The partnership tsx rules for distributions lean heavily on the aggregate concept, which treats the entity like a conduit. As a result, the distribution rules strive to keep the basis of property the same, regardless of whether the partner or partnership holds them. Consequently, moving assets in and out of a partnership should theoretically have little tax consequence. The basis rules for liquidating distributions focus on allocating the terminating partner's entire outside basis in the partnership to the assets the partner receives in the distribution. The entire outside basis is allocated because after a liquidating distribution, the partner will no longer hold an interest in the partnership. It all must go. The allocation, however, depends on two issues. One, the partnership's inside basis and the distributed assets relative to the partner's outside basis in the partnership interest. And two, the type of property distributed, meaning money, hot assets, or other property. The combination of these issues creates five possible conditions of importance. Two of them arise when the partner's outside basis is greater than the partnership's inside bases of the distributed assets. And the other three occur when the partner's outside basis is less than the partnership's inside bases. Let's examine each condition in turn beginning with the distribution of money and/or hot assets when the partner's outside basis is greater than the inside basis of the distributed assets. Condition one, if the partnership distributes only money and/or hot assets, that is inventory and unrealized receivables, and the partner's outside basis is greater than the sum of the inside bases of the distributed assets, the partner will recognize a capital loss. This treatment occurs because the partner assigns a basis to the assets received from the partnership equal to the partnership's inside basis in the assets. But, because in this condition, outside basis is greater than the partnership's inside basis, and the partner is terminating the interests, the remaining outside basis after allocating is recognized as a loss. The code precludes a step up in basis and hot assets to avoid a situation where a partner converts a capital loss into an ordinary loss.