Choice "d" is correct. In this liquidating distribution of a partnership, three different assets are distributed. The $4,000 cash distributed reduces Chang's (outside) basis in the partnership to $8,000. At that point, Chang's outside basis is less than the total (inside) basis of the remaining property distributed. The inventory gets $4,000 of basis first and Chang's outside basis is reduced to $4,000. The land gets the remaining $4,000 basis (whatever is left over). The sale of the inventory for $5,000 then produces a $1,000 ordinary gain ($5,000 - $4,000), and the sale of the land for $3,000 produces a $1,000 capital loss ($3,000 - $4,000).

Choice "c" is incorrect. There is gain or loss on the sale transactions because each of the assets distributed is sold for an amount that is different from its basis. This choice would require that the inventory be given a basis of $5,000 and the land be given a basis of $3,000.

Choice "b" is incorrect. A $0 ordinary gain could be recognized if the inventory were given a basis of $5,000, but there is no reason for doing that. The $1,000 capital loss is correct, but the choice is already incorrect.

Choice "a is incorrect. A $0 capital loss could be recognized if the land were given a basis of $3,000. That would require that the land be given a basis of its fair market value on the distribution date. However, it is the bases of the property distributed that are allocated, not the fair market values. The $1,000 ordinary gain is correct, but the choice is already incorrect.