Capital loss on series of liquidating distributions
If S would recognize a ,000 loss on a liquidation of the partnership that follows the distribution to R, then R should be required to recognize ,000, rather than ,000, of gain on a subsequent sale of property 1, so that the total gain recognized by both parties equals the appreciation inside the partnership of ,000. When the pre-distribution bases of the distributed properties (other than money) exceed the partner’s remaining outside basis after reduction for money received, the bases of the properties must be reduced, and this reduction must be allocated among the distributed properties. The total basis of the distributed properties is 0 ( ), A’s remaining outside basis after reduction for money received is 0 (0-).
If the distribution does not include any inventory items or unrealized receivables (“hot assets”), the basis reduction is first allocated among all of the distributed properties to the extent of their unrealized depreciation. A receives a current distribution of in cash as well as properties X and Y which are not hot assets. Thus, A must take a basis in the properties is 0, and so A is required to reduce the basis of X and Y from 0 to 0. The first of the basis reduction is allocated to X to the extent of its unrealized depreciation of ( - ). The remaining of basis reduction is allocated each to X and Y because they have the same remaining basis of .
The distribution of ,000 is treated as a current distribution because it is not part of a series of distributions that will result in the termination of A’s interest.
AB distributes cash of ,000 to A, and A’s ownership decreases from 50% to 30%.As a result, if the partnership is liquidated and the remaining ,000 of cash is distributed to S, S will recognize ,000 of loss under the rules discussed below for liquidating distributions.