Advanced entity taxation
The Partnership Allocation
Track outside basis the partnership way: add the share of liabilities, run distributions for gain, and carve out 751 hot assets and 736 payments.
How the exam words it
- -The stem gives a contribution and a share of partnership liabilities and asks for the partner's outside basis.
- -It describes a fixed payment to a partner for services and asks how the guaranteed payment is treated.
- -It gives outside basis and a distribution and asks the gain or loss on a nonliquidating or liquidating distribution.
- -It sells a partnership interest or pays a retiring partner and asks about 751 hot assets or the 736(a) versus 736(b) split.
The playbook
- 1Build outside basis from contributed basis plus the share of partnership liabilities, then adjust for income, distributions, and liability shifts as deemed contributions or distributions.
- 2Treat a guaranteed payment as deductible by the partnership and ordinary income to the partner, not a distribution that reduces basis.
- 3Recognize gain only when cash exceeds basis, allow a loss in liquidation only for cash, receivables, and inventory, and never recognize a loss on a current distribution.
- 4Carve out the 751 hot-asset share as ordinary on a sale of an interest, and split 736 payments between capital 736(b) and ordinary 736(a).
The trap
Omitting the partner's share of liabilities from outside basis, or recognizing a loss on a nonliquidating distribution. Liabilities are part of basis, and a current distribution never triggers a loss.
How the exam varies it
The same pattern, re-skinned along these axes:
Outside basis including the share of liabilitiesGuaranteed payments versus distributions and 751 hot-asset gainNonliquidating versus liquidating distribution gain and loss
Drill this pattern
8 questions of The Partnership Allocation from across the AUD topics. Clear it by getting 5 right with a streak of 3.