Final answer:
A partner recognizes a gain in a liquidating distribution when the partnership distributes money, hot assets, and other property, and the amount of the distribution exceeds the partner's outside basis. Options b, c, and d do not result in gain recognition because they either involve distributions less than the outside basis or only money without hot assets or other property.
Step-by-step explanation:
A partner will recognize a gain in a liquidating distribution when the partnership distributes money, hot assets (such as inventory or unrealized receivables), and other property and the amount of the distribution exceeds the partner's outside basis (option a).
This occurs because the outside basis essentially represents the partner's investment in the partnership. When the total amount received in the liquidating distribution surpasses this basis, the excess is considered a gain and must be recognized for tax purposes.
Here is a step-by-step explanation:
- The partnership decides to liquidate and distributes its assets to the partners.
- Each partner assesses the total amount received (money, hot assets, and other property).
- The partner compares the distribution amount to their outside basis in the partnership.
- If the distribution amount is greater than their outside basis, the difference is recognized as a gain.
Options b, c, and d do not lead to gain recognition. In option b and d, the amount of the distribution is less than the partner's outside basis, meaning no gain is recognized. In option c, even if the distribution exceeds the outside basis, only money is distributed and no hot assets or other property are involved, leading to different tax considerations.