Chapter 11 A partnership that distributes an asset the FMV of which exceeds its inside basis must recognize gain equal to the excess 1. ent cash distributions from partnerships are nontaxable unless they exceed the partner's basis in the partnership. If a partner receives a property distribution consisting of partnership inventory, and in a subsequent year sells the distributed property at a gain, such gain must always be recognized as ordinary income. 3 4 Section 751 assets ("hot" assets) include (but are not limited to) amounts due from the performance of services that have not previously been reported as income and recapture of depreciation 5. When a general partner's capital interest in a service partnership is retired, liquidating distributions can include payment for goodwill and unrealized receivables if the partnership agreement so specifies. 6 The seller of a partnership interest may recognize ordinary gain on the sale will never recognize ordinary loss. death of a partner closes the partnership taxable year with respect to that partner 7. The Partner Z received a current distribution from the XYZ Partnership consisting of $3,000 cash and partnership inventory (FMV $10,000 and basis $7,800). The distribution did not change Z's profit and loss sharing ratio. Immediately prior to the distribution, Z's outside basis in his partnership interest was $11,000. Because of the distribution Z must: a. Recognize a $2,000 gain and reduce outside basis to zero b. Recognize no gain or loss and reduce outside basis to $8,000 c. Recognize no gain or loss and reduce outside basis to zero d. Recognize no gain or loss and reduce outside basis to $200 e. Recognize a $200 loss and reduce outside basis to zero 8