As a result the land will have a basis of 14000

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parcel of land must absorb all of Day's unrecovered partnership basis. As a result, the land will have a basis of $14,000. Retirement Distributions 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.
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However, payments made to a retiring or deceased general partner in a partnership in which capital 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). 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). 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., accountants, doctors, dentists, lawyers). Special Issues Complications are created by built-in gains, deemed distributions, and disproportionate distributions. Deemed distributions (reductions in liabilities) are treated as cash distributions. Distributions of marketable securities (up to the value of the securities less the partner's share of appreciation inherent in the securities) are treated as deemed distributions. Distributions of built-in gain property to other partners (other than the partner who originally contributed the property) within seven years of the original contribution cause gain recognition. “Disproportionate” distributions of hot assets can also trigger income recognition. Hot Assets Generate ordinary income or loss because the partner has not yet been taxed on accrued, but unrealized, income. Disproportionate Distributions : Occur when ordinary income assets (inventory and receivables) are distributed to partners without regard to their proportionate ownership interests . Therefore, if a 12% partner receives 12% of the hot assets, then no special rules need to be applied because it is a proportionate distribution. Most CPA Exam questions on this topic will be proportionate distributions . 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 basis.
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Hot assets are inventory and unrealized receivables . For distributions, inventory has to be substantially appreciated (FMV > 120% × adjusted basis) for it to be classified as a hot asset.
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  • Spring '17
  • Wendy Achiles
  • partner

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