Question

The STUV Partnership owns the following assets on December 30 of the current? year:

Assets	Partnership's Basis	FMV
Cash	$70,000	$70,000
Receivables	0	36,000
Inventory	112,000	160,000
Total	$182,000	$266,000

The partnership has no? liabilities, and each? partner's basis in his or her partnership interest is $15,000.On December 30 of the current? year,Sally receives a current distribution of inventory having a $16,625 ?FMV, which reduces her partnership interest from? one-fourth to? one-fifth.

Requirement

What are the tax consequences of the distribution to the? partnership,Sally?,and the other? partners?

	Beginning	Interest Before	Interest After	Hypothetical
		Partnership	Distribution	Distribution	Proportionate	Actual
		Amount	(1/4)	(1/5)	Distribution	Distribution	Difference
Sec. 751 assets:
Total Sec. 751 assets
Non-Sec. 751 assets:
Total non-Sec. 751 assets

Answer 1

	Beginning Partnership Amount	(1) Sally’s Interest Before Distribution 1/4	(2) Hypothetical Distribution 1/5	(3) Proportionate Distribution (3)= (1)-(2)	(4) Actual Distribution	(5) Difference (5)=(4)-(3)
Section 751 assets :
Receivables	36,000	9,000	7,200	1,800	0	(1,800)
Inventory	160,000	40,000	32,000	8,000	16,625	8,625
Total Sec.751 Assets	196,000	49,000	39,000	10,000	16,625	6,625
Non-Sec 751 assets:
Cash	70,000	17,500	14,000	3,500	0	(3,500)
Total Non-Sec 751 assets	70,000	17,500	14,000	3,500	0	(3,500)

In terms of gain, loss or income recognized from the partnership reduction, the partnership will end up recognizing gain of the total distribution amount of Sec.751 assets minus the adjusted basis of those assets.

Inventory = Partnership’s basis x Hypothetical Proportionate Distribution

                              FMV

                  = 112,000 x 3500

                      160,000

                  = 2,450

Therefore, $6,625-$2,450 = $4,175

Sally has $3,500 in deemed cash distribution and the partnership recognizes gain of $4,175.