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 Pamela'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 Pamela's recognized gain or loss?

Quizplus · Accepted Answer

This is a disproportionate distribution. In essence, Pamela is treated as having sold her share of the hot assets ($5,000) to the partnership in exchange for cold assets. This deemed sale generates ordinary income to Pamela equal to her share of the appreciation in the receivables. Pamela has a $5,000 basis in PW therefore she does not recognize any gain on the cash portion ($5,000) of the distribution.

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