Jamie owns a 40% interest in the JSD LLC. In liquidation of the entity, Jamie receives a proportionate distribution of $20,000 cash, inventory (basis of $12,000 and fair market value of $14,000), and land (basis of $10,000 and fair market value of $30,000). Jamie's basis in the entity immediately before the distribution was $50,000. As a result of the distribution, what is Jamie's basis in the inventory and land, and how much gain or loss does she recognize?
A) $0 basis in inventory; $30,000 basis in land; $0 gain or loss.
B) $12,000 basis in inventory; $18,000 basis in land; $0 gain or loss.
C) $12,000 basis in inventory; $10,000 basis in land; $8,000 loss.
D) $14,000 basis in inventory; $30,000 basis in land; $14,000 gain.
E) $30,000 basis in inventory; $0 basis in land; $0 gain or loss.

Question

Quizplus · Accepted Answer

Jamie's proportionate share of the inventory is 40% of $12,000, or $4,800, which becomes her basis in the inventory after the distribution. Her proportionate share of the land is 40% of $10,000, or $4,000, which is subtracted from her basis in the entity to get her new basis of $46,000. Since the fair market value of the land received in the distribution is greater than Jamie's adjusted basis in the entity, she must recognize a gain of $30,000 - $46,000 = ($16,000). However, since the fair market value of the inventory received in the distribution is less than Jamie's adjusted basis in the entity, she has no gain or loss to recognize with regard to the inventory. Therefore, Jamie's basis in the inventory is $4,800 and her basis in the land is $4,000, and she recognizes a loss of $16,000.

Jamie Owns a 40% Interest in the JSD LLC