LO.2, 12 Paula’s basis in her partnership interest is $60,000. In liquidation of her interest, the partnership distributes to Paula cash of $20,000 and inventory (basis of $5,000 and value of $7,000).

a. How much gain or loss, if any, must Paula recognize as a result of the distribution?

b. What basis will Paula take in the inventory?

c. What are the tax consequences to the partnership?

d. Can you recommend an alternative distribution? Explain.

e. Would your answer to

(a) or

(b) change if this had been a nonliquidating distribution?

Explain.