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Unformatted text preview: 363 Chapter 20 <<<<<<<<<<<<<<<< Partnerships—Distributions, Sales, and Exchanges ————————————————————— SUMMARY OF CHAPTER There can be both current and liquidating distributions by the partnership to its partners. The tax impact and basis adjustments vary according to the nature of the assets distributed. Certain assets retain their ordinary income character when distributed by the partnership and upon the sale of a partnership interest. If the distributee partner recognizes gain or loss in a distribution, or if the partner's basis in distributed property is different from the partnership's predistribution basis in the property, recognition is given by a special basis adjustment. Also, in a sale by a partner of a partnership interest, if the purchase price differs from the bases of the underlying assets in the partnership, recognition is given by a special basis adjustment. Payments made to retiring partners and the successors to the interest of partners who die are taxed as ordinary income or capital gain, depending on the character of the assets held by the partnership and the manner of payment. Partnership Distributions ¶20,001 Introduction Unlike distributions from corporations to shareholders, distributions from a partnership to its partners are generally tax-free transactions. Indeed, the ability to withdraw appreciated property from the partnership without recognizing taxable gain is one of the major advantages of the partnership form of organization. As a general rule, the partnership does not recognize gain or loss on distributions to its partners. The partners recognize gain on the receipt of a distribution from the partnership only if they receive cash in excess of their tax basis in their partnership interests. Distributions of cash in amounts less than a partner's basis in the partnership interest are nontaxable as are most property distributions received from the partnership. The tax-free status of partnership distributions reflects the pass-through nature of the partnership tax framework. Recall that although the partnership files a tax return reporting its income to the IRS, it does not pay income taxes. Instead, the partnership's income is divided (allocated) among its partners, who report their shares on their own returns and pay taxes accordingly. Thus, as the income is distributed to the partners, no tax is assessed because they have already paid tax on their shares of the partnership's income. Moreover, on a distribution of appreciated property, there is no immediate need to assess the income tax, because the partnership would not have paid any tax even if the property had been sold. Any gain would be allocated to the partners and they would pay any associated tax liability....
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- Summer '09
- partner, Retiring Partners