000 cash and inventory (basis of $5,000 and value of $7,000). (Assume that the partnership also liquidates.)

a. How much gain or loss, if any, will Paula recognize on the distribution?
b. What basis will Paula take in the inventory?
c. What are the tax consequences to the partnership?
d. Can you recommend an alternative distribution? Explain.
e. Would your answer to part (a) or (b) change if this had been nonliquidating distribution? Explain.

Answer 1

Answer:

A) PAULA (LOSS) = $60000 - 20000 - 7000

                          = $33000

Explanation:

A) PAULA (LOSS) = $60000 - 20000 - 7000

                          = $33000

B)

Paula will take $7000 in the inventory this is because the market value is considered at the time of liquidation

C)

The business will only pay the amount of tax on the amount realised after setting the liability, this is because the firm is liquidated

D)

The partners may give amount to the Paula  without liquidating business and reduce the amount from capital account

E)

If it non liquidating

A) LOSS = $60000-20000-5000

=35000

B)Paula will take $5000 in the inventory as cost is considered at time of liquidation.