What is the amount and character of the gain that Kate must recognize on the liquidating distribution?
On December 31, Kate receives a $28,000 liquidating distribution from the KLM Partnership. On that date, Kate's basis in her limited partnership interest is $18,000 (which, of course, includes her share of partnership liabilities). The other partners assume her $6,000 share of liabilities. Just prior to the distribution, the partnership has the following balance sheet. Kate is leaving the partnership but the partnership is continuing.
Divide the payments between Sec. 736(a) and Sec. 736(b) payments.
Total received ($28,000 + $6,000) $34,000
Minus: FMV of assets (Sec. 736(b)) ( 33,000)
Sec. 736(a) payment - guaranteed payment taxable as ordinary income $ 1,000
Analysis of the Sec. 736(b) payment of $33,000.
Kate is first deemed to receive her share of Sec. 751 assets from the partnership and then immediately sell them to the partnership for cash.
The remaining Sec. 736(b) payment of $24,000 ($33,000 - $9,000 deemed paid for the Sec. 751 assets) is analyzed as a liquidating distribution.
Predistribution basis in partnership $18,000
Minus: Sec. 751 deemed distribution ( 3,000)
Basis in partnership interest after Sec. 751 transaction $15,000
Minus: remaining Sec. 736(b) distribution ( 24,000)
Excess or capital gain to be recognized $ 9,000
Summary: Kate recognizes a $1,000 guaranteed payment, $6,000 of ordinary income, and a $9,000 capital gain.
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