Answer (A) is correct.
The basis of properties distributed by a partnership in a liquidating distribution to a partner is the adjusted basis of the partner’s interest in the partnership less any money received in the same distribution. The basis of distributed property is allocated first to inventory items and unrealized receivables up to the amount of the partnership’s adjusted basis in these items, then to other property to the extent of each distributed property’s adjusted basis to the partnership. The remaining basis increase or decrease is allocated depending on whether the adjusted bases of the distributed properties exceed the partner’s remaining basis in the partnership interest or not. Since the partnership’s bases in the distributed properties exceed the partner’s remaining basis in the partnership, a decrease must be allocated among the properties with unrealized depreciation, in proportion to their respective amounts of unrealized depreciation (to the extent of cash property’s depreciation), and then in proportion to the properties’ respective adjusted bases (considering the adjustments already made). In this case, a $40,000 decrease ($50,000 reduced by $10,000 because of the decrease in the computer’s value to fair market value) is allocated based on the properties’ respective adjusted bases as follows:
Building
Computer
Carryover basis
$80,000
$20,000
Allocate decline
(10,000)
$80,000
$10,000
Allocate decrease (8/9 to building
and 1/9 to equipment)
(35,555)
(4,445)
Basis
$44,445
$ 5,555
.