In a liquidating distribution of a partnership, Partner P receives cash of $10,000 and inventory with a basis to the partnership of $5,000. P's outside basis in the partnership was $8,000 prior to the distribution. What is P's recognized gain or loss?

In a partnership distribution, gain is recognized only to the extent that money (cash) received exceeds the partner's outside basis. Cash received ($10,000) - Outside Basis ($8,000) = $2,000 Gain. The inventory takes a basis of zero in the partner's hands because basis is reduced to zero by the cash.