Hi. My question relates to a partnership terminating and the liquidating distribution from it. If the partner receives money in excess of his outside basis, the partner recognizes income, regardless of whether the distribution is a current distribution or liquidating distribution. Assume the partnership is open 2 years. Parter 1 did not contribute anything to the partnership. He is liable for 1/2 the partnership debt of $420,000, which amounts to $210,000. Partner 1 has a capital account of negative $50,000, which was his share of income from year 1 and loss from year 2 along with distribution. The partnership liquidates and Partner 1 is relieved of his 50% share of debt (which amounts to $210,000), receives cash of $25,000, and receives a lot (parcel of land) which has a fmv of $190,000 and a cost basis to the partnership of $120,000. My question is how much income does Partner 1 report and what type of income is it? The partnership agreement does not address the issue of bringing negative capital account balances to zero by reimbursing the partnership. Does Partner 1 have in the amount of $75,000? This would be money received $235,000 ($25,000 cash plus $210,000 relief of debt) in excess of outside basis $160,000 (negative $50,000 capital account plus $210,000 share of debt). If so, what type of income and how is this reported on the Schedule K-1?
Thanks for any help.