Question

JESSICIA IS A 25 % PARTNER IN THE JRL PARTNERSHIP. ON JANUARY 1, JRL DISTRIBUTES $40,000 CASH TO JESSICIA.

JRL HAS NO HOT ASSETS OR LIABILITIES AT THE DATE OF THE DISTRIBUTION.

JESSICA'S BASIS IN JRL IS $28,000.

WHAT IS THE AMOUNT AND CHARACTER OF JESSICA'S (GAIN OR LOSS) FROM THE DISTRIBUTION?

MULTIPLE CHOICE

1. $0
2. $12,000 ORDINARY INCOME
3. $12,000 CAPITOL LOSS
4. $12,000 CAPITOL GAIN

Answer 1

4. $12,000 CAPITOL GAIN

Step-by-step explanation:

JRL distributes $40,000 Cash to Jessica which includes $28,000 basis of Jessica in JRL. So the remaining amount of $12,000 will be accumulated as Capital Gain for Jessica as JRL has no other Asset or Liability at the date of Distribution of Cash.