Sarah owns a 30% interest in the capital and profits of the STP Partnership.Immediately before she receives a proportionate nonliquidating distribution from STP,the basis of her partnership interest is $25,000.The distribution consists of $20,000 in cash and land with a fair market value of $40,000.STP's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution,Sarah recognizes a gain of $35,000 and her basis in the land is $40,000.

Question

Quizplus · Accepted Answer

Under § 731(a)gain is recognized by a distributee partner in a nonliquidating distribution only if the cash received (including marketable securities or liability relief treated as cash)exceeds the basis of the partner's interest.Since Sarah received cash of only $20,000,no gain results.Sarah's basis in the land is limited to $5,000,and her interest basis is reduced to zero.

Sarah Owns a 30% Interest in the Capital and Profits