Imagine that your interest in a partnership is a bottle of coke u fill it up with income and % of liabilities u take it on your shoulder and u drink from it when the partnership distributes any thing  to u or when u lose some of the coke in the bottle so that reduce ur basis in the partnership

remember always U can,t drink more than u have in the bottle when a partnership distributes a property or cash in a non-liquidating distribution ,u,ll drink what the company distributes to u but not more than u have in the bottle always,and U,ll keep the bottle in ur fridge even it,s empty cause u,re gonna fill it up again and u still a partnerwhen a partnership distributes cash or property in a liquidating distribution ,U have to drink the whole coke in the bottle and get rid of it ,cause the company liquidates and U,re not a partner any more

non-liquidating distribution( non taxable):

on the top of the bottle there,s cash ,and in the middle hot assets and on the bottom other propertiesfor example we will imagine that ur adjusted basis in ur parnership is a 20OZ(20k) bottle of cokeGain recognized:gain is recognized if u receive cash(top of the bottle) only that exceeds ur basisso if u recive 25K cash distribution u,ll recognize 5K gainexample:if the partnership distributes cash 15k and land that have a net book value of 3k and a FMV of 6k u always use the NBV ignore the FMV(non taxable)now start drinking from the top of the bottleyour basis in the partnership(20k) will decrease by cash first 15k to 5k drink more ur basis will decrease by property 3k to 2kso ur basis in the partnership after distribution is 2kkeep it in the fridge U still a partnerexample 2:same facts as last example but the net book value of the land is 9kU can,t drink more than u have in the bottlestart drinkingreduce ur basis by cash to 5k the NBV of land is 9k(u can,t drink more than 5kso 5k will be allocated to land and ur basis in the partnership is zeroeven if the bottle is empty now keep it in the fridge to fill it up again cause u still a partner

Liquidating distribution

liquidation song(don,t forget mate, when partnership liquidate,ur remaining basis to asset u must allocateand don,t play with hot assets or U,ll get burned

whatever the partnership distributes to U ,U have to drink the whole bottle and git rid of it cause u,ll leave the company

1_complete withdrawal

Gain recognized:same if u receive cash more than ur basisloss recognized:if u receive only hot assets (cash,unrealized receivable and inventory)less than ur basishot assets dosen,t make the coke taste good I like it coldso if u receive cash 5k and inventory 4k U,ll recognize 11k lossexample:before u decrese ur basis by distribution u should compute ur outside basis at date of withdrawal so u should add income u received and % of liabilities assumed or decrease ur basis by ur share of loss   if the partnership distributes cash 15k and land that have a net book value of 3k and a FMV of 6k this is the same example but now it,s a liquidating distributionU have to drink the whole coke in the bottle and get rid of itreduce ur outside basis by cash 15K to 5kwhat left over in the bottle  5k u have to drink it and it dosen,t matter what,s the basis of the landso 5K will be allocated to land to end up with zero basis in the partnership and get rid of the bottle and withdraw from the partner ship

2-sale of ur interest(taxable)

 If u sell ur interest to some one u should compute ur outside basis at date of sale so u should add income u received and % of liabilities assumed or decrease ur basis by ur share of loss
compre this with the money or fmv of property u receive from the incoming partner if u receive more than ur outside basis gain is recognized and if u receive less loss is recognized
if the incoming partner assumed ur % of liabilities in the partnership it,s like money so u add it to the amount received (the net effect here is zero cause u add ur% of liabilities when u compute ur outside basis and u add it to the amounrt received when the incoming partner assumes it)
when u receive hot assets only for cash (dosen,t make the coke taste good) the gain will be ordinary not capital (low tax rate and u can use it to deduct capital losses)
example :
U r a  partner in a partnership and ur capital account at date of sale is 30k and ur share of liabilities is 3k and the incoming partner agreed to assume ur liablities and he paid u 40k cash
capital account 30000
+ %liabilities 3000
--------------------
33000 outside basis
- 43000 )cash + liabilities assumed by incoming partner)
---------
10000 gain
so if the incoming partner assumed ur liabilites u can ignore it and reduce ur capital account 40000 by cash 30000 and recognize 10000 gain

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