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John O. Everett, Ph.D., CPA
Cherie J. Hennig, Ph.D., M.B.A.
Nancy Nichols, Ph.D., CPA

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 Contemporary Tax Practice Students

Contemporary Tax Practice
Tax Tutorial Module 1 — Partnership Taxation

Topic 6: Nonliquidating and Liquidating Partnership Distributions
[IRS Materials: Publication 541]

B. Nonliquidating Partnership Distributions – Adjusted Basis of Property Received

1. Because no loss can be recognized on a nonliquidating distribution, the adjusted basis of the property to the partnership generally carries over as the recipient partner’s basis.

2. This is always the case when the sum of cash plus adjusted basis of property distributed in the nonliquidating distribution is less than or equal to the partner’s basis in the partnership interest.

Example – Jason Thirteen has a $20,000 basis in his ABC Partnership interest. During the current year Jason received a nonliquidating distribution of $6,000 cash and property with an adjusted basis to the partnership of $12,000. Jason’s basis in the cash is $6,000, and his basis in the property is the partnership’s basis of $12,000. The basis of Jason’s partnership interest after reflecting these distributions is $2,000 ($20,000 - $6,000 - $12,000).

Example – Assume the same facts as the previous example, except that the basis of Jason’s partnership interest is $16,000. In this case, Jason will assign a $6,000 basis to cash first, and then his remaining partnership interest basis of $10,000 ($16,000 - $6,000) is assigned to the property, even though the partnership had a basis of $12,000 in the property. The basis of Jason’s partnership interest is now $0.

3. If several properties other than cash are received in the distribution, and the adjusted bases exceed the remaining basis in the partner’s capital account after reduction for the cash received, the remaining basis is allocated to the properties received based on their relative fair market values.

Example - If Jason in the previous example received two properties A and B worth $9,000 and $3,000 respectively, property A would be assigned a basis of $7,500 (9/12 x $10,000) and property B would be assigned a basis of $2,500 (3/12 x $10,000).

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