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QUESTION

The Olive Partnership makes a proportionate distribution of its assets to Jerry, in complete liquidation of his partnership interest.

The Olive Partnership makes a proportionate distribution of its assets to Jerry, in complete liquidation of his partnership interest. The distribution consists of $40,000 in cash and capital assets with a basis to the partnership of $150,000 and a fair market value of $160,000. None of the payment is for partnership goodwill. At the time of the distribution, Jerry's partnership basis is $150,000 and the partnership has no liabilities and no "hot assets." If the partnership makes an optional basis adjustment election on a timely filed return, it recognizes:

a.      Capital gain of $40,000 and increases the basis of its remaining assets by $40,000.

b.      Capital loss of $40,000 and decreases the basis of its remaining assets by $40,000.

c.      No gain or loss and increases the basis of its remaining assets by $40,000.

d.     No gain or loss and decreases the basis of its remaining assets by $40,000.

e.      None of the above.

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