Partnerships Pt. 3 Flashcards
What are the 3 ways a partner can liquidate their partnership interest?
complete withdrawal (liquidating distribution), sale of partnership interest, or retirement/death
How is gain/loss recognized in a liquidating distribution?
gain is only recognized to the extent that money received exceeds the partner’s basis in the partnership
loss is recognized if money, unrealized receivables, or inventory are the only assets received and if the partner’s basis in the partnership interest is more than the partnership’s basis in the assets received
How is basis assigned when there is a distribution of multiple assets?
first to cash, then hot assets, and lastly to other property
Consequences of a liquidating distribution to the partnership
the partnership does not recognize any gain or loss on the distribution of assets as all gains/losses are recognized at the partner level
How is the sale of a partnership interest treated?
as a general rule, the partner has a capital gain/loss when transferring a partnership interest because it is a capital asset to the partner
Gain/loss treatment on sale of partnership interest
a partner who sells or exchanges their interest in the partnership has a recognized gain/loss; if any partnership liabilities are allocated to the partnership interest and transferred to the buyer, they are considered part of the amount realized
Gain treatment on sale of partnership interest exception
any gain that represents a partner’s share of hot assets is treated as ordinary income rather than capital gain since the subsequent sale of these assets by the partner will result in ordinary income (hot assets include: inventory and unrealized receivables)
How is retirement/death of a partner treated?
payments in liquidation of their entire partnership interest are allocated between payment for an interest in partnership assets and other payments
payments for the interest in partnership assets result in capital gain/loss
if payments are measured by partnership income, they are treated as partnership income regardless of the period over which they are paid (taxable as ordinary income as if the retired partner is still a partner at the company)
How is the liquidation of an LLC handled?
it is treated the same as either a corporation or a partnership, whichever form the LLC elected to take for federal income tax purposes upon formation
