Differences between liquidating and nonliquidating distribution
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Any gain is treated as gain from the disposition of the partner’s partnership interest, and is thus generally considered capital gain. Because the calculation of A’s gain, if any, is determined before any reduction to A’s outside basis upon the receipt of the property with a FMV of $6,000, A recognizes no gain on the distribution because the cash received ($18,000) does not exceed A’s basis in his partnership interest ($20,000).Next week, we'll address a slightly more nuanced issue -- the so-called "mixing bowl" rules of Sections 737 and 704. Partnership Distributions, Part 1: Gain/Loss and Basis Issues The primary Code sections that govern the treatment of partnership distributions are Section 731, Section 732, and Section 733, which determine the amount of gain or loss recognized by the partner, his basis in the distributed property, and the effect of the distribution on his basis in his partnership interest.The tax treatment of a distribution, however, depends on whether it is a Current Distributions A current distribution is a distribution that does not terminate a partner’s interest in the partnership.Rather than requiring the partnership to recognize $6,000 of gain upon the distribution to A, however, as shown above, no gain is recognized.Instead, the gain of $6,000 is preserved by giving A a basis in the property of $11,000.This is primarily attributable to the fact that when a corporation (whether C or S) makes a distribution of appreciated property, the corporation recognizes gain as if it sold the asset for its FMV.
To the contrary, when a partnership distributes appreciated property, the general rule is one of no gain is recognized by the partnership, and instead the gain will be recognized when the distributee partner sells the property.
For the past few months, I've been traveling around the country teaching the finer points of the Affordable Care Act and the repair regulations in such exotic locales as Hartford, Grand Junction and Billings, which is every bit as depressing as it sounds.
But now that I'm settled in, I'm excited to get back to providing what no one ever really asked for: an in-depth look at a narrow area of the tax law. As you will see, the regime governing partnership distributions is drastically different from the one governing corporate distributions.
Now, if A sells the property for its FMV of $17,000, A will recognize the $6,000 of gain that the partnership did not recognize.
Ex: Partner R has an adjusted basis of $20,000 in his partnership interest.
No gain is recognized by R because the cash received ($14,000) does not exceed R's outside basis in his partnership interest. In this example, at first blush it appears that more than the $4,000 of gain inherent in the partnership's property 1 will be recognized when R sells the property.