Since, Ruth has received the retirement payment in installments; she will recognize gain to the extent distribution exceeds her basis. A retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions. In Yr1, she has received $18,320 ($10,000 + $8,320 debt relief) which is less than her basis of $19,504, therefore, none of the amount will be recognized as gain in Yr1. In Yr2, she received another $10,000 when her basis was $1,184, accordingly, she will recognize a gain of $8,816 out of which $2,249 will be an ordinary gain and $6,567 will be capital gain. In Yr 3, on receipt of the 3rd installment of $10,000, she will recognize $2,551 as ordinary gain and the remaining $7,449 as capital gain.