The U.S. IRS has released an international practice unit on Liquidating Distributions of a Partner's Interest in a Partnership. The general overview of the practice unit includes the following:

All partnership distributions are either current or liquidating. A liquidating distribution terminates a partner's entire interest in the partnership. A current distribution reduces a partner's capital accounts and basis in his interest in the partnership ("outside basis") but does not terminate the interest.

For current and liquidating distributions, a partner will generally not recognize gain. IRC 731(a)(1). However, gain may be recognized on the distribution of assets such as IRC 751(b) "hot" assets (inventory or unrealized receivables). IRC 751 gain arising from a distribution is treated as gain from the sale or exchange of a partnership interest and thus is generally capital gain, unless IRC 751 is applicable. IRC 741.

For current distributions, a partner recognizes gain to the extent the money he receives is greater than his outside basis immediately before the distribution. IRC 731(a)(1). A reduction of a partner's share of the partnership's liability is treated as a distribution of money under IRC 752(b) and distributions of marketable securities may also be treated as money under IRC 731(c). A partner will never recognize a loss on a current distribution. IRC 731(a)(2).

For liquidating distributions, gain is recognized to the extent money (or deemed money) distributed exceeds the partner's outside basis; loss is recognized to the extent the partner's outside basis exceeds money distributed and the basis of any hot assets distributed. A partner will not recognize a loss on a liquidating distribution if he receives any property other than money, unrealized receivables, or inventory.

Click the following link for the International Practice Units page on the IRS website.