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Footnotes · EA Part 2 study notes · Partnerships · Worked Examples

Worked Examples

The first four are the liquidation and sale worksheets I built while studying, with the arithmetic laid out; the rest are the problems from the chapter that I keep coming back to.

1. Liquidation with two declined assets — my worksheet

John's basis is $30,000. In complete liquidation he receives Asset X (partnership basis $20,000, FMV $5,000) and Asset Y (basis $30,000, FMV $20,000). No cash, no hot assets.

  1. Partnership basis in the assets $50,000; John's basis $30,000; deficit to allocate $20,000
  2. First allocation, to decline in value: X declined $15,000, Y declined $10,000 (total $25,000); the $20,000 deficit is allocated 60/40: X –$12,000, Y –$8,000
  3. Bases: X $8,000, Y $22,000; total $30,000 = John's outside basis. No second allocation needed because the declines absorbed the whole deficit

2. Liquidation with cash, inventory, and a declined asset — my worksheet

Jeff's basis is $150,000. He receives $70,000 cash, inventory (partnership basis $30,000), a building (basis $80,000, FMV $90,000) and a computer (basis $20,000, FMV $10,000).

  1. Cash and inventory first: $150,000 – $70,000 – $30,000 = $50,000 to allocate against $100,000 of basis in the building and computer; deficit $50,000
  2. First allocation, to decline in value: only the computer declined, by $10,000; computer basis $10,000; deficit left $40,000
  3. Second allocation, by relative remaining basis ($80,000 : $10,000): building –$35,556, computer –$4,444
  4. Bases: building $44,444, computer $5,556; total $50,000. No loss is recognized because property other than cash, receivables and inventory was received

3. Complete liquidation, partner's basis exceeds the property — my worksheet

A partner with a $100,000 basis receives $10,000 cash and equipment with a partnership basis of $80,000 in complete liquidation.

  1. Cash first: $100,000 – $10,000 = $90,000 to allocate
  2. The equipment carried $80,000 of basis; the $10,000 excess is an increase, allocated to the one asset: equipment basis $90,000
  3. The $10,000 'loss' is not recognized; it lives in the equipment and comes out as less gain or more depreciation later

4. Sale with a zero basis and debt relief — my worksheet

Carl's outside basis is zero. He sells his interest for $15,000 cash and is relieved of his $10,000 share of partnership liabilities.

  1. Amount realized: $15,000 cash + $10,000 liabilities relieved = $25,000
  2. Basis $0; total gain $25,000, capital under Sec. 741 (no hot assets in the facts)
  3. The debt relief is taxable even though no cash came with it

5. Basis at formation with a mortgage and a bank loan

Martin contributes $15,000 cash and property with a $113,000 basis (including land with a $100,000 mortgage the partnership assumes) for a 30% interest in LMN, a cash-basis partnership with a $50,000 bank loan and $10,000 of accounts payable.

  1. Cash $15,000 + property basis $113,000 = $128,000
  2. Less the other partners' 70% of the $100,000 mortgage: –$70,000
  3. Plus his 30% of the $50,000 bank loan: +$15,000 (the cash-basis payables are ignored)
  4. Basis $73,000

6. Contribution with debt exceeding basis

Albert contributes $10,000 cash and land with a $20,000 basis subject to a $70,000 mortgage for a 20% interest.

  1. Debt shifted to the other partners: 80% × $70,000 = $56,000
  2. Total basis contributed: $10,000 + $20,000 = $30,000
  3. Gain: $56,000 – $30,000 = $26,000, capital; outside basis $0; partnership's basis in the land $20,000 + $26,000 = $46,000

7. Year-end basis with a refinance

Jane (30%, cash-basis general partnership, all partners personally liable) starts the year with a $50,000 basis. The partnership borrows $200,000 and uses $170,000 of it to retire an older loan. The partnership loses $250,000.

  1. Debt share up: 30% × $200,000 = +$60,000; debt share down: 30% × $170,000 = –$51,000; basis before loss $59,000
  2. Her loss share is $75,000; deductible this year $59,000 (Sec. 704(d)); $16,000 suspended until basis returns
  3. At-risk is the same here because the debt is recourse to her; a nonrecourse loan would have given basis but no at-risk amount

8. Nonrecourse debt, a distribution, and a sale the next year

Harvey contributes $12,000 for a one-fifth interest. The partnership borrows $50,000 nonrecourse (no guarantees, no minimum gain). He receives a $15,000 cash distribution; the partnership earns $60,000. On January 2 of the next year he sells for $20,000 cash and the buyer takes over his debt share.

  1. Basis: $12,000 + $10,000 (20% of the loan) – $15,000 + $12,000 (20% of income) = $19,000
  2. The $15,000 distribution was tax-free because basis was $22,000 when received (after the debt share)
  3. Sale: $20,000 cash + $10,000 debt relief = $30,000 realized; gain $11,000, capital

9. Guaranteed minimum

Meena is entitled to 30% of income but not less than $13,000. Income before the guarantee is $30,000.

  1. Her share without the guarantee: 30% × $30,000 = $9,000
  2. Guaranteed payment: $13,000 – $9,000 = $4,000, deductible by the partnership
  3. Meena reports $13,000 ordinary (all SE income); the other partners share $17,000. At $50,000 of income her $15,000 share beats the floor and there is no guaranteed payment

10. Sale with hot assets

Lloyd's basis is $40,000 including a $35,000 share of nonrecourse liabilities. His share of the partnership's unrealized receivables (zero basis) is $15,000. He sells for $60,000 cash and the buyer takes the debt.

  1. Amount realized: $60,000 + $35,000 = $95,000; total gain $55,000
  2. Sec. 751(a): $15,000 ordinary income (his share of the receivables)
  3. Remaining $40,000 is capital gain under Sec. 741; the partnership files Form 8308

11. Liquidation with a basis increase

Ruth's basis is $72,500. In complete liquidation she receives an apartment house (partnership basis $10,000, FMV $50,000) and an office building (basis $12,500, FMV $12,500).

  1. Assign partnership basis: $10,000 and $12,500; $50,000 of Ruth's basis remains
  2. Appreciation: the apartment house has $40,000, the building none; allocate $40,000 to the apartment house; $10,000 remains
  3. Remainder by FMV ($50,000 : $12,500): apartment house $8,000, building $2,000
  4. Bases: apartment house $58,000, office building $14,500

12. Retiring partner in a service partnership

Walt, a one-third general partner in a cash-basis engineering firm (capital not material), basis $60,000, is paid $300,000 over three years: $60,000 for fixed assets, $90,000 for his share of receivables, $150,000 for goodwill. The agreement says nothing about goodwill.

  1. $60,000 for property: Sec. 736(b), a distribution, tax-free against his $60,000 basis
  2. $90,000 for receivables and $150,000 for goodwill: Sec. 736(a) because he is a general partner in a service partnership and the agreement is silent on goodwill — ordinary income, SE taxable, deductible to the firm in substance
  3. Had the agreement provided for goodwill, the $150,000 would be 736(b) capital gain to Walt and nondeductible to the firm

Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.