Hi. My question relates to a partnership terminating and the
liquidating distribution from it. If the partner receives money in
excess of his outside basis, the partner recognizes income, regardless
of whether the distribution is a current distribution or liquidating
distribution. Assume the partnership is open 2 years. Parter 1 did not
contribute anything to the partnership. He is liable for 1/2 the
partnership debt of $420,000, which amounts to $210,000. Partner 1 has
a capital account of negative $50,000, which was his share of income
from year 1 and loss from year 2 along with distribution. The
partnership liquidates and Partner 1 is relieved of his 50% share of
debt (which amounts to $210,000), receives cash of $25,000, and
receives a lot (parcel of land) which has a fmv of $190,000 and a cost
basis to the partnership of $120,000. My question is how much income
does Partner 1 report and what type of income is it? The partnership
agreement does not address the issue of bringing negative capital
account balances to zero by reimbursing the partnership.
Does Partner 1 have in the amount of $75,000? This would be money
received $235,000 ($25,000 cash plus $210,000 relief of debt) in
excess of outside basis $160,000 (negative $50,000 capital account
plus $210,000 share of debt). If so, what type of income and how is
this reported on the Schedule K-1?

Thanks for any help.

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