### Consequences of the transaction-liquidating distribution

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Two years ago, Corporation Z, a 10 percent partner in XYZ Partnership, borrowed \$150,000 from the partnership in an arm's length transaction. Corporation Z gave the partnership a properly executed note stipulating that it would repay the loan at the end of three years and that it would pay the partnership 9 percent interest each year on the outstanding principal balance. During the current year, Corporation Z decided to withdraw from the partnership. Both Z and the other partners agreed that the fair market value of Z's capital account was \$150,000 and that the partnership would liquidate this interest by distributing Z's own note back to the corporation. On the date of the liquidating distribution, Z's outside basis in its 10% interest in XYZ was \$116,000.

Issue: What are the consequences of this transaction to Corporation Z and the XYZ Partnership? What are the Law implications in this analysis? Which conclusions did you arrive at?

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