If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?
A)The partner will treat the distribution in excess of her basis as ordinary income.
B)The partner will treat the distribution in excess of her basis as capital gain.
C)The partner will not ever be taxed on the distribution in excess of her basis.
D)The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

Question

Quizplus · Accepted Answer

The partner will treat the distribution in excess of her basis as capital gain. This is because distributions from a partnership to a partner that exceed the partner's basis in the partnership are treated as a sale or exchange of the partnership interest, which generally results in capital gain.

If Partnership Debt Is Reduced and a Partner Is Deemed