The statutory provisions which govern the treatment of partnership distributions are contained in Sections through of the Code. Section controls the extent to which gain or loss will be recognized on partnership distributions. Section provides the rules for determining the basis of property received in a distribution. Section provides the rules for determining the effect of distributions upon the distributes partner's remaining basis in the partnership interest.
When a partner receives a distribution, Congress generally wanted it treated as a tax-free return of capital because a partner is taxed each year on a distributive share of partnership income, whether or not any actual distribution is made. Consequently, the general rule of Section is that no gain or loss is recognized by the partner or the partnership in a distribution of cash or property. There are, however, two exceptions to this general rule. Exception 1 - partner gain recognition: When a partnership distribution is in the form of cash, gain must be recognized by the distributee partner to the extent that the money received exceeds the partner's adjusted basis in the partnership interest at the time of the distribution.
The computation of gain is made without regard to any other property that may be distributed concurrently. Any gain recognized in Disproportionate liquidating distributions in a partnership distribution is treated as gain from the sale or exchange of a partnership interest is ordinarily a capital gain or loss.
Beginning inmarketable securities are treated as cash for purposes of Section a 1. Exception 2 - partner loss recognition: A loss may not be recognized by the distributes partner unless the distribution results in the liquidation of the partner's entire interest in the partnership. Thus, losses will never be recognized in current distributions. While Section a 1 recognizes marketable securities as cash, Section a 2 does not.
Thus, no loss can be recognized on a distribution of marketable securities. If a partnership distributes property other than money, the partner generally takes the same basis in the property that the partnership had immediately prior to the distribution. In a current distribution, the distributes partners outside basis in the partnership must be reduced by the sum of: However, the distributes partner's basis may never be reduced below zero.
Therefore, the basis of the property received cannot exceed the outside basis of the partnership interest, reduced by any money distributed in the same transaction. The result may be that some of the basis of the distributed property could disappear. A partner's remaining basis in a partnership is determined by first reducing the partner's outside basis by the amount of any money distributed and the adjusted basis of any property other than money distributed.
Recall, however, that a distribution cannot reduce a partner's basis in the partnership interest below zero. Consequently, if the basis of property distributed exceeds the partner's outside basis in the partnership, the partner's outside basis for the remaining interest is zero.
Section b states that the holding period of property received in a distribution includes that of the partnership as determined under Section Character of gain or loss. Gain or loss recognized as a result of a distribution is considered a gain or loss from the sale or exchange of a partnership interest. Overview The term liquidating distribution means the termination of a partner's entire interest in the partnership by means of a distribution, or a series of distributions, from the partnership to the partner.
Liquidating distributions can take several forms. They can be either in cash or in kind, or they can be either in lump-sum or a series of distributions. In addition, liquidating distributions are classified into two categories: Disproportionate liquidating distributions in a partnership the treatment of liquidating and current distributions is so similar, this subchapter examines only a comparison of the differences concerning: Loss is recognized to the extent that a partners basis exceeds the sum of the cash and the basis of the Sec.
Because the unrealized receivables have a zero basis to the partnership, Z takes a zero basis in them as well. If, on the other hand, Z had received land a capital asset instead of the unrealized receivables, no gain would be recognized because something other than cash or Section assets had been received.
Unlike current distributions, the basis of property received in liquidation is the adjusted basis of the partner's interest in the partnership reduced by any cash distributed. When two or more properties are distributed by a partnership, the partner's adjusted basis in the partnership reduced by any cash distributed must be allocated to the distributed properties.
Effective for partnership distributions after August 5,the Taxpayer Relief Act of modified the manner in which basis allocations are made under Section c. Under this new legislation, a partners outside basis is allocated under the following rules: First to unrealized receivables and inventory items, in an amount equal to their inside basis.
If there is any remaining outside basis, go to Step 2. If there is insufficient outside basis to allow all hot assets to take basis equal to their inside basis, this shortfall referred to in the statute as a "decrease" is allocated among the hot assets in two steps: Any basis remaining after Step 1A is then allocated to cold assets assets other than hot assets in an amount equal to their inside basis.
If there is any remaining outside basis, go to Step 3. If there is insufficient outside basis to allow all cold assets to take an outside basis equal to their inside basis, this is treated as a decrease, allocated in two steps: Any basis remaining after Step 2A is allocated to cold assets to the extent of and in proportion to the excess of fair market value over basis as adjusted under prior steps. Any remaining outside basis is allocated under Step 4. Any remaining basis is allocated among all cold assets in proportion to their relative fair market values.
Neither asset consists of inventory or unrealized receivables step 1. Section was enacted in as a simplifying measure to govern payments made by a partnership to a retiring or deceased partner's successor in interest. Unfortunately, the attempt at simplicity led only to complexity. Section has become one of the most complex sections in Subchapter K. Although this topic is beyond the scope of this module, a brief explanation follows. A partnership does not terminate upon the death of a partner because the decedent's successor in interest is recognized as a partner until the interest is liquidated.
Similarly, a retiring partner is recognized as a partner until his Disproportionate liquidating distributions in a partnership is Disproportionate liquidating distributions in a partnership. Thus, Section was necessary to classify payments by the partnership as either winding down payments Section a or payments for the partnership interest Section b. Payments which are not covered by Section b are to be considered winding down payments and fall within the rules of Section a.
These payments are treated as distributions of income or guaranteed payments and are taxable to the retiring partner or deceased partner's successor in interest as ordinary income, Payments that are considered a payments will reduce the other partners' distributive shares of partnership income.
Payments made for a interest in partnership property are treated as Section b payments and are taxed under the same provisions Disproportionate liquidating distributions in a partnership apply to current nonliquidating distributions.
However, payments made for a. Thus, Section b payments only apply to capital gain or loss properties. Which of the following transactions will fall within the general liquidating distribution rules? Overview While Congress, as a general rule, has done everything possible to allow partnerships to avoid recognition of any gain or loss on the distribution of their properties, there are certain exceptions to this generous policy.
The first exception is found in Section b and deals with the notion of disproportionate distributions. This issue is summarized at the end of this section. A second set of exceptions is the result of what is affectionately referred to Disproportionate liquidating distributions in a partnership mixing bowl transactions.