Pettifog Partnership distributes cash of $20,000, hot assets worth $5,000, and a parcel of land in a liquidating distribution to Li, a partner. The hot assets have a basis of $0 to the partnership. The land has a fair market value of $80,000 and an inside basis of $55,000. Li's outside basis in Pettifog just prior to the distribution is $85,000. What amount of gain or loss, if any, must Li recognize and what is Li's resulting basis in the land?

The amount of gain that Li will have is $0 and the resulting basis of land is $60,000.

Explanation:

To take out the resulting basis of land and gain or loss, we need to know what happens in this situation of liquidating distribution. Under this liquidating distribution, the gain will only be recognized when the cash receipts that Li will receive are more than than the outside basis.

Here Li is also receiving other assets along with the cash, so the remaining balance (which we will get by subtracting cash receipts from the Li outside basis before distribution) will be adjusted against these assets.

Li outside basis = $85,000

(-) cash received = $20,000

(-) hot assets = $5,000

Balance left to be adjusted against assets = $60,000

Here there is no gain for Li since cash receipts are not more than than outside basis and the resulting basis in land is $60,000.