Choice "C" is correct. In a complete liquidation of a partnership, the partner's basis in property received is the same as the adjusted basis of his partnership interest reduced for any monies actually received and is generally a nontaxable event. However, if a partner receives only money that exceeds his basis in the partnership, gain or loss is recognized. In this instance, Frazier's basis in his partnership interest was $1,200. He received $1,500 in cash in the liquidation. Frazier's gain is calculated as follows:

Note: Don't be confused by the term "outside basis." The term outside basis merely refers to the differences that may exist between the partner's share of the basis of the assets in the hands of the partnership (inside basis) and his basis in his partnership interest.Choice "a" is incorrect. If Frazier had received property other than cash, gain would not have been recognized.
Choice "d" is incorrect. This choice appears to utilize Frazier's book capital of $1,000 (which is wrong) and 50% of the fair market value of the equipment to calculate gain of $500. However, use of that capital balance as his basis and the fact that the question does not indicate that Frazier received anything other than the cash as a distribution make this choice incorrect.
Choice "b" is incorrect. This choice erroneously uses Frazier's capital on the partnership's balance sheet as his basis in his partnership.