What is the tax effect of the distribution to Melodie

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Problem - At the beginning of the tax year, Melodie's basis in the MIP LLC was $60,000, including her $40,000 share of the LLC's liabilities. At the end of the year, MIP distributed to Melodie cash of $10,000 and inventory (basis of $6,000, fair market value of $10,000). In addition, MIP repaid all of its liabilities by the end of the year.

Required -

a. If this is a proportionate current 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 part (a) change if this had been a proportionate liquidating distribution? Explain.

Reference no: EM132648454

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