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The ABC equal partnership has the following balance sheet: Assets                                &n

  1. The ABC equal partnership has the following balance sheet:

Assets                                                                                           Partners’ Capital

                                    A.B.                 F.M.V.                                     A.B.                 F.M.V.

Cash                            $6,000             $6,000                         A          $3,000             $6,000

Accounts Receivable   0                      3,000                           B          3,000               6,000

Capital Asset               3,000               9,000                           C          3,000               6,000

                                    $9,000             $18,000                                   $9,000             $18,000

The partnership distributes the accounts receivable to A in an operating distribution. After the distribution, A has one-fifth interest worth $3,000 in the remaining partnership assets.

  1. What results to A, B, C and the partnership as a result of the distribution? Reconstruct the partnership balance sheet at the end of the transaction.
  2. If the distribution results in an increase to the partnership’s inside basis, how should that increase be allocated?
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Answer #1

Balance Sheet

ASSET AB FMV PARTNERS CAPITAL AB FMV
cash 6000 6000 A 1000 3000
accounts receivable 0 0 B 4000 6000
capital asset 3000 9000 C 4000 6000
9000 15000 9000 15000

after distribution A,B and C will have 1:2:2 (i.e. 3000:6000:6000) interest in the partnership.

When property is distributed to a partner, then the partnership must treat it as a sale at fair market value (FMV). The partner's capital account is decreased by the FMV of the property distributed. The book gain or loss on the constructive sale is apportioned to each of the partners' accounts. i.e. profit of 3000 allocated in equal basis to A,B and C.

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