Question

Justin and Lauren are equal partners in the PJenn Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners have the following bases in their partnership interests:
Partner Outside Basis
Justin $22,000
Lauren 22,000

On December 31 of the current year, the partnership makes a pro rata operating distribution of:

Partner Distribution
Justin Cash $25,000
Lauren Cash $18000
Property 9,000 (FMV)
($2,000 to partnership)

Requried:
a. What is the amount and character of Justin's recognized gain or loss?
b. What is Justin's remaining basis in his partnership interest?
c. What is the amount and character of Lauren's recognized gain or loss?
d. What is Lauren's basis in the distributed assets?
e. What is Lauren's remaining basis in her partnership interest?

Answer 1

Answer:

PJenn Partnership

a. The amount and character of Justin's recognized gain or loss:

Justin has a recognized gain of $3,000 ($25,000 - $22,000).  The character of Justin's recognized gain or loss must have substantial economic effect.

b. Justin's remaining basis in his partnership interest = $1,000 ($2,000/2) in the property distribution to the partnership.

c. The amount and character of Lauren's recognized gain or loss:

Lauren has a recognized gain of $3,000 ($25,000 - $22,000).  The character of Justin's recognized gain or loss must have substantial economic effect.

d. Lauren's basis in the distributed assets is $22,000, which is her outside basis.

e.Lauren's remaining basis in her partnership interest = $1,000 ($2,000/2) in the property distribution to the partnership.

Explanation:

a) Data and Calculations:

Partner Outside Basis    Partner Distribution

Justin $22,000              $25,000 cash

Lauren 22,000             $18,000 cash + $7,000 in property

Property $2,000 to Partnership

Justin and Lauren's recognized gain or loss is determined by the amount of the sale minus the partner's interest, which is often referred to as the partner's outside basis.

Justin's and Lauren's remaining basis in the partnership is the amount of the fair market value of property remaining after Lauren's share in the property.