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has taken deductions attributable to nonre-

He had been paid his share of the partnership

Services rendered or to be rendered.

course liabilities or the partnership holds prop-

income for the tax year.

These rights must have arisen under a con-

erty that was contributed by a partner.

Kumar realizes $25,000 from the sale of his

partnership interest ($10,000 cash payment +

tract or agreement that existed at the time of

More information. For more information on

$15,000 liability relief). He reports $5,000

sale or distribution, even though the partnership

the effect of partnership liabilities, including

($25,000 realized − $20,000 basis) as a capital

may not be able to enforce payment until a later

rules for limited partners and examples, see

gain.

date. For example, unrealized receivables in-

sections 1.752-1 through 1.752-5 of the regula-

clude accounts receivable of a cash method

tions.

Example 2. The facts are the same as in

partnership and rights to payment for work or

Example 1, except that Kumar withdraws from

goods begun but incomplete at the time of the

the partnership when the adjusted basis of his

sale or distribution of the partner’s share.

interest in the partnership is zero. He is consid-

The basis for any unrealized receivables in-

Disposition of

ered to have received a distribution of $15,000,

cludes all costs or expenses for the receivables

his relief of liability. He reports a capital gain of

Partner’s Interest

that were paid or accrued but not previously

$15,000.

taken into account under the partnership’s

method of accounting.

Exchange of partnership interests. An ex-

The following discussions explain the treatment

change of partnership interests generally does

Other items treated as unrealized receiv-

of gain or loss from the disposition of an interest

not qualify as a nontaxable exchange of

ables. Unrealized receivables include poten-

in a partnership.

like-kind property. This applies regardless of

tial gain that would be ordinary income if the

whether they are general or limited partnership

Abandoned or worthless partnership inter-

following partnership property were sold at its

interests or interests in the same or different

est. A loss incurred from the abandonment or

fair market value on the date of the payment.

partnerships. However, under certain circum-

worthlessness of a partnership interest is an

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stances, such an exchange may be treated as a

Mining property for which exploration ex-

ordinary loss only if both of the following tests

penses were deducted.

tax-free contribution of property to a partnership.

are met.

See Contribution of Property under Transac-

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Stock in a Domestic International Sales

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The transaction is not a sale or exchange.

tions Between Partnership and Partners, earlier.

Corporation (DISC).

An interest in a partnership that has a valid

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The partner has not received an actual or

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election in effect under section 761(a) of the

Certain farm land for which expenses for

deemed distribution from the partnership.

Internal Revenue Code to be excluded from the

soil and water conservation or land clear-

If the partner receives even a de minimis actual

partnership rules of the Code is treated as an

ing were deducted.

or deemed distribution, the entire loss generally

interest in each of the partnership assets and not

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Franchises, trademarks, or trade names.

is a capital loss. However, see Payments for

as a partnership interest. See Exclusion From

Unrealized Receivables and Inventory Items,

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Partnership Rules, earlier.

Oil, gas, or geothermal property for which

later.

intangible drilling and development costs

Installment reporting for sale of partnership

were deducted.

For information on how to report an abandon-

interest. A partner who sells a partnership in-

ment loss, see the Instructions for Form 4797.

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terest at a gain may be able to report the sale on

Stock of certain controlled foreign corpora-

See Revenue Ruling 93-80 for more information

the installment method. For requirements and

tions.

on determining if a loss incurred on the aban-

other information on installment sales, see Pub-

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Market discount bonds and short-term ob-

donment or worthlessness of a partnership inter-

lication 537.

ligations.

est is a capital or an ordinary loss.

Part of the gain from the installment sale may

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be allocable to unrealized receivables or inven-

Property subject to recapture of deprecia-

Partnership election to adjust basis of part-

tory items. See Payments for Unrealized Re-

tion under sections 1245 and 1250 of the

nership property. Generally, a partnership’s

ceivables and Inventory Items, later. The gain

Internal Revenue Code. Depreciation re-

basis in its assets is not affected by a transfer of

allocable to unrealized receivables and inven-

capture is discussed in chapter 3 of Publi-

an interest in the partnership, whether by sale or

tory items must be reported in the year of sale.

cation 544.

exchange or because of the death of a partner.

The gain allocable to the other assets can be

However, the partnership can elect to make an

reported under the installment method.

Determining gain or loss. The income or

optional adjustment to basis in the year of trans-

loss realized by a partner upon the sale or ex-

fer.

Payments for Unrealized

change of its interest in unrealized receivables

Receivables and Inventory

and inventory items, discussed below, is the

Sale, Exchange,

amount that would have been allocated to the

Items

or Other Transfer

partner if the partnership had sold all of its prop-

erty for cash at fair market value, in a fully

If a partner receives money or property in ex-

The sale or exchange of a partner’s interest in a

taxable transaction, immediately prior to the

change for any part of a partnership interest, the

partnership usually results in capital gain or loss.

partner’s transfer of interest in the partnership.

amount due to his or her share of the partner-

However, see Payments for Unrealized Receiv-

Any gain or loss recognized that is attributable to

ship’s unrealized receivables or inventory items

ables and Inventory Items, later, for certain ex-

the unrealized receivables and inventory items

results in ordinary income or loss. This amount

ceptions. Gain or loss is the difference between

will be ordinary gain or loss.

is treated as if it were received for the sale or

the amount realized and the adjusted basis of

exchange of property that is not a capital asset.

the partner’s interest in the partnership. If the

Example. You are a partner in ABC Partner-

This treatment applies to the unrealized re-

selling partner is relieved of any partnership

ship. The adjusted basis of your partnership

ceivables part of payments to a retiring partner

liabilities, that partner must include the liability

interest at the end of the current year is zero.

or successor in interest of a deceased partner

relief as part of the amount realized for his or her

Your share of potential ordinary income from

only if that part is not treated as paid in ex-

interest.

change for partnership property. See Liquida-

partnership depreciable property is $5,000. The

tion at Partner’s Retirement or Death, later.

partnership has no other unrealized receivables

Example 1. Kumar became a limited part-

or inventory items. You sell your interest in the

ner in the ABC Partnership by contributing

Unrealized receivables. Unrealized receiv-

partnership for $10,000 in cash and you report

$10,000 in cash on the formation of the partner-

ables include any rights to payment not already

the entire amount as a gain since your adjusted

ship. The adjusted basis of his partnership inter-

included in income for the following items.

basis in the partnership is zero. You report as

est at the end of the current year is $20,000,

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ordinary income your $5,000 share of potential

which includes his $15,000 share of partnership

Goods delivered or to be delivered to the

liabilities. The partnership has no unrealized re-

extent the payment would be treated as

ordinary income from the partnership’s depre-

ceivables or inventory items. Kumar sells his

received for property other than a capital

ciable property. The remaining $5,000 gain is a

interest in the partnership for $10,000 in cash.

asset.

capital gain.

Publication 541 (December 2010)

Page 11

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 11

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