Susan is a one-fourth limited partner in the SJ Partnership in which capital is not a material income-producing factor.Partnership assets consist of land (value of $100,000,basis of $80,000),accounts receivable (value of $100,000,basis of $0)and cash of $200,000.SJ distributes $100,000 of the cash to Susan in liquidation of her interest.Susan's basis in the partnership interest was $70,000 immediately before the distribution.Susan recognizes $25,000 of ordinary income,and a $5,000 capital gain on the distribution,and the partnership cannot claim a deduction for the $25,000 Susan recognizes as ordinary income.

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Because Susan is a limited partner,SJ's $25,000 payment for her share of unrealized receivables is treated as a § 736(b)payment.As such,Susan recognizes ordinary income,but the partnership cannot claim a deduction.The remaining $75,000 payment exceeds Susan's $70,000 basis in the partnership interest by $5,000; therefore,Susan recognizes a $5,000 capital gain on disposition of the interest.

Susan Is a One-Fourth Limited Partner in the SJ Partnership