Thanks so much for your detailed responses, and while it makes perfect sense, it still raises questions. Let's assume the following: 10 partners, each with a 10% share. Only assets are land and trees, with book values of $100k and $0k respectively, and FMV of $300k and $300k. So, his partnership capital account/basis is $10k, but her FMV basis is now $60k. If we were to clear cut the trees and receive $300k, each of the other partners would have a $30k net capital gain. Would she also?
And taking it one step further, assume the partnership keeps the cash, and sells the entire partnership for $600k, its FMV. She has no net gain overall, so does she pay taxes on the tree capital gain, and then have a $30k loss on the partnership sale? That doesn't seem logical to me.
