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Example. The adjusted basis of Jo’s part-

Net precontribution gain. A partner gener-

money) distributed to the partner by a partner-

nership interest is $14,000. She receives a dis-

ally must recognize gain on the distribution of

ship is its adjusted basis to the partnership im-

tribution of $8,000 cash and land that has an

mediately before the distribution. However, the

property (other than money) if the partner con-

adjusted basis of $2,000 and a fair market value

basis of the property to the partner cannot be

tributed appreciated property to the partnership

of $3,000. Because the cash received does not

more than the adjusted basis of his or her inter-

during the 7-year period before the distribution.

exceed the basis of her partnership interest, Jo

est in the partnership reduced by any money

The gain recognized is the lesser of the fol-

does not recognize any gain on the distribution.

received in the same transaction.

lowing amounts.

Any gain on the land will be recognized when

Example 1. The adjusted basis of Emily’s

she sells or otherwise disposes of it. The distri-

1. The excess of:

partnership interest is $30,000. She receives a

bution decreases the adjusted basis of Jo’s part-

a. The fair market value of the property

nership interest to $4,000 [$14,000 − ($8,000 +

distribution of property that has an adjusted ba-

received in the distribution, over

sis of $20,000 to the partnership and $4,000 in

$2,000)].

cash. Her basis for the property is $20,000.

b. The adjusted basis of the partner’s in-

Marketable securities treated as money.

terest in the partnership immediately

Example 2. The adjusted basis of Steve’s

Generally, a marketable security distributed to a

before the distribution, reduced (but not

partnership interest is $10,000. He receives a

partner is treated as money in determining

below zero) by any money received in

distribution of $4,000 cash and property that has

whether gain is recognized on the distribution.

the distribution.

an adjusted basis to the partnership of $8,000.

This treatment, however, does not generally ap-

His basis for the distributed property is limited to

ply if that partner contributed the security to the

2. The “net precontribution gain” of the part-

$6,000 ($10,000 − $4,000, the cash he re-

partnership or an investment partnership made

ner. This is the net gain the partner would

ceives).

the distribution to an eligible partner.

recognize if all the property contributed by

The amount treated as money is the secur-

the partner within 7 years of the distribu-

Complete liquidation of partner’s interest.

ity’s fair market value when distributed, reduced

tion, and held by the partnership immedi-

The basis of property received in complete liqui-

(but not below zero) by the excess (if any) of:

ately before the distribution, were

dation of a partner’s interest is the adjusted

distributed to another partner, other than a

1. The partner’s distributive share of the gain

basis of the partner’s interest in the partnership

that would be recognized had the partner-

partner who owns more than 50% of the

reduced by any money distributed to the partner

ship sold all its marketable securities at

partnership. For information about the dis-

in the same transaction.

their fair market value immediately before

tribution of contributed property to another

the transaction resulting in the distribution,

partner, see Contribution of Property,

Partner’s holding period. A partner’s holding

over

under Transactions Between Partnership

period for property distributed to the partner in-

and Partners, later.

cludes the period the property was held by the

2. The partner’s distributive share of the gain

partnership. If the property was contributed to

that would be recognized had the partner-

The character of the gain is determined by

the partnership by a partner, then the period it

ship sold all such securities it still held after

reference to the character of the net precontribu-

was held by that partner is also included.

the distribution at the fair market value in

tion gain. This gain is in addition to any gain the

(1).

partner must recognize if the money distributed

Basis divided among properties. If the basis

is more than his or her basis in the partnership.

For more information, including the definition

of property received is the adjusted basis of the

For these rules, the term “money” includes

of marketable securities, see section 731(c) of

partner’s interest in the partnership (reduced by

the Internal Revenue Code.

marketable securities treated as money, as dis-

money received in the same transaction), it must

cussed earlier.

be divided among the properties distributed to

Loss on distribution. A partner does not rec-

the partner. For property distributed after August

Effect on basis. The adjusted basis of the

ognize loss on a partnership distribution unless

5, 1997, allocate the basis using the following

partner’s interest in the partnership is increased

all the following requirements are met.

rules.

by any net precontribution gain recognized by

•

The adjusted basis of the partner’s interest

the partner. Other than for purposes of deter-

1. Allocate the basis first to unrealized receiv-

in the partnership exceeds the distribution.

mining the gain, the increase is treated as occur-

ables and inventory items included in the

ring immediately before the distribution. See

•

The partner’s entire interest in the partner-

distribution by assigning a basis to each

Basis of Partner’s Interest, later.

ship is liquidated.

item equal to the partnership’s adjusted

The partnership must adjust its basis in any

basis in the item immediately before the

•

The distribution is in money, unrealized re-

property the partner contributed within 7 years of

distribution. If the total of these assigned

ceivables, or inventory items.

the distribution to reflect any gain that partner

bases exceeds the allocable basis, de-

recognizes under this rule.

crease the assigned bases by the amount

There are exceptions to these general rules.

of the excess.

See the following discussions. Also, see Liqui-

Exceptions. Any part of a distribution that is

dation at Partner’s Retirement or Death under

2. Allocate any remaining basis to properties

property the partner previously contributed to

Disposition of Partner’s Interest, later.

other than unrealized receivables and in-

the partnership is not taken into account in de-

ventory items by assigning a basis to each

termining the amount of the excess distribution

Distribution of partner’s debt. If a partner-

property equal to the partnership’s ad-

or the partner’s net precontribution gain. For this

ship acquires a partner’s debt and extinguishes

justed basis in the property immediately

purpose, the partner’s previously contributed

the debt by distributing it to the partner, the

before the distribution. If the allocable ba-

property does not include a contributed interest

partner will recognize capital gain or loss to the

sis exceeds the total of these assigned ba-

in an entity to the extent its value is due to

extent the fair market value of the debt differs

ses, increase the assigned bases by the

property contributed to the entity after the inter-

from the basis of the debt (determined under the

amount of the excess. If the total of these

est was contributed to the partnership.

rules discussed in Partner’s Basis for Distributed

assigned bases exceeds the allocable ba-

Recognition of gain under this rule also does

Property, later).

sis, decrease the assigned bases by the

not apply to a distribution of unrealized receiv-

The partner is treated as having satisfied the

amount of the excess.

ables or substantially appreciated inventory

debt for its fair market value. If the issue price

items if the distribution is treated as a sale or

(adjusted for any premium or discount) of the

Allocating a basis increase. Allocate any

exchange, as discussed earlier.

debt exceeds its fair market value when distrib-

basis increase required in rule (2), above, first to

uted, the partner may have to include the excess

properties with unrealized appreciation to the

Partner’s Basis for

amount in income as canceled debt.

extent of the unrealized appreciation. If the basis

Distributed Property

Similarly, a deduction may be available to a

increase is less than the total unrealized appre-

corporate partner if the fair market value of the

ciation, allocate it among those properties in

debt at the time of distribution exceeds its ad-

Unless there is a complete liquidation of a part-

proportion to their respective amounts of unreal-

justed issue price.

ner’s interest, the basis of property (other than

ized appreciation. Allocate any remaining basis

Publication 541 (December 2010)

Page 5

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 5

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