Unrealized receivables generally are receivables of

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Unrealized receivables generally are receivables of cash basis taxpayers. Potential Section 1245 and Section 1250 recapture are also included as an unrealized receivable. Inventory is defined as any asset other than cash, capital assets, or Section 1231 assets. The partner may receive more than the partner's share of these assets, or The 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. The partner may recognize gain or loss . The gain or loss is the difference between the FMV of what is received and the basis of what is given up . The gain or loss is limited to the disproportionate amount of unrealized receivables or substantially appreciated inventory that is received or given up. The character of the gain or loss depends on the character of the property given up. The partnership may similarly recognize gain or loss when there is a disproportionate distribution with respect to substantially appreciated inventory or unrealized receivables. Example A, B, and C each own a one-third interest in a partnership. The partnership has the following assets: Adjusted Basis FMV Cash $6,000 $6,000 Inventory 6,000 12,000 Land 9,000 18,000 $21,000 $36,000 Example Assume that A has a $7,000 basis for his partnership interest and that all inventory is distributed to A in liquidation of his partnership interest. He is treated as having exchanged his one-third interest in the cash and the land for a two-thirds increased interest in the substantially appreciated inventory . He has a gain of $3,000. He received $8,000 (2/3 ×
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$12,000) of inventory for his basis of $2,000 (1/3 × $6,000) in cash and $3,000 (1/3 × $9,000) of land. The gain is capital if the land was a capital asset. The partnership is treated as having received $8,000 (FMV of A's one-third share of cash and land) in exchange for inventory with a basis of $4,000 (basis of inventory distributed in excess of A's one-third share). Thus, the partnership will recognize ordinary income of $4,000. Optional Section 754 Adjustment to Basis of Partnership Property On a distribution of property to a partner or on a sale by a partner of a partnership interest, the partnership may elect to adjust the basis of its assets to prevent any inequities that otherwise might occur . Once an election is made, it applies to all similar transactions unless the IRS approves revocation of the election. Upon the distribution of partnership property , the basis of remaining partnership property will be adjusted for all partners. 1. Increased by 1. The amount of gain recognized to a distributee partner , and 2. The excess of the partnership's basis in the property distributed over the basis of that property in the hands of distributee partner. 2. Decreased by 1. The amount of loss recognized to a distributee partner, and 2. The excess of basis of property in hands of distributee over the prior basis of that property in the partnership.
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  • Spring '17
  • Wendy Achiles
  • partner

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