Taxes: Partnership Distributions

Question 1

Taxes:

Partnership Distributions

Answer 1

Gain/Loss Deferral

• partnerships generally do not recognize gain/loss on distributions
• partners can recognize gains on liquidating or non-liquidating distributions of cash when cash> outside basis
• nonliquidating distributions of property never trigger loss recognition, but losses may be recognized on liquidating

Question 2

Taxes:
Partnership Distributions
Nonliquidating Distributions

Answer 2

Nonliquidating Distributions

• arms length sale is not a distribution
• Basis effects:
  
  • return of capital that reduces outside basis
    1. partner’s adj basis is allocated to cash distributed and cash deemed distributed (reduced liabilities)
    2. partner’s adj basis allocated to distributions of unrealized receivables or inventory equal to partnership’s basis in these assets
    3. partner’s adj basis is allocated to other assets distributed. any deficiency in partner’s adj basis is allocated to unrealized losses, any excess allocated to unrealized gains
  • distributed property retains its inside basis unless partner runs out of outside basis

Question 3

Taxes:
Partnership Distributions
Liquidating Distributions

Answer 3

Liquidating Distributions
- may result in gain/loss
- requires partner to transfer his/her outside basis to assets received from partnership
Occurs When:
- entire partnership or interest of one partner liquidated
- can be a series of transfers
- partnership: no gain/loss

Question 4

Taxes:
Partnership Distributions
Liquidating Distributions 2

Answer 4

Basis Effect
- liquidating distribution treated as a return of capital and the partner’s outside basis is substituted for the inside basis of distributed property
- distributions of cash trigger gain to extent cash>basis
- distributed property retains its inside basis but amount is adjusted depending on outside basis of partner
- inventory and receivables distributed pro rata
Loss Recognition
- partners can recognize losses if:
1. distribution is only cash, inventory, and unreal receivables
2. outside basis of partners interest exceeds the sum of cash plus inside basis of receivables

Question 5

Taxes:
Partnership Distributions
Special Issues

Answer 5

Special Issues

• complications: built-in gains, deemed distributions, and disproportionate distributions
• reductions in liabilities treated like cash
• distributions of marketable securities (fmv-partner’s share of appreciation) treated as deemed distributions
• distributions of built-in gain property, within 7 years of contribution cause gain recognition

Question 6

Taxes:
Partnership Distributions
Hot Assets

Answer 6

Hot Assets

• generate OI/OL because partner has not yet been taxed on accrued but unrealized income
• inventory and unrealized AR