The XYZ Partnership owns the following assets on December 31: A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating distribution of $10,000 cash. XYZ Partnership has no liabilities. His recognized gain is

Question

The XYZ Partnership owns the following assets on December 31:  A partner has a 20% interest with a basis of $6,000 in XYZ before receiving a liquidating distribution of $10,000 cash. XYZ Partnership has no liabilities. His recognized gain is

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When a partner receives a liquidating distribution, the partner's basis in the partnership interest is usually reduced by the amount of the distribution. However, if the distribution exceeds the partner's basis, the excess is treated as a gain.

In this case, the partner received a liquidating distribution of $10,000 but had a basis of only $6,000. Therefore, the partner has a recognized gain of $4,000 ($10,000 - $6,000).

Since the partner held the partnership interest as a capital asset, $3,000 of the recognized gain is a long-term capital gain and $1,000 is a Section 751(a) ordinary income. Section 751(a) recapture is required when a distribution contains hot assets, such as unrealized receivables or inventory items, and certain gains must be recaptured as ordinary income.

The XYZ Partnership Owns the Following Assets on December 31