Tax rules are involved in determining the basis of property in a partnership that liquidates distribution. Here's a brief explanation:

• Begin with the Partner's outside basis: The adjusted basis of the partner's partnership interest prior to distribution.
• The distributed property is granted the entirety of the outside basis. If there are multiple properties to be distributed, they are allocated proportionally according to their fair market value.
• The partner's outside basis is reduced first when cash is part of the distribution. Any remaining basis is given to the property.
• When distributing 'hot assets', such as inventory or unrealized receivables, special rules may be implemented to ensure proper tax treatment.

Here's an explanation using an example:

"Partner-A's" interest in the partnership "D" had an adjusted basis of $40,000.

In complete liquidation of D "Parther-A" received $20,000 cash, inventory items with a basis to "D" of '$10,000 ", and land used in the partnership more than 1 year with an adjusted basis  to " D " of $15,000 and a fair market value of $18,000.

What is " A's" basis in the land received?

Solution:

Basis will be allocated in the following order:

1. A's adjusted basis in partnership "D" $40,000
2. Cash distribution to "A" (20,000)
3. Basis to be allocated to inventory $20,000 ($40,000 - $20,000)
4. Inventory distribution to "A" $10,000 leaving $10,000 basis to land ($20,000 - $10,000).