A client, a partnership, made a nonliquidating distribution of marketable securities to Partner G. The securities had a fair market value (FMV) of $40,000 and an adjusted basis to the partnership of $25,000. Partner G's outside basis in the partnership immediately before the distribution was $30,000. What is Partner G's basis in the distributed marketable securities?
- A$0
- B$40,000
- C$30,000
- D$25,000
Show answer & explanationAnswer & explanation
Correct answer: C. $30,000
In a nonliquidating distribution, the partner's basis in distributed property is generally the partnership's adjusted basis in the property immediately before the distribution. However, this basis cannot exceed the partner's outside basis in the partnership reduced by any money distributed in the same transaction. For marketable securities, the basis to the partner is generally the *fair market value* of the securities, but this amount cannot exceed the partner's adjusted basis in the partnership interest immediately before the distribution, reduced by any cash distributed in the same transaction. Here, since no cash was distributed, Partner G's basis in the marketable securities is limited to their outside basis of $30,000. The partnership's basis of $25,000 is irrelevant for marketable securities if the partner's outside basis is higher. The FMV of $40,000 is also limited by the partner's outside basis.
Why the other options are wrong
- A. Incorrect. This would imply the entire distribution was taxable or reduced basis to zero.
- B. Incorrect. The basis in marketable securities is limited by the partner's outside basis, even if the FMV is higher.
- D. Incorrect. This would be the partnership's basis, which is generally used for non-marketable property, but not for marketable securities if the partner's outside basis is lower than FMV.
Partnership Nonliquidating Distribution (Marketable Securities)
In a nonliquidating distribution of marketable securities, a partner's basis in the distributed securities is generally their fair market value (FMV), but cannot exceed the partner's adjusted basis in their partnership interest (outside basis) immediately before the distribution, reduced by any cash distributed.
- Generally, partner takes FMV basis in marketable securities.
- Basis is limited by the partner's outside basis.
- Outside basis reduced by any cash distributed first.
- This rule prevents partners from converting what would be cash distributions into property distributions to avoid gain recognition.
Memory trick: Basis from Partnership, but Not More Than My Basis.