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Downloaded From OutlineDepot.comCapital II$3x$9xC$5x$5x------------------------$15x$15x$15x$15xIf Capital I is distributed to A, A’s basis in the asset is limited to heroutside basis of $5x, thus evaporating $4x of the loss from the partnership. §734(b) permits the partnership to increase its bases inthe remaining assets by an amount equal to the difference of the original basis of the asset and A’s basis. §755 adjustments (same as§743 adjustments) then apply. b.A partner’s capital account must be reduced by any money distributed to the partner and by the fair market value of any distributed property. i.The capital accounts of all the partners must be adjusted by their respective shares of the gain or loss that the partnership would have recognized if it had sold the distributed property for its fair market value on the date of distribution.1.Example: ABC equal partnership distributed to A land X valued at $10x with an adjusted basis (and book value) of $4x. a.For tax purposes, ABC recognizes no gain. On the balance sheet the $6x gain is allocated equally among the partners, increasing each partner's capital account by $2x. The distributee then reduces his capital account by $10x.b.When the smoke clears, A’s capital account is reduced by $8x, and B & C’s are increased by $2x each. 2.The partnership may elect to restate all remaining assets on a significant distribution. C.Mixing Bowl Transactionsa.§704(c)(1)(B) provides that if property contributed by one partner is distributed toanother partner within seven years of its contribution to the partnership, the contributing partner is treated as recognizing §704(c) gain or loss as if the partnership had sold the property for its FMV at the time of distribution. i.Example; A contributes G with a basis of $12x and FMV of $20x, B contributes $20x cash. 3 years later, AB distributed G (FMV=$23x) to B.