The PW partnership's balance sheet includes the following assets immediately before it liquidates:
In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Wade's recognized gain or loss?

Question

The PW partnership's balance sheet includes the following assets immediately before it liquidates: 
In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Wade's recognized gain or loss?

Quizplus · Accepted Answer

This is a disproportionate distribution. In essence, PW is deemed to have distributed Wade's proportionate share of the unrealized receivables ($5,000). Since the receivables have no basis, the distribution does not affect Wade's outside basis. PW then distributes the remaining $5,000 of receivables to Wade. These receivables are Pamela's share that PW purchased from Pamela. PW has a $5,000 basis in the receivables and Wade takes a $5,000 basis in these receivables. He reduces his outside basis to zero. These events result in no immediate gain or loss to Wade.

The PW Partnership's Balance Sheet Includes the Following Assets Immediately