Current cash distributions reduce outside basis dollar-for-dollar and are not taxable as long as they do not exceed outside basis. $20,000 - $15,000 = $5,000 remaining basis. Answer B is correct. Answer A is incorrect because no income is recognized when a current distribution does not exceed outside basis. Answer C is incorrect because the distribution does reduce outside basis - it is not excluded from the basis calculation. Answer D is incorrect because outside basis never goes below zero; gain is recognized only when a distribution exceeds basis, which does not occur here.

When a cash distribution exceeds outside basis, the excess is recognized as gain from the sale of the partnership interest - generally capital gain. $30,000 - $10,000 = $20,000 gain; basis goes to zero. Answer A is correct. The gain is capital, not ordinary (B). At-risk rules don't apply here (C). Excess distributions create gain, not a loss carryforward (D).

In a liquidating distribution, basis is first assigned to cash, then the remaining outside basis is assigned to property. $50,000 - $40,000 cash = $10,000 remaining basis assigned to property. Answer B is correct. FMV (A) is not used. Inside basis (C) is the carryover basis rule for current distributions, not liquidating. The remaining basis goes to property (D).

Hot assets under Section 751 are unrealized receivables and substantially appreciated inventory - they generate ordinary income rather than capital gain when a partnership interest is sold or certain distributions are made. Answer A is correct. Real property and securities (B) are not hot assets unless they are inventory. No dollar threshold applies (C). Goodwill is a Section 751(b) consideration in limited cases but not the primary definition (D).

Under Section 735, if a partner disposes of distributed inventory within 5 years of the distribution, any gain or loss is treated as ordinary income or loss (retaining inventory character). Answer B is correct. 1 year (A), 3 years (C), and 10 years (D) are not the applicable period.

In a partnership liquidation, outside creditors are paid first, then partner loans, then partners' capital accounts. Answer A is correct. Partners are paid after creditors (B, C). Claims are not paid pro rata across all categories (D).

For current non-liquidating distributions, the partner takes a carryover basis equal to the partnership's inside basis ($8,000), and outside basis is reduced by the same amount. Answer C is correct. FMV (A) doesn't apply. Full outside basis assignment (B) applies only when inside basis exceeds outside basis in liquidating distributions. Inventory distributions receive carryover basis (D).

In a cash-only liquidating distribution, a loss equal to outside basis minus cash received is recognized when cash received is less than outside basis. $80,000 - $60,000 = $20,000 loss. Answer D is correct. Gain is not recognized when distribution is less than basis (A). No property was received to assign basis to (B). Cash-only liquidating distributions can generate a recognized loss (C).

In a property-only liquidating distribution where loss would result, no immediate loss is recognized - instead, the partner's full outside basis is assigned to the distributed property (giving the property a basis that may exceed its FMV), preserving the loss for future recognition when the property is sold. Answer A is correct. Basis is not lost (B). Section 734(b) adjustments are for the partnership's remaining assets (C). The loss is preserved in the property's higher basis, not separately deferred (D).

A decrease in the partner's share of partnership liabilities is treated as a distribution of cash, reducing outside basis. This applies to both recourse and nonrecourse liabilities. Answer C is correct. Basis is decreased, not increased (A). Liability changes do affect basis (B). The rule applies to all liability decreases (D).