532 MODULE 35 TAXES: PARTNERSHIPS

11. Pro Rata Distributions from Partnership

12. Partnership recognizes no gain or loss on a distribution.
13. If a single distribution consists of multiple items of property, the distributed property reduces
the
partner's basis for the partnership interest in the following order:
14. Money,
15. Adjusted basis of unrealized receivables and inventory, and
16. Adjusted basis of other property.
17. Partner recognizes gain only to the extent money received exceeds the partner's partnership basis.
18. Relief from liabilities is deemed a distribution of money.
19. Gain is capital except for gain attributable to unrealized receivables and substantially appreciated
inventory.
20. The receipt of property (other than money) will not cause the recognition of gain.
EXAMPLE: Casey had a basis of $9,000 for his partnership interest at the time that he received a nonliquidating
partnership distribution consisting of $5,000 cash and other property with a basis of $3,000·and a FMV of $8,000.
No gain is recognized by Casey since the cash received did not exceed his partnership basis. Casey's $9,000 basis
for his partnership interest is first reduced by the $5,000 cash, and then reduced by the $3,000 basis of other prop-
erty, to $1,000. Casey will have a basis for the other property received of $3,000.
21. Partner recognizes loss only upon complete liquidation of a partnership interest through receipt
of
only money, unrealized receivables, or inventory.
22. The amount of loss is the basis for the partner's partnership interest less the money and the part-
nership's basis in the unrealized receivables and inventory received by the partner.
23. The loss is generally treated as a capital loss.
24. If property other than money, unrealized receivables, or inventory is distributed in complete liq-
uidation of a partner's interest, no loss can be recognized.
EXAMPLE: Day had a basis of $20,000 for his partnership interest before receiving a distribution in complete
liquidation of his interest. The liquidating distribution consisted of $6,000 cash and inventory with a basis of
$11,000. Since Day's liquidating distribution consisted of only money and inventory, Day will recognize a loss on
the liquidation of his partnership interest. The amount of loss is the $3,000 difference between the $20,000 basis
for his partnership interest, and the $6,000 cash and the $11,000 basisfor the inventory received. Day will have
an $11,000 basis for the inventory.
EXAMPLE: Assume the same facts as in the preceding example except that Day's liquidating distribution consists
of $6,000 cash and a parcel of land with a basis of $11,000. Since the liquidating distribution now includes
property other than money, receivables, and inventory, no loss can be recognized on the liquidation of Day's
partnership interest. The basisfor Day's partnership interest isfirst reduced by the $6,000 cash to $14,000. Since
no loss can be recognized, the parcel of land must absorb all of Day's unrecovered partnership basis. As a result,
the land will have a basis of $14,000. .
25. In nonliquidating (current) distributions, a partner's basis in distributed property is generally the
same part-
as the nership interest less any money received.
partne EXAMPLE: Sara receives a current distribution from her partnership at a time when the basis for her partnership in-
rship'S terest is $10,000. The distribution consists of $7,000 cash and Sec. 1231 property with an adjusted basis of $5,000 and
former a FMV of $9,000. No gain is recognized by Sara since the cash received did not exceed her basis. After being reduced
by the cash, her partnership basis of $3,000 is reduced by the basis of the property (but not below zero). Her basis for
basis the property is limited to $3,000.
in the
proper 26. If multiple properties are distributed in a liquidating distribution, or if the partnership's basis for
distributed properties exceed the partner's basis for the partnership interest, the partner's basis for the
ty; but
partnership interest is allocated in the following order:
is
limite 27. Basis is first allocated to unrealized receivables and inventory items in an amount equal to their
d to adjusted basis to the partnership. If the basis for the partner's interest to be allocated to the assets
the is less than the total basis of these properties to the partnership, a basis decrease is required and is
basis determined under (1) below.
for the 28. To the extent a partner's basis is not allocated to assets under a. above, basis is allocated to other
partne distributed properties by assigning to each property its adjusted basis in the hands of the partner-
r's ship, and then increasing or decreasing the basis to the extent required in order for the adjusted ba-
sis of the distributed properties to equal the remaining basis for the partner's partnership interest.