CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a partnership, distributes a nonliquidating cash distribution of $20,000 to Partner A. Partner A's adjusted basis in the partnership interest immediately before the distribution was $15,000. What is Partner A's recognized gain and basis in the partnership interest after the distribution?
- ARecognized Gain: $5,000; Basis: $0
- BRecognized Gain: $0; Basis: $0
- CRecognized Gain: $5,000; Basis: $5,000
- DRecognized Gain: $0; Basis: $5,000
Show answer & explanationAnswer & explanation
Correct answer: A. Recognized Gain: $5,000; Basis: $0
In a nonliquidating distribution, a partner recognizes gain only to the extent that the cash distributed exceeds the adjusted basis of their partnership interest. Here, the cash distributed ($20,000) exceeds the basis ($15,000) by $5,000, so Partner A recognizes a $5,000 gain. Partner A's basis becomes $0.
Why the other options are wrong
- B. Incorrect. A gain is recognized when cash exceeds basis, and basis cannot be negative.
- C. Incorrect. While the gain is correct, the ending basis should be $0, as it cannot go below zero for cash distributions.
- D. Incorrect. A gain is recognized when cash exceeds basis, and the basis becomes zero.
Partnership Nonliquidating Cash Distribution
A partner recognizes gain in a nonliquidating cash distribution only if the cash received exceeds the partner's adjusted basis in their partnership interest. The basis cannot go below zero.
- Gain recognition is limited to cash exceeding basis
- Basis is reduced by the cash distributed, but not below zero
- No loss is recognized in nonliquidating distributions
Memory trick: Cash in hand, if it's more than your share, a gain you'll declare, with basis to spare (zero, that is).