Proportionate nonliquidating distribution examples
Thus, current distributions include both distributions of a partner’s distributive share of partnership income as well as distributions in partial liquidation of a partner’s interest (Ex: A is a 50% partner in partnership AB.AB distributes cash of ,000 to A, and A’s ownership decreases from 50% to 30%.Before the distribution, the appreciation inherent in the asset held by the partnership was ,000 (,000-,000).Rather than requiring the partnership to recognize ,000 of gain upon the distribution to A, however, as shown above, no gain is recognized.It is these rules -- those governing gain recognition and determination of partner basis -- that are the focus of this Tax Geek Tuesday.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 partnership then takes ,000 of the ,000 of cash and purchases property 1.
The basis of the property in A's hands will be ,000, the same basis the partnership has in the property.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.If, however, a distribution is part of a series of distributions that will result in the termination of the partner’s interest, the distribution is not a current distribution.Instead, the gain of ,000 is preserved by giving A a basis in the property of ,000.Now, if A sells the property for its FMV of ,000, A will recognize the ,000 of gain that the partnership did not recognize.
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.