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First, AJ must determing his basis in Trane as of the distribution. At the beginning of the year, his basis is $75,000. Trane earns $42,800 during the period of which 305+ is allocable to AJ. He increases his basis by his $12,840 ($427,800 = 30%) share of Trane's income. Thus, as of the distribution, AJ's basis in Trane is $87,840 ($75,000 + $12,840). Next, AJ accounts for the deemed cash distribution relating to his reduction of Trane debt. His 30% share of Trane's $51,600 debt is 315,480. AJ reduces his outside basis by the 515.480 leaving a basis of $72,360 to allocate to the distributed assets. He does not recognize any gain or oss on the distribution because the deemed cash distribution does not exceed his basis in Trane. 20.c. What is AJ's basis in the distributed assets? Explanation Cc. Al calculanes his basis in the distributed asserts as follows: 1. First he assigns a carryover basis to the distributed assets. InventoryS57, 608 Land 30, 860 Since the sum of the adjusted bases of the distributed assets ($87,800) is greater than his basis in Trane after the deemed cash distribution ($72,360), he has a required decrease of $15,440. 2. AJlallocates his required decrease to the other property with unrealized depreciation. Since the distributed land has an inherent loss of $5,400, AJ allocates this amount of the required decrease to the land. Thus, at the end of this step, the basis in the land is $25,400. 3. Inthe final step, AJ allocates the remaining required decrease $10,040 ($15_440 - $5,400) to the land. After completing the allocation his bases in the distributed assets are: Inventory $57,600 Land ($25,400 in step 2 - $16,640) 15,360