ABC is a cash-method partnership with three equal partners, A, B and C. It has no liabilities. Its assets are:

Basis FMV

Cash $ 60 $ 60

Inventory 60 90

Accts Receivable 0 30

Land held for investment 30 90

Total $150 $270

Assume the bases of A, B and C for their partnership interests are $40, $30 and $20, respectively. The partnership's total inside basis exceeds the partners' total outside bases, even though the partnership assets reflect unrealized appreciation. (Can you figure out how this might happen? See footnote2 for one possibility).

What are the tax consequences to the partnership and the partners if the partnership:

(a) Makes a cash distribution of $20 to each partner and also distributes an undivided one-third interest in the land to each partner,

(b) Makes a distribution to each partner consisting of $10 in cash, one-third of the inventory and an undivided one-third interest in the land,

(c) Makes a distribution to each partner consisting of $10 in cash, one-third of the accounts receivable, and one-third of the inventory, or

(d) Distributes $45 cash to A and distributes one-half undivided interests in the land to B and C.

(e) Do only if specifically assigned: Borrows $75, giving a mortgage on the land as security, distributes the land (subject to the mortgage) to A, and distributes $15 in cash to each of B and C.

1 Reg. 1.446-1(c)(2)(i) requires use of the accrual method for purchases and sales if the taxpayer must maintain inventories. Assume the receivables in the problem arose from a separate business carried on by the partnership, unrelated to its inventory sales, for which the cash method is used. See 1.446-1(d).

2 One possibility is that one or more of the partners bought her or their interest(s) when the partnership assets had declined in value to less than the partnership's basis (i.e., when the partnership had unrealized losses); no 754 election was in effect; and the asset values subsequently rebounded.