At the beginning of the tax year, Melodie's basis in the MIP LLC was $60,000, including Melodie's $40,000 share of the LLC's liabilities. At the end of the year, MIP distributed to Melodie cash of $10,000 and inventory (bais of $6,000, fair market value of $10,000). MIP repaid all of its liabilities by the end of the year. a. If this is a proportionate nonliquiding distribution, what is the tax effect of the distribution to Melodie and MIP? After the distribution, what is Melodie's basis in the inventory and in her MIP interest?

b. Would your answers to (a) change if this had been a proportionate liquidating distribution? Explain.

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Business

Nikhil Stevens

6 February, 04:48

At the beginning of the tax year, Melodie's basis in the MIP LLC was $60,000, including Melodie's $40,000 share of the LLC's liabilities. At the end of the year, MIP distributed to Melodie cash of $10,000 and inventory (bais of $6,000, fair market value of $10,000). MIP repaid all of its liabilities by the end of the year. a. If this is a proportionate nonliquiding distribution, what is the tax effect of the distribution to Melodie and MIP? After the distribution, what is Melodie's basis in the inventory and in her MIP interest?

b. Would your answers to (a) change if this had been a proportionate liquidating distribution? Explain.

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Answers (1)

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Finley Mack · Answer 1

a. Monica is treated as receiving cash distributions of $50,000 ($10,000 cash plus $40,000 relief of liabilities). The distributions reduce Monica's basis to $10,000

b. The inventory takes a carryover basis to Monica of $6,000, and reduces her basis in MIP to $4,000

c. If this is a proportionate liquidating distribution, Monica recognizes a loss of $4,000, and her basis in the inventory will be $6,000. The inventory cannot be "stepped up" to absorb the $10,000 of basis remaining after the distribution. Because Monica has received only cash and inventory, she may claim the loss.