Randi owns a 40% interest in the capital and profits of the RAY Partnership.Immediately before she receives a proportionate nonliquidating distribution from RAY, the basis for her partnership interest is $60,000.The distribution consists of $45,000 in cash and land with a fair market value of $72,000.RAY's adjusted basis in the land immediately before the distribution is $36,000.As a result of the distribution, Randi recognizes a gain of $21,000.

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the gain or loss recognized on a proportionate nonliquidating distribution:

Gain or Loss = FMV of Property Received - Basis of Partnership Interest

For Randi, the cash portion of the distribution does not affect her basis. Therefore, her gain or loss only depends on the land portion of the distribution:

Gain or Loss = $72,000 - $60,000 = $12,000

This means that Randi recognizes a gain of $12,000, not $21,000. Therefore, the correct answer is B, false.

Randi Owns a 40% Interest in the Capital and Profits