lecture8 - Week Eight Partnerships Distributions, Sales and...

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Week Eight Partnerships – Distributions, Sales and Exchanges 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. Since the distributed property remains in the hands of one or more partners, they will still be liable for the income tax on any gain recognized on its subsequent sale. ¶20,011 Current vs. Liquidating Distributions The tax consequences of a partnership distribution differ depending on whether the distribution is classified as a current distribution or a liquidating distribution. A “liquidating” distribution is one which completely liquidates (terminates) the recipient’s interest in the partnership. All other distributions are “current” distributions. ¶20,020 Current Distributions—Cash A partner recognizes taxable gain in connection with a distribution only if (s)he receives cash in an amount exceeding his/her basis in the partnership interest. Marketable securities are treated as cash for this purpose. Gain is generally not recognized upon the receipt of property unless the distribution is a disproportionate distribution that triggers the application of Code Sec. 751(b) (discussed below). These rules are the same whether or not the distribution is in complete liquidation of the partner’s interest in the
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partnership. [Note that other provisions of the Internal Revenue Code, such as Secs. 704(c)(1)(B), 707 and 737, may trigger gain on certain distributions involving
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lecture8 - Week Eight Partnerships Distributions, Sales and...

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