Partnership Distributions

Partnership distributions include the following.

• A withdrawal by a partner in anticipation of the current year’s earnings.

• A distribution of the current year’s or prior years’ earnings not needed for working capital.

• A complete or partial liquidation of a partner’s interest.

• A distribution to all partners in a complete liquidation of the partnership.

A partnership distribution is not taken into account in determining the partner’s distributive share of partnership income or loss. If any gain or loss from the distribution is recognized by the partner, it must be reported on their return for the tax year in which the distribution is received. Money or property withdrawn by a partner in anticipation of the current year’s earnings is treated as a distribution received on the last day of the partnership’s tax year.

Effect on partner’s basis. A partner’s adjusted basis in their partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to

the partner. See Adjusted Basis under Basis of Partner’s Interest , later.

Effect on partnership. A partnership generally doesn’t recognize any gain or loss because of distributions it makes to partners. The partnership may be able to elect to adjust the basis of its undistributed property.

Certain distributions treated as a sale or exchange. When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution.

• Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner’s interest in other partnership property, including money.

• Other property (including money) distributed in exchange for any part of a partner’s interest in unrealized receivables or substantially appreciated inventory items.

See Payments for Unrealized Receivables and Inven- tory Items under Disposition of Partner’s Interest , later.

This treatment doesn’t apply to the following distribu- tions.

• A distribution of property to the partner who contributed the property to the partnership.

• Payments made to a retiring partner or successor in interest of a deceased partner that are the partner’s distributive share of partnership income or guaranteed payments.

Substantially appreciated inventory items. Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total FMV is more than 120% of the partnership’s adjusted basis for the property. However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded.