Partnership Distributions Partnership distributions include the following. A withdrawal by a partner in anticipation of the currentyear's earnings. A distribution of the current year's or prior years'earnings not needed for working capital. A complete or partial liquidation of a partner'sinterest. A distribution to all partners in a complete liquidation ofthe partnership. A partnership distribution is not taken into account in determiningthe partner's distributive share of partnership income or loss. If anygain or loss from the distribution is recognized by the partner, itmust be reported on his or her return for the tax year in which thedistribution is received. Money or property withdrawn by a partner inanticipation of the current year's earnings is treated as adistribution received on the last day of the partnership's tax year. Effect on partner's basis.A partner's adjusted basis in his or her partnership interest isdecreased (but not below zero) by the money and adjusted basis ofproperty distributed to the partner. See Adjusted Basisunder Basis of Partner's Interest, later. Effect on partnership.A partnership generally does not recognize any gain or loss becauseof distributions it makes to partners. The partnership may be able toelect to adjust the basis of its undistributed property, as explainedlater under Adjusting the Basis of Partnership Property. Certain distributions treated as a sale or exchange.When a partnership distributes the following items, thedistribution may be treated as a sale or exchange of property ratherthan a distribution. Unrealized receivables or substantially appreciatedinventory items to a partner in exchange for any part of the partner'sinterest in other partnership property, including money. Other property (including money) in exchange for any part ofa partner's interest in unrealized receivables or substantiallyappreciated inventory items. See Payments for Unrealized Receivables and Inventory Itemsunder Disposition of Partner's Interest, later. This treatment does not apply to the following distributions. Hoteles LondresA distribution of property to the partner who contributedthe property to the partnership. Certain payments made to a retiring partner or successor ininterest of a deceased partner. Inventory items that have appreciated substantially in value.Inventory items of the partnership are considered to haveappreciated substantially in value if, at the time of the sale ordistribution, their total fair market value is more than 120% of thepartnership's adjusted basis for the property. However, if a principalpurpose for acquiring inventory property is to avoid ordinary incometreatment by reducing the appreciation to less than 120%, thatproperty is excluded. Partner's Gain or Loss A partner generally recognizes gain on a partnership distributiononly to the extent any money (and marketable securities treated asmoney) included in the distribution exceeds the adjusted basis of thepartner's interest in the partnership. Any gain recognized isgenerally treated as capital gain from the sale of the partnershipinterest on the date of the distribution. If partnership property(other than marketable securities treated as money) is distributed toa partner, he or she generally does not recognize any gain until thesale or other disposition of the property. For exceptions to these rules, see Distribution of partner'sdebt and following discussions, later. Also, see Paymentsfor Unrealized Receivables and Inventory Items underDisposition of Partner's Interest, later. Example.The adjusted basis of Jo's partnership interest is $14,000. Shereceives a distribution of $8,000 cash and land that has an adjustedbasis of $2,000 and a fair market value of $3,000. Because the cashreceived does not exceed the basis of her partnership interest, Jodoes not recognize any income on the distribution. Any gain on theland will be recognized when she sells or otherwise disposes of it.The distribution decreases the adjusted basis of Jo's partnershipinterest to $4,000 [$14,000 - ($8,000 + $2,000)]. Marketable securities treated as money.Generally, a marketable security distributed to a partner istreated as money in determining whether gain is recognized on thedistribution. This treatment, however, does not generally apply ifthat partner contributed the security to the partnership or aninvestment partnership made the distribution to an eligible partner. The amount treated as money is the security's fair market valuewhen distributed, reduced (but not below zero) by the excess (if any)of: The partner's distributive share of the gain that would berecognized had the partnership sold all its marketable securities attheir fair market value immediately before the transaction resultingin the distribution, over The partner's distributive share of the gain that would berecognized had the partnership sold all such securities it still heldafter the distribution at the fair market value in (1). For the definition of marketable securities and other information,see section 731(c) of the Internal Revenue Code. Loss on distribution.A partner does not recognize loss on a partnership distributionunless all of the following requirements are met. The adjusted basis of the partner's interest in thepartnership exceeds the distribution. The partner's entire interest in the partnership isliquidated. The distribution is in money, unrealized receivables, orinventory items. There are exceptions to these general rules. See the followingdiscussions. Also, see Liquidation at Partner's Retirement orDeath under Disposition of Partner's Interest, later. Distribution of partner's debt.If a partnership acquires a partner's debt and extinguishes thedebt by distributing it to the partner, the partner will recognizecapital gain or loss to the extent the fair market value of the debtdiffers from the basis of the debt (determined under the rulesdiscussed in Partner's Basis for Distributed Property,later). The partner is treated as having satisfied the debt for its fairmarket value. If the issue price (adjusted for any premium ordiscount) of the debt exceeds its fair market value when distributed,the partner may have to include the excess amount in income ascanceled debt. Similarly, a deduction may be available to a corporate partner ifthe fair market value of the debt at the time of distribution exceedsits adjusted issue price. Net precontribution gain.A partner generally must recognize gain on the distribution ofproperty (other than money) if the partner contributed appreciatedproperty to the partnership during the 7-year period before thedistribution. Caution: A 5-year period applies to property contributed before June 9,1997, or under a written binding contract: That was in effect on June 8, 1997, and at all timesthereafter before the contribution, and That provides for the contribution of a fixed amount ofproperty. The gain recognized is the lesser of the following amounts. The excess of: The fair market value of the property received in thedistribution, over The adjusted basis of the partner's interest in thepartnership immediately before the distribution, reduced (but notbelow zero) by any money received in the distribution. The "net precontribution gain" of the partner. This isthe net gain the partner would recognize if all the propertycontributed by the partner within 7 years (5 years for propertycontributed before June 9, 1997) of the distribution, and held by thepartnership immediately before the distribution, were distributed toanother partner, other than a partner who owns more than 50% ofthe partnership. See Distribution of contributed property toanother partner under Contribution of Property,later. The character of the gain is determined by reference to thecharacter of the net precontribution gain. This gain is in addition toany gain the partner must recognize if the money distributed is morethan his or her basis in the partnership. For these rules, the term "money" includes marketablesecurities treated as money, as discussed earlier. Effect on basis.The adjusted basis of the partner's interest in the partnership isincreased by any net precontribution gain recognized by the partner.Other than for purposes of determining the gain, the increase istreated as occurring immediately before the distribution. SeeBasis of Partner's Interest, later. The partnership must adjust its basis in any property the partnercontributed within 7 years (5 years for property contributed beforeJune 9, 1997) of the distribution to reflect any gain that partnerrecognizes under this rule. Exceptions.Any part of a distribution that is property the partner previouslycontributed to the partnership is not taken into account indetermining the amount of the excess distribution or the partner's netprecontribution gain. For this purpose, the partner's previouslycontributed property does not include a contributed interest in anentity to the extent its value is due to property contributed to theentity after the interest was contributed to the partnership. Recognition of gain under this rule also does not apply to adistribution of unrealized receivables or substantially appreciatedinventory items if the distribution is treated as a sale or exchange,as discussed earlier. hôtels TurinPartner's Basis forDistributed Property Unless there is a complete liquidation of a partner's interest, thebasis of property (other than money) distributed to the partner by apartnership is its adjusted basis to the partnership immediatelybefore the distribution. However, the basis of the property to thepartner cannot be more than the adjusted basis of his or her interestin the partnership reduced by any money received in the sametransaction. Example 1.The adjusted basis of Beth's partnership interest is $30,000. Shereceives a distribution of property that has an adjusted basis of$20,000 to the partnership and $4,000 in cash. Her basis for theproperty is $20,000. Example 2.The adjusted basis of Mike's partnership interest is $10,000. Hereceives a distribution of $4,000 cash and property that has anadjusted basis to the partnership of $8,000. His basis for thedistributed property is limited to $6,000 ($10,000 - $4,000, thecash he receives). Complete liquidation of partner's interest.The basis of property received in complete liquidation of apartner's interest is the adjusted basis of the partner's interest inthe partnership reduced by any money distributed to the partner in thesame transaction. Partner's holding period.A partner's holding period for property distributed to the partnerincludes the period the property was held by the partnership. If theproperty was contributed to the partnership by a partner, then theperiod it was held by that partner is also included. Basis divided among properties.If the basis of property received is the adjusted basis of thepartner's interest in the partnership (reduced by money received inthe same transaction), it must be divided among the propertiesdistributed to the partner. For properties distributed after August 5,1997, allocate the basis using the following rules. Allocate the basis first to unrealized receivables andinventory items included in the distribution by assigning a basis toeach item equal to the partnership's adjusted basis in the itemimmediately before the distribution. If the total of these assignedbases exceeds the allocable basis, decrease the assigned bases by theamount of the excess. Allocate any remaining basis to properties other thanunrealized receivables and inventory items by assigning a basis toeach property equal to the partnership's adjusted basis in theproperty immediately before the distribution. If the allocable basisexceeds the total of these assigned bases, increase the assigned basesby the amount of the excess. If the total of these assigned basesexceeds the allocable basis, decrease the assigned bases by the amountof the excess. Allocating a basis increase.Allocate any basis increase required in rule (2), earlier first toproperties with unrealized appreciation to the extent of theunrealized appreciation. (If the basis increase is less than the totalunrealized appreciation, allocate it among those properties inproportion to their respective amounts of unrealized appreciation.)Allocate any remaining basis increase among all the properties inproportion to their respective fair market values. Example.Julie's basis in her partnership interest is $55,000. In adistribution in liquidation of her entire interest, she receivesproperties A and B, neither of which is inventory or unrealizedreceivables. Property A has an adjusted basis to the partnership of$5,000 and a fair market value of $40,000. Property B has an adjustedbasis to the partnership of $10,000 and a fair market value of$10,000. To figure her basis in each property, Julie first assigns bases of$5,000 to property A and $10,000 to property B (their adjusted basesto the partnership). This leaves a $40,000 basis increase (the $55,000allocable basis minus the $15,000 total of the assigned bases). Shefirst allocates $35,000 to property A (its unrealized appreciation).The remaining $5,000 is allocated between the properties based ontheir fair market values, $4,000 ($40,000/$50,000) to property A and$1,000 ($10,000/$50,000) to property B. Julie's basis in property A is$44,000 ($5,000 + $35,000 + $4,000) and her basis inproperty B is $11,000 ($10,000 + $1,000). Allocating a basis decrease.Use the following rules to allocate any basis decrease required inrule (1) or rule (2), earlier. Allocate the basis decrease first to items with unrealizeddepreciation to the extent of the unrealized depreciation. (If thebasis decrease is less than the total unrealized depreciation,allocate it among those items in proportion to their respectiveamounts of unrealized depreciation.) Allocate any remaining basis decrease among all the items inproportion to their respective assigned basis amounts (as decreased in(1)). Example.Tom's basis in his partnership interest is $20,000. In adistribution in liquidation of his entire interest, he receivesproperties C and D, neither of which is inventory or unrealizedreceivables. Property C has an adjusted basis to the partnership of$15,000 and a fair market value of $15,000. Property D has an adjustedbasis to the partnership of $15,000 and a fair market value of $5,000. To figure his basis in each property, Tom first assigns bases of$15,000 to property C and $15,000 to property D (their adjusted basesto the partnership). This leaves a $10,000 basis decrease (the $30,000total of the assigned bases minus the $20,000 allocable basis). Heallocates the entire $10,000 to property D (its unrealizeddepreciation). Tom's basis in property C is $15,000 and his basis inproperty D is $5,000 ($15,000 - $10,000). Distributions before August 6, 1997.For properties distributed before August 6, 1997, allocate thebasis using the following rules. Allocate the basis first to unrealized receivables andinventory items included in the distribution to the extent of thepartnership's adjusted basis in those items. If the partnership'sadjusted basis in those items exceeded the allocable basis, allocatethe basis among the items in proportion to their adjusted bases to thepartnership. Allocate any remaining basis to other distributed propertiesin proportion to their adjusted bases to the partnership. Partner's interest more than partnership basis.If the basis of a partner's interest to be divided in a completeliquidation of the partner's interest is more than the partnership'sadjusted basis for the unrealized receivables and inventory itemsdistributed, and if no other property is distributed to which thepartner can apply the remaining basis, the partner has a capital lossto the extent of the remaining basis of the partnership interest. Special adjustment to basis of property received.A partner who acquired any part of his or her partnership interestin a sale or exchange or upon the death of another partner may be ablechoose a special basis adjustment for the property. In order for thepartner to choose the special adjustment, the distribution must bemade within 2 years after the partner acquired the partnershipinterest. Also, the partnership must not have chosen the optionaladjustment to basis, discussed later under Adjusting the Basis ofPartnership Property, when the partner acquired the partnershipinterest. If a partner chooses this special basis adjustment, the partner'sbasis for the property distributed is the same as it would have beenif the partnership had chosen the optional adjustment to basis.However, this assigned basis is not reduced by any depletion ordepreciation that would have been allowed or allowable if thepartnership had previously chosen the optional adjustment. The choice must be made with the partner's tax return for the yearof the distribution if the distribution includes any property subjectto depreciation, depletion, or amortization. If the choice does nothave to be made for the distribution year, it must be made with thereturn for the first year in which the basis of the distributedproperty is pertinent in determining the partner's income tax. A partner choosing this special basis adjustment must attach astatement to his or her tax return that the partner chooses undersection 732(d) of the Internal Revenue Code to adjust the basis ofproperty received in a distribution. The statement must show thecomputation of the special basis adjustment for the propertydistributed and list the properties to which the adjustment has beenallocated. Example.Bob purchased a 25% interest in X partnership for $17,000 cash. Atthe time of the purchase, the partnership owned inventory having abasis to the partnership of $14,000 and a fair market value of$16,000. Thus, $4,000 of the $17,000 he paid was attributable to hisshare of inventory with a basis to the partnership of $3,500. Within 2 years after acquiring his interest, Bob withdrew from thepartnership and for his entire interest received cash of $1,500,inventory with a basis to the partnership of $3,500, and otherproperty with a basis of $6,000. The value of the inventory receivedwas 25% of the value of all partnership inventory. (It is immaterialwhether the inventory he received was on hand when he acquired hisinterest.) Since the partnership from which Bob withdrew did not make theoptional adjustment to basis, he chose to adjust the basis of theinventory received. His share of the partnership's basis for theinventory is increased by $500 ( 1/4 of the $2,000difference between the $16,000 fair market value of the inventory andits $14,000 basis to the partnership at the time he acquired hisinterest). The adjustment applies only for purposes of determining hisnew basis in the inventory, and not for purposes ofpartnership gain or loss on disposition. The total to be allocated among the properties Bob received in thedistribution is $15,500 ($17,000 basis of his interest - $1,500cash received). His basis in the inventory items is $4,000 ($3,500partnership basis + $500 special adjustment). The remaining$11,500 is allocated to his new basis for the other property hereceived. Mandatory adjustment.A partner does not always have a choice whether or not to use thisspecial adjustment to basis. The special adjustment to basis mustbe made for a distribution of property, whether or not thedistribution is made within 2 years after the partnership interest wasacquired, if all of the following conditions existed when the partnerreceived the partnership interest. The fair market value of all partnership property (otherthan money) was more than 110% of its adjusted basis to thepartnership. If there had been a liquidation of the partner's interestimmediately after it was acquired, an allocation of the basis of thatinterest under the general rules (discussed earlier under cheap hotels in BudapestBasisdivided among properties) would have decreased the basis ofproperty that could not be depreciated, depleted, or amortized andincreased the basis of property that could be. The optional basis adjustment, if it had been chosen by thepartnership, would have changed the partner's basis for the propertyactually distributed. Marketable securities.A partner's basis in marketable securities received in apartnership distribution, as determined in the preceding discussions,is increased by any gain recognized by treating the securities asmoney. See Marketable securities treated as money underPartner's Gain or Loss, earlier. The basis increase isallocated among the securities in proportion to their respectiveamounts of unrealized appreciation before the basis increase.