I think this question in Ninja contradicts you Amay.
While preparing a partnership tax return, the accountant discovered that ABC Partnership distributed property to Anne, a partner, in a nonliquidating transfer. No money was distributed to Anne during the year, the property was in the partnership for over five years, and no debt was attached to the property. Anne had a basis in her partnership interest of $10,000. The partnership had an adjusted basis of $20,000 in the property distributed to Anne. Which of the following are the tax consequences to Anne?
A. $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $10,000
B. $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000
C. $10,000 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000
D. $10,000 gain, basis in the partnership is unchanged, and basis in the property received is $20,000
The answer is A:
Explanation: The general rule is that neither the partner nor the partnership recognizes a gain or loss on a nonliquidating distribution of partnership property to a partner. The exception is if cash is distributed and exceeds the adjusted basis of the partnership interest, the excess is recognized gain to the partner.
The adjusted basis of the partner's partnership interest is first reduced by any cash received (in this case, no cash was distributed), and the adjusted basis is next reduced by the adjusted basis of the property in the hands of the partnership. However, the partner's adjusted basis in the partnership interest cannot be reduced below zero. Therefore, the land received by Anne will take a substituted basis of $10,000, the amount of her adjusted basis in the partnership interest prior to the distribution of the land.
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