The December 31,2008,balance sheet of the DIP Partnership reads as follows.

Each partner shares in 1/3 of the partnership capital,income,gain,loss,deduction and credit.Capital is not a material income-producing factor to the partnership.On December 31,2008,general partner Dana receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736.If Dana's outside basis for the partnership interest immediately before the distribution is $90,000,the recognized taxable gain and ordinary income from the distribution is:
A)$30,000 ordinary income.
B)$30,000 capital gain.
C)$10,000 capital gain; $20,000 ordinary income.
D)$20,000 capital gain; $10,000 ordinary income.
E)None of the above.

Question

The December 31,2008,balance sheet of the DIP Partnership reads as follows.

Each partner shares in 1/3 of the partnership capital,income,gain,loss,deduction and credit.Capital is not a material income-producing factor to the partnership.On December 31,2008,general partner Dana receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736.If Dana's outside basis for the partnership interest immediately before the distribution is $90,000,the recognized taxable gain and ordinary income from the distribution is:
A)$30,000 ordinary income. 
B)$30,000 capital gain. 
C)$10,000 capital gain; $20,000 ordinary income. 
D)$20,000 capital gain; $10,000 ordinary income. 
E)None of the above.

Quizplus · Accepted Answer

The $20,000 payment for Dana's share of the unrealized receivables is a § 736(a)payment,taxed as ordinary income.Dana's share of the receivables is $20,000 ($60,000 F1F1F1S1F1F1F10 1/3).The § 736(b)payment is $100,000,consisting of the amount paid for Dana's 1/3 share of the partnership cash and capital assets.The § 736(b)payment is treated first as a return of Dana's $90,000 outside basis.The rest of the § 736(b)payment is taxed to Dana as a $10,000 capital gain.

The December 31,2008,balance Sheet of the DIP Partnership Reads as Follows