A client, Partnership X, distributes property with a fair market value (FMV) of $50,000 and an adjusted basis to the partnership of $30,000 to Partner C in a nonliquidating distribution. Partner C's adjusted basis in her partnership interest before the distribution was $25,000. What is Partner C's basis in the distributed property immediately after the distribution?
- A$0
- B$50,000
- C$30,000
- D$25,000
Show answer & explanationAnswer & explanation
Correct answer: D. $25,000
In a nonliquidating distribution, the partner's basis in distributed property is generally the partnership's adjusted basis in the property. However, this basis cannot exceed the partner's adjusted basis in her partnership interest immediately before the distribution, reduced by any money distributed in the same transaction. Here, the partnership's basis ($30,000) exceeds Partner C's basis ($25,000). Therefore, Partner C's basis in the distributed property is limited to her pre-distribution partnership basis of $25,000. Her partnership basis is then reduced to $0.
Why the other options are wrong
- A. This would be the partnership basis if the partner's basis was less than zero, which is not the case.
- B. This is the FMV, which is not used for determining basis in nonliquidating distributions.
- C. This is the partnership's basis in the property, but the partner's basis is limited by her outside basis.
Partnership Nonliquidating Distributions
In a nonliquidating distribution, a partner takes a basis in distributed property equal to the partnership's basis, limited by the partner's pre-distribution outside basis.
- Partner's basis in property = partnership's basis (inside basis).
- Limited to partner's outside basis (before distribution, reduced by cash).
- Partner's outside basis is reduced by the basis taken in the distributed property.
Memory trick: Non-Liquidating Basis: Partnership's Basis, But Don't Go Over Your Own!