The allocation of gains or losses during a partnership's liquidating distribution is determined by specific guidelines to ensure fairness and compliance with tax laws. The order in which gains are allocated is as follows:

• In the beginning, all outstanding debts owed to creditors are settled. This encompasses both external debts to third parties and internal liabilities to partners.
• Gains are utilized to recoup the partners' original contributions to the partnership. If a partner made a contribution of capital, property, or cash, those amounts will be repaid first.
• After the return of contributions, the partnership agreement determines how the remaining gains are distributed. Typically, this is determined by how profits and losses were divided among the partners throughout the partnership's existence.
• The partners are typically given any leftover amounts, which typically reflect their ownership percentages or as stated in the partnership agreement.
• Tax implications play a significant role, and partners may face capital gains tax if they make gains.

Here is an example for the explnation:

Mr.K Owned 50% of "K-Partnership", which reports income on an accrual basis.

Mr. K received the distribution of the 'K-Partnership' that was dissolved on April 1st of this year. One-half of the assets in the partnership.

The partnership had no liabilities.

The following assets are distributed to "K":

K's share of the partnership interest was $43,000. By December 31st of this year, K had acquired all accounts receivable by selling the inventory for $10,000. What will be the income or gain that "K" will report for these transactions in the year if the following assets were distributed to
Partner-K.

• Cash Basis $5,000 with FMV $5,000.
• Accounts receiveable Basis $10,000 with FMV $10,000.
• Inventory Basis $8,000 with FMV $10,000.
• Land Basis $20,000 with FMV $25,000.

Explanatipn:

• The distribution of property by the partnership does not result in a partner recognizing any gain, except when the amount distributed exceeds the partner's adjusted basis in the partnership.
• The cash was $5,000, but it was not more than $43,000, so there was no recognition of gain.
• The partner's adjusted basis in the partnership interest is the basis used to distribute the property, minus any money that was disbursed, which is $43,000 - $5,000 = $38,000.
• The partnership's adjusted basis for property is not exceeded when the basis is allocated to unrealized receivables and inventory items.
• Partner K's inventory basis is $8,000, resulting in a gain of $2,000 when it is old. Because the inventory was sold within 5 years of the distribution, this gain is considered normal.
• Partner K recognizes no gain on the collection of $10,000 in accounts receiveable because his basis in them is also $10,000. Partner K still holds land with a basis of $20,000 at year end.