Ch20IM - 351 Chapter 20 PartnershipsDistributions, Sales,...

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© 2009 CCH. All Rights Reserved. Chapter 20 351 Chapter 20 Partnerships—Distributions, Sales, and Exchanges SUMMARY OF CHAPTER Partnership distributions are generally nontaxable to both the partnership and the partner. The partner normally takes a carryover basis in distributed property and recognition of income or loss is deferred until he or she subsequently sells or disposes of the property. In exceptional cases, however, either the partner or the partnership or both will recognize gain or loss in connection with the transaction. For example, if the partner receives a distribution of cash (including liability relief) in excess of his or her tax basis in the partnership interest, gain must be recognized. Similarly, in rare instances, the partner may be required to recognize a loss upon receipt of a liquidating distribution if the distribution consists of nothing but cash and/or ordinary income property the aggregate basis of which is exceeded by his/her basis in the partnership interest. In other cases, the partner or the partnership may be required to recognize income or gain if a distribution changes the partner’s interest in partnership “hot” assets (ordinary income property). For the most part, however, accounting for partnership distributions is focused on the determination of basis—in the distributed property, in the partner’s remaining partnership interest (if any), and in the partnership’s remaining assets. These determinations can be rather complex, and are dependent on whether the liquidation is current (does not liquidate the partner’s entire interest in the partnership) or liquidating (does liquidate that interest), and whether or not the partnership has a Code Sec. 754 election in effect. Sale of part or all of a partnership interest to an outside buyer is economically similar to receipt of a distribution from the partnership. Accordingly, the tax consequences are also similar. The partner recognizes gain or loss equal to the difference between the proceeds of sale and the basis of the interest sold. The proceeds from the sale include the selling partner’s share of any partnership liabilities, and the character of the selling partner’s gain depends on whether or not the partnership owns ordinary income property at the date of the sale. A Code Sec. 754 election may also be important here as it will determine whether or not the partnership can adjust its basis in its assets following the sale of a partnership interest. In many partnerships, it is not feasible to allow a partner to sell an interest to an outside buyer. In these cases, a retiring partner must “sell” his or her interest back to the partnership. Payments made to retiring partners or to the successors in interest of deceased partners will generally trigger recognition of gain or loss in the same amount as would be triggered under the normal distribution rules, but the character of such gain or loss will depend on the nature and character of partnership assets and the speci
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This note was uploaded on 01/16/2011 for the course MBA AC553 taught by Professor Johnson during the Summer '10 term at DeVry Arlington.

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Ch20IM - 351 Chapter 20 PartnershipsDistributions, Sales,...

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