Proportionate Nonliquidating Distributions

In each of the following independent situations, assume partner Bob has a basis in his partnership interest of $50,000.

What gain or loss is recognized, and what is Bob's basis in the property received and the partnership interest if the partnership makes the following proportionate nonliquidating distributions?

(1) The partnership distributes $40,000 in cash.

Bob reduces his basis in the partnership interest to $10,000, has a $40,000 basis in the cash received, and recognizes no gain or loss.

(2) The partnership distributes $60,000 cash.

Bob reduces his basis in the partnership interest to $0, has a $60,000 basis in the cash received, and he must recognize a gain of $10,000 on the excess distribution.

(3) The partnership distributes $40,000 cash and unrealized accounts receivable $20,000.

Bob takes a basis in the cash of $40,000 and a substituted basis in the receivables of $10,000. His basis in the partnership interest is reduced to $0, and he recognizes no gain or loss.

(4) The partnership distributes inventory with a basis of $5,000 and a value of $10,000.

Bob takes a carryover basis of $5,000 in the inventory, and reduces his basis in the partnership interest to $45,000. He recognizes no loss since this is a nonliquidating distribution.

(5) The partnership distributes two parcels of land, each valued at $30,000. The basis in parcel A is $40,000 and the basis in parcel B is $20,000.

Bob assigns a substituted basis of $50,000 to the two parcels, and reduces his basis in his partnership interest to $0. Bob’s $50,000 basis is allocated between the two parcels as follows.

1. First, the parcels are assigned carryover bases of $40,000 and $20,000, respectively ($60,000 total).

2. Next, the reduction in value in parcel 1 is eliminated, to reduce its basis from $40,000 to $30,000. The basis of parcel2 is not adjusted since it is an appreciated asset.

3. Since the bases in the properties now total the $50,000 basis Bob must allocate to the parcels, no further adjustment is made. Parcel1 is allocated a basis of $30,000 and parcel2 is allocated a basis of $20,000. The bases are now closer to the fair market values of the properties.

Bob recognizes no gain or loss.

Proportionate Liquidating Distributions

Assume partner Bob has a basis in his partnership interest of $50,000 in each of the following independent situations. What gain or loss is recognized, and what is Bob's basis in the property received and the partnership interest if the partnership makes the following proportionate liquidating distributions (where the partnership also liquidates)?

(1) The partnership distributes $40,000 cash.

Bob has a $40,000 basis in the cash received and recognizes a $10,000 loss, since he received “only cash, unrealized receivables and inventory” in the distribution.

(2) The partnership distributes $60,000 cash.

Bob reduces his basis in the partnership interest to $0, has a $60,000 basis in the cash received, and he must recognize a gain of $10,000 on the excess distribution. (This is the same result as in the current distribution above.)

(3) The partnership distributes $40,000 cash and accrual basis accounts receivable with a basis and fair market value of $20,000.

Bob takes a basis in the cash of $40,000 and a substituted basis in the receivables of $10,000. His basis in the partnership interest is reduced to $0, and he recognizes no gain or loss. (This is the same result as in the current distribution above.)

(4) The partnership distributes inventory with a basis of $5,000 and a value of $10,000.

Bob takes a carryover basis of $5,000 in the inventory, and reports a loss on his partnership interest of $45,000, since he received “only cash, unrealized receivables and inventory” in the distribution. He recognizes a loss since this is a liquidating distribution.

(5) The partnership distributes two parcels of land, each valued at $20,000. The basis in parcel A is $10,000 and the basis in parcel B is $20,000.

Bob assigns a substituted basis of $50,000 to the two parcels, and reduces his basis in his partnership interest to $0. Bob’s $50,000 basis is allocated between the two parcels as follows.

1. First, the parcels are assigned carryover bases of $10,000 and $20,000, respectively ($30,000 total).

2. Next, the appreciation in parcel 1 is added to the basis of the parcel. This increases its basis from $10,000 to $20,000. The basis of parcel2 is not adjusted above $20,000 since it is not an appreciated asset.

3. The bases in the properties now total $40,000, but Bob must allocate $50,000 to them. The additional $10,000 basis is allocated according to the relative values of the property after adjustment in 2. above. Since the properties have equal allocations ($20,000), the $10,000 is allocated equally ($5,000 to each parcel). Bob’s basis in each parcel, then, is $25,000.

He recognizes no gain or loss. Note that he can “step-up” the basis in land (a capital asset), but he cannot “step-up” his basis in unrealized receivables or inventory [(4) above)].

Proportionate Liquidating Distributions - #5, in review:

Bob’s P/S Basis / $50,000
Land Distributed / A / B
FMV / 20,000 / 20,000 / 40,000
Basis / 10,000 / 20,000 / 30,000
First
Assign carryover basis to both Parcels
Basis / 10,000 / 20,000 / 30,000
Second
Increase Parcel A to it FMV
Increase / 10,000 / 10,000
New Basis / 20,000 / 20,000 / 40,000
Third
$10,000 more basis must be allocated /
Allocation increase* / 5,000 / 5,000 / 10,000
Final distributed basis / 25,000 / 25,000 / 50,000

* Since the two properties have equal FMV ($20,000) the remaining $10,000

is allocated equally, $5,000 to each property.

Note: he can step-up the basis in land, a capital asset, but cannot step-up his

basis in unrealized receivables or inventory.