A liquidating distribution is treated as a sale or exchange of a partnership interest.

Question

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When a partnership makes a liquidating distribution to its partners, it is treated as a sale or exchange of the partner's interest in the partnership, rather than a mere return of capital. This means that the partner may recognize gain or loss on the distribution, depending on the difference between the partner's basis in the partnership interest and the amount of cash or property received.

A Liquidating Distribution Is Treated as a Sale or Exchange