MODULE 35 TAXES: PARTNERSHIPS 533

(1) A basis decrease is allocated

(a) First to properties with unrealized depreciation in proportion to their respective amounts
of unrealized depreciation (but only to the extent of each property's
unrealized deprecia-
tion), and
(b) Then in proportion to the respective adjusted basis of the distributed properties.
EXAMPLE: A partnership distributes two items of property (A and B) that are neither unrealized
receivables nor inventory to Baker in liquidation of his partnership interest that has a basis of $20.
Partnership basis FMV
Property A $15 $15
Property B 15 ..2
Total $30 , $20
Basis is first allocated $15 to A and $15 to B (their adjusted bases to the partnership). A $10 basis
decrease is required because the assets' bases of $30 exceeds Baker's basis for his partnership interest of
$20. The $10 decrease is allocated to B to the extent of its un realized depreciation. Thus, Baker has a
basis of $15 for property A and a basis of $5 for property B.
(2) A basis increase is allocated
(a). First to properties with unrealized appreciation in proportion to their respective amounts
of unrealized appreciation (but only to the extent of each property's
unrealized apprecia-
tion), and .
(b) Then in proportion to the relative FMVs of the distributed properties.
EXAMPLE: A partnership distributes two items of property (C and D) that are neither un realized
receivables nor inventory to Alan in liquidation of his partnership interest that has a basis of $55.
Partnership basis FMV
Property C $5 $40
Property D 10 10'
Total $15 $50
Basis isfirst allocated $5 to C and $10 to D (their adjusted bases to the partnership). 'l uc ''1 basis
increase (Alan 's $55 basis less the partnership's basis for the assets $15) is then allocated to C to the
extent of its unrealized appreciation of $35, with the remaining $5 of basis adjustment allocated
'according to the relative FMV ofC and D [i.e., $4 to C (for a total basis of$44) and $1 to D (for a total
basis of $11)]
7. Payments made in liquidation of the interest of a retiring or deceased partner are generally
treated as
partnership distributions made in exchange for the partner's interest in partnership property. Such
payments generally result in capital gain or loss to the retiring or deceased partner.
8. However, payments made to a retiring or deceased general partner in a partnership in which capi-
tal is not a material income-producing factor must be reported as ordinary income by the partner
to the extent such payments are for the partner's share of unrealized receivables or goodwill
(unless the partnership agreement provides for a payment with respect to goodwill).
9. Amounts treated as ordinary income by the retiring or deceased partner are either deductible by
the partnership (treated as guaranteed payments), or reduce the income allocated to remaining
partners (treated as a distributive share of partnership income).
10. Capital is not a material income-producing factor if substantially all of the gross income of the
business consists of fees, commissions, or other compensation for personal services (e.g., accoun-
tants, doctors, dentists, lawyers).
11. Non-Pro Rata Distributions from Partnership
12. A non-pro rata (disproportionate) distribution occurs when
13. A distribution is disproportionate as to a partner's share of unrealized receivables or substantially
appreciated inventory. Inventory is substantially appreciated if its FMV exceeds 120% of its ba-
sis.
(1) Partner may receive more than the partner's share of these assets, or
(2) Partner may receive more than the partner's share of other assets, in effect giving up a share of
unrealized receivables or substantially appreciated inventory
14. The partner may recognize gain or loss.
(1) The gain or loss is the difference between the FMV of what is received and the basis of what
is given up. '