Furthermore, in the following example, how do you know which order in which to apply the adjustments to basis? Do you just assume that these assets were distributed in the order in which they're listed?
“The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang's partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?
a.
$0 gain or loss.
b.
$0 ordinary gain and $1,000 capital loss.
c.
$1,000 ordinary gain and $1,000 capital loss.
d.
$1,000 ordinary gain and $0 capital loss.
Explanation
Choice “c” is correct. In this liquidating distribution of a partnership, three different assets are distributed. The $4,000 cash distributed reduces Chang's (outside) basis in the partnership to $8,000. At that point, Chang's outside basis is less than the total (inside) basis of the remaining property distributed. The inventory gets $4,000 of basis first and Chang's outside basis is reduced to $4,000. The land gets the remaining $4,000 basis (whatever is left over). The sale of the inventory for $5,000 then produces a $1,000 ordinary gain ($5,000 – $4,000), and the sale of the land for $3,000 produces a $1,000 capital loss ($3,000 – $4,000).”
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