What number comes first in a partnership liquidation question when cash and basis are both moving around?

author: Verified Expert

• Topics: ["Partnership Taxation","Distributions"]
• Tags: ["cpa","reg","tcp","partnership","liquidation","outside-basis","cash-distribution"]
• Related articles: ["reg-tcp-basis-credits-macrs-decision-map"]
• Related questions: []
• Answer:

The number you want first is the partner's outside basis immediately before the liquidating distribution.

Do not compare the cash to a stale basis number from the start of the year.

Use this sequence:

1. start with beginning outside basis
2. adjust for current-year income, loss, contributions, and distributions that occur before liquidation
3. arrive at outside basis right before the liquidating event
4. compare cash received to that updated basis

If cash exceeds outside basis, the excess is generally recognized gain. If cash does not exceed outside basis, you usually move to the basis assigned to any distributed property under the facts.

Fresh example:

• beginning outside basis: 26,000
• ordinary income allocated before liquidation: 4,000
• cash distributed in liquidation: 27,500

Updated outside basis before liquidation is 30,000, not 26,000. Since cash of 27,500 does not exceed 30,000, there is no gain from the cash comparison.

The trap answer usually compares the cash to beginning basis and reports a gain too early.