UP Partnership has been in business since 1965, located in the upper peninsula of Michigan, near the Sault Ste. Marie area. It is owned 50-50 by Aaron and Caitlin and operates a fishing camp and logging business.

As one part of its operations, UP Partnership invested in a cooperative investment some years back with Trixie Hassell, a brilliant former employee who came up with the idea of recovering cypress logs from the swamps of South Louisiana in Lafourche Parish. (In Louisiana, counties are called parishes, due to the strong Catholic heritage there.) In the wasteful logging days of the late 1800s and first half of the 20th century, many cypress trees were cut down and the logs bundled together to be transported down through the swamps and rivers. Periodically, however, some of these broke off due to floods or other mishap, and the cypress logs eventually sunk down in the rivers and swamps, where (due to the remarkable quality of cypress wood not to rot or deteriorate) the logs still remain good wood today and are a valuable commodity.

The UP Partnership and Trixie form a limited partnership, which, due to its location in Lafourche Parish, will be named LP Partners. UP Partnership will function as the general partner, and Trixie will be the limited partner. LP Partners is able to secure an operating loan of $1,000,000 as a base for funding its operations. LP Partners also purchases a large tract of river and swamp, an area where the land is quite inexpensive, for $2.2 million, putting down $200,000 as a down payment and obtaining a nonrecourse loan for $2 million from a bank owned by Trixie's uncle. Two years after the operations of LP Partners commence, during which time it has been performing quite well, the UP partnership makes a distribution to Caitlin of its entire interest in LP Partners. Previous distributions to Caitlin had caused her to have no remaining basis in her interest in UP Partnership. At the time, the UP Partnership has a basis of $300,000 in its interest in LP Partners, and that interest was worth $600,00
 

Instructions


First, perform an analysis and explain what would be the UP Partnership share of the liabilities of LP Partners. Be sure to explain your reasoning and cite the applicable law. Second, explain the tax effect of the distribution to all parties: Caitlin, Aaron, and UP Partnership. Explain both gain and loss effect as well as any effect on basis.