i decided to answer some random tax mcq's
what I don't get about this question is why wasn't FMV of inventory used
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 a 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 ordinary gain and $1,000 capital loss.
B. $1,000 ordinary gain and $0 capital loss.
C. $0 gain or loss.
D. $1,000 ordinary gain and $1,000 capital loss.
Answer (D) is correct.
Chang begins with $12,000 of AB. Cash is distributed first and Chang’s AB is reduced to $8,000. Next, the $4,000 of inventory reduces Chang’s overall AB to $4,000. Since there is only $4,000 AB remaining, Chang is only able to take a $4,000 basis in the land. He cannot go negative in basis for a non-cash distribution. The sale of the inventory was completed within 5 years of the distribution; therefore, the $1,000 gain ($5,000 sale price – $4,000 AB) is an ordinary gain (not capital gain). The sale of the land results in a $1,000 capital loss ($3,000 sale price – $4,000 AB).
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