Question

A is a partner in the ABC cash method partnership, has an outside basis of $10,000. In a pro rata operating distribution to the partners, A receives a parcel of land held as inventory by the partnership with a basis of $2,000 and a value of $3,000 and zero basis accounts receivable with a value of $3,000. Both properties become capital assets in her hands. Six years later, she collects the receivables and sells the parcel for $3,000.

(a) What are the tax consequences to A on the distribution and on the collection of the receivables and the sale of the parcel? What is the justification for the different results?

(b) What result if, immediately after the distribution, A gives the parcel to her daughter D, who promptly sells the parcel for $3,000? Assume the parcel is a capital asset in D’s hand?

Answer 1

Answer

A.

A would have ordinary income of $3,000 on the collecting of the receivables and $1,000 capital gain income on the sale of the land since the land was held over 5 years.

B.

Ordinary income to A since A did not hold over 5 years.

The only thing I would add are the citations. Code Sec. 735(a) applies to receivables,and as Rinkuben said, always carries an ordinary income taint. 735(b) requiresordinary income or loss treatment on inventory sold within 5 years of thedistribution.