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be reduced for rent of the farmland, (2) petitioners’ income from
their rental real estate activity will not be increased for such
rent, and (3) petitioners’ distributions from the Bitker
partnership will include the partnership’s payments of petitioners’
personal debt.
B. Whether Distributions Petitioners Received From the
Bitker Partnership in 1996 and 1997 Exceeded Their Bases
in Their Partnership Interests
Section 731(a) sets forth the circumstances under which a
partner recognizes gain or loss from partnership distributions. In
the case of a distribution by a partnership to a partner, gain is
recognized only to the extent that the money (including marketable
securities) distributed exceeds the adjusted basis of a partner’s
interest in the partnership immediately before the distribution.
Sec. 731(a)(1); Jacobson v. Commissioner, 96 T.C. 577, 584 (1991),
affd. 963 F.2d 218 (8th Cir. 1992). Any gain recognized under
section 731(a) is considered gain from the sale or exchange of the
partnership interest of the distributee partner. Sec. 731(a);
P.D.B. Sports, Ltd. v. Commissioner, 109 T.C. 423, 441 (1997). In
the case of a sale or exchange of an interest in a partnership,
gain recognized to the transferor partner is generally treated as
gain from the sale or exchange of a capital asset. Sec. 741;
Colonnade Condo., Inc. v. Commissioner, 91 T.C. 793, 814 (1988).
Section 705(a) states a general rule for determining the
adjusted basis of a partner’s interest. In relevant part, section
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