[needhelpnow]

Belson and Forman decided to terminate North partnership. On the date of termination, North’s balance sheet was as follows:

Adjusted Basis

Cash $2,000

Equipment (fair market value $4,000) $6,000

Capital – Belson $4,000

Capital – Forman $4,000

Forman’s outside basis is $2,000. The partnership assets were distributed equally between the partners. What is Forman’s tax basis in the property received?

a $1,000

b $4,000

c $6,000

d $10,000

Answer: C

Explanation: Forman’s partnership interest is terminating, and therefore he is receiving a liquidating distribution. When a partner receives a liquidating distribution, their basis in the partnership must be reduced to $0. Forman would first receive cash of $1,000 ($2,000 x 50% = $1,000). This cash distribution would reduce Foreman’s basis to $1,000. The partnership’s basis in the equipment distributed to Forman is $3,000 ($6,000 x 50% = $3,000). Since it exceeds the partner’s basis in the partnership, which is reduced to zero in a liquidating distribution, the basis of the property distributed must equal the partner’s basis in the partnership before the distribution. In this case, Forman’s basis in the partnership before the distribution of the property is $1,000 and thus his basis in the property will be $1,000.

BUT, this doesn’t make sense to me. Why? Please help understand. Thank you in advance!

[Anonymous]

The correct answer to me is A, which is $1,000..not sure why it says the answer is C. Forman's basis before the liquidating distribution is $2,000. He receives $1,000 in cash and property with an adjusted basis of $3,000 (6,000/2). The cash reduces his basis first, to $1,000, so his remaining basis is $1,000.

The rule in P/S liquidating distributions is that you “zero out to get out,” which means that you eliminate the partner's basis in the P/S and allocate it to any property received. Since Forman's remaining basis is $1,000, you would allocate it to the property distributed, giving him a basis in the property of $1,000.

[gt5717b]

Probably just a typo in the book. The explanation definitely seems to justify answer A and not C.

REG - 89
FAR - 84
AUD - 73, 86
BEC - 89

GA Licensed CPA

[needhelpnow]

Thank you guys!

[Author]

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