Prorata Current Distributions Assignment:
Logic: Chapter Eleven
Code: §§ 731(a) & (b), 732(a) & (c); 733; 734(a), 735.
Regulations: §§ 1.704-1(b)(2)(iv)(e), -1(b)(5) Ex.(14)(v); 1.731-1(a)(1), (3), -1(c);
1.732-1(a), (c); 1.752-1(e), (f).
Problem:
ABC is a cash-method partnership with three equal partners, A, B and C. It has
no liabilities. Its assets are:
Basis FMV
Cash $ 60 $ 60
Inventory 60 90
Acc’ts Receivable1
0 30
Land held for investment 30 90
Total $150 $270
Assume the bases of A, B and C for their partnership interests are $40, $30 and
$20, respectively. The partnership's total inside basis exceeds the partners' total outside
bases, even though the partnership assets reflect unrealized appreciation. (Can you figure
out how this might happen? See footnote2
for one possibility).
What are the tax consequences to the partnership and the partners if the
partnership:
(a) Makes a cash distribution of $20 to each partner and also distributes an
undivided one-third interest in the land to each partner,
(b) Makes a distribution to each partner consisting of $10 in cash, one-third
of the inventory and an undivided one-third interest in the land,

1 Reg. § 1.446-1(c)(2)(i) requires use of the accrual method for purchases and sales if the taxpayer must
maintain inventories. Assume the receivables in the problem arose from a separate business carried on by
the partnership, unrelated to its inventory sales, for which the cash method is used. See § 1.446-1(d).
2 One possibility is that one or more of the partners bought her or their interest(s) when the partnership
assets had declined in value to less than the partnership's basis (i. e., when the partnership had unrealized
losses); no § 754 election was in effect; and the asset values subsequently rebounded.
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(c) Makes a distribution to each partner consisting of $10 in cash, one-third
of the accounts receivable, and one-third of the inventory, or
(d) Distributes $45 cash to A and distributes one-half undivided interests in
the land to B and C.
(e) Do only if specifically assigned: Borrows $75, giving a mortgage on
the land as security, distributes the land (subject to the mortgage) to A,
and distributes $15 in cash to each of B and C.