Pat, Kelly, and Yvette are equal partners in the PKY Partnership before Kelly sells her partnership interest. On January 1 of the current year, Kelly's basis in her partnership interest, including her share of liabilities, was $35,000.
During January, the calendar year partnership earned $15,000 ordinary income and $6,000 of tax-exempt income. The partnership has a $60,000 recourse liability on January 1, and this amount remains constant throughout the tax year. Kelly's share of that liability is $20,000. The partnership has no other liabilities. Kelly sells her interest on February 1 to Margaret for a cash payment of $45,000. On the sale date, the partnership had the following assets:
Assets Partnership’s Basis FMV
Cash $2,500 $2,500
Inventory $8,000 $9,000
Capital Asset 1 $10,000 $15,000
Capital Asset 2 $15,000 $17,500
Total $35,500 $44,000
Note that Sec. 751 does not apply because the inventory is not substantially appreciated.
a. Determine Larry's basis in each distributed asset.
b. Determine Larry's basis in each distributed asset if the distribution is $46,500.
c. Determine Larry's basis if Capital Asset 2 is $20,000 instead of $15,000.
d. Determine Larry's basis if his partnership basis before distribution is $34,000.
