Under Section 731(a)(1), a partner recognizes gain on a current distribution only to the extent that money distributed exceeds the partner's outside basis immediately before the distribution. Cash of $40,000 minus outside basis of $25,000 = $15,000 gain. This gain is typically capital gain. Answer A is incorrect because cash distributions exceeding outside basis do trigger gain. Answer C ($40,000) ignores the basis offset. Answer D ($25,000) is the outside basis itself, not the recognized gain.

Under Section 731(a)(2), a partner may recognize a loss on a liquidating distribution only if the distribution consists solely of money, unrealized receivables, and inventory items, and the sum of money received plus the basis of unrealized receivables and inventory is less than the partner's outside basis. No loss is recognized if the liquidating distribution includes any other property. Answer B is incorrect because loss is not recognized simply because FMV is below outside basis; the distribution must meet the all-cash/receivables/inventory test. Answer C is incorrect because a decrease in partnership liabilities is treated as a deemed cash distribution, which can trigger gain but the scenario described does not automatically produce a recognizable loss in the way Section 731(a)(2) requires. Answer D is incorrect because distribution of appreciated property does not trigger a loss for the distributee partner.

Under Section 732(b), in a complete liquidating distribution, the partner's total basis in all distributed property equals the partner's outside basis reduced by any cash received in the same distribution. This remaining basis is then allocated among the non-cash assets under the Section 732(c) ordering rules: first to unrealized receivables and inventory (up to their partnership basis), then to any remaining assets. Answer A (FMV basis) would apply only if gain were fully recognized. Answer B (partnership's adjusted basis) is the rule for current distributions under Section 732(a), subject to the outside basis cap, not the liquidating distribution rule. Answer C ($0 basis) has no basis in the Code.

Under Section 732(b), the partner's basis in property received in a liquidating distribution = outside basis minus cash received = $50,000 - $20,000 = $30,000. This $30,000 is allocated to the equipment. The partnership's basis in the equipment ($15,000) does not cap the liquidating distribution basis since Section 732(b) (not 732(a)) applies. The partner takes a $30,000 basis in the equipment, absorbing the full remaining outside basis. Answer A ($15,000) is the partnership's basis, which serves as a cap in current (not liquidating) distributions. Answer C ($35,000) incorrectly adds cash to the remaining basis. Answer D ($50,000) ignores the cash received.

Under Section 731(c), marketable securities distributed by a partnership are generally treated as money (cash) equal to their fair market value for purposes of the Section 731 gain recognition rule. This means if the FMV of the securities exceeds the partner's outside basis, gain is recognized just as if cash had been distributed. This rule prevents partners from using partnerships to distribute appreciated publicly traded securities tax-free. Answer A is incorrect because Section 731(c) specifically treats marketable securities as cash, which can trigger gain. Answer B is incorrect because the 12-month acquisition rule is not the primary standard; Section 731(c) applies broadly to marketable securities. Answer C is incorrect because the securities are treated as money, not as ordinary income assets per se.

Section 732(c) establishes a two-tier ordering rule for allocating basis in liquidating distributions. First, basis is allocated to unrealized receivables and inventory items in an amount equal to the partnership's adjusted basis in those assets (but not to exceed the total basis being allocated). Second, any remaining basis is allocated to other distributed properties. If the remaining basis exceeds the total adjusted basis of the other assets, the excess is allocated proportionally based on fair market values (positive adjustments). If basis is insufficient, reductions are made based on depreciation potential and then FMV. Answer A (FMV basis for all) ignores the statutory ordering. Answer C (equal split) has no basis in Section 732(c). Answer D reverses the correct priority.

Under Section 732(a)(1), in a current distribution of property other than cash, the partner's basis in the distributed property equals the lesser of the partnership's adjusted basis in the property or the partner's outside basis. The partnership's basis in the land = $20,000; partner's outside basis = $30,000. Lesser = $20,000. Leo takes a $20,000 basis in the land. His remaining outside basis = $30,000 - $20,000 = $10,000. Answer A uses FMV as basis. Answer B uses the full outside basis. Answer D correctly states $20,000 basis in the land but incorrectly reduces remaining outside basis to $0.

Under Section 731(a)(1), a partner recognizes gain in a liquidating (or current) distribution to the extent money distributed exceeds the partner's outside basis. Gain = $120,000 - $100,000 = $20,000. Under Section 741, gain on the liquidation of a partnership interest is generally treated as capital gain (subject to Section 751 recharacterization for hot assets, which are not present here). Answer A is incorrect because the gain is capital, not ordinary, in the absence of hot assets. Answer C is incorrect because distributions of cash exceeding outside basis do trigger gain recognition. Answer D ($120,000) ignores the outside basis offset.

Section 737 is the anti-mixing bowl rule that prevents a contributing partner from extracting other property from the partnership tax-free when contributed property with built-in gain remains in the partnership. If, within 7 years of a contribution, the contributing partner receives a distribution of other property with an FMV exceeding the partner's outside basis, gain is recognized equal to the lesser of (1) the net pre-contribution gain in the contributed property still held by the partnership, or (2) the excess of the FMV of distributed property over the partner's outside basis. Answer B is incorrect because gain is limited to the lesser of pre-contribution gain or the FMV-over-basis excess. Answer C is incorrect because Section 737 triggers even if the contributed property has not been sold; the sale triggers Section 704(c)(1)(B) instead. Answer D is incorrect because Section 737 specifically overrides the general nonrecognition rule in these circumstances.

When a partnership agreement includes a deficit restoration obligation (DRO), a partner with a negative capital account must contribute the deficit amount to the partnership before final distributions are made. Partner Z must contribute $30,000 to restore the capital account to zero; those funds may then be distributed to partners with positive capital account balances. Answer C is correct. Answer A is incorrect because the partnership agreement here expressly requires deficit restoration - absent such an obligation, the analysis would differ. Answer B is incorrect because a negative capital account creates a contribution obligation, not capital gain income. Answer D is incorrect because this situation involves a capital account deficit governed by the partnership agreement, not a discharge of indebtedness under Section 108.