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I think I understand, maybe, 731 (a) seems to indicates gains is money distributed in excess of adjusted basis. As such, a negative capital account + money on liquidation, if less-then adjusted basis, is not a gain.
so hypothetically in partnership AB, if A(80%) acquires B(20%) , it a liquidation per the ruling 99-6
if:
adjust basis for one partner A is $250 ( $200 non-rec liabilities + $50 capital account [cash]),
and adjusted basis for partner B is $200 ($50 non-rec liabilities + $150 capital account [cash]),
then:
A: cash Dist:$160, ending capital account $-110
B: cash Dist:$40, ending capital account $110
in this above case though, this implies there is a liability created on A to pay back the disregarded entity. further, since there is no relief of any debts from A to is creditors, there is also no gain or loss, per se.
731 (a) also seems to indicate that a loss is not recognized either because the loss as show in the example above are not in excess of basis.
the problem I see is that should K-1 instruction indicates the end-year of liabilities should reflect just before disposition, if I understand correctly. if there is no relief of debt, would the K-1 on its own be interpreted as such? it would be really annoying for someone to get a tax bill for a debt deemed as income merely because of a K-1 reporting requirement.
but even in this case, is a 6198 required for that $110 or since there is no actual gain, or it is not required.
or is the example above incorrect somehow?
