When a partner exits a partnership, distributed assets during the liquidation must be assigned basis. Start with the exiting partner's adjusted basis. This will include the initial capital contribution, their share of the partnership income and any additional contributions they have made. Next subtract cash received. Cash will directly reduce the partner's basis by the amount received. Next allocate basis to inventory and unrealized receivables. Basis in these items is generally cost minus depreciation or adjustments. If the total value distributed (Cash + Inventory + unrealized receivables) is less than the partner's basis in the partnership, they would recognize a loss. They would recognize a gain only if he receives more money than his basis in partnership interest.