Partnerships Chapters 8 and 9

Partnerships Chapters 8 and 9 - CHAPTER 8 LIQUIDING...

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CHAPTER 8 LIQUIDING DISTRIBUTIONS AND TERMINATIONS Basically – 2 ways to get out of a partnership – sell your interest or liquidate A. INTRODUCTION Sec. 736 Sec. 761(d) 1. To retire from a partnership, a partner may sell his interest and bear the effects of Sections 741 and 751(a) or he may liquidate his interest. 2. Section 736 classifies payments received upon liquidation of a partnership interest. a. Section 736(a) applies to: (1) payments received for a partner's share of unrealized receivables (2) payments for goodwill which are not specifically designated as such in the partnership agreement and (3) other payments that exceed the FMV of the partner's share of partnership property. Payments that fall under Sec. 736 (a) are taxable income to the retiring partner and the remaining partners receive a deduction from partnership income. b. Section 736(b) applies to payments received for a partner's interest in partnership property other than 736(a) payments. Under this section, there is no recognition of income by the retiring partner but the tax burden falls on the partnership by denying a deduction from income for the payments. The classification of payments as (a) or (b) payments has important tax consequences to the partner and the partnership, so proper planning for retirement of partner is necessary. 3. Capital accounts determine the amounts that partners are entitled to receive on a liquidation of their interests in the partnership.
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LIQUIDATION OF A PARTNER'S INTEREST 1. SECTION 736(b) PAYMENTS Sec. 731 Sec. 732(b),(c,)(d) THE Scope of Section 736(b) Section 736(b) payments are liquidating distriubtions which are attributable to the retiring partner’s interest in most types of partnership property. Two categories of property specifically excluded from sec. 736(b) and therefore are taxed under 736(a) (if it is a service partnership): 1. The partner’s share of unrealized receivables (does not include recapture gain) 2. Partnership goodwill if the partnership agreement does not provide for such payments. 3. Bonus payments These above are always income to the partner. Tax Consequences to the Retiring Partner Just like regular distributions (1) If cash received exceeds outside basis, the partner recognizes gain. (2) If cash does not exceed outside basis, and partner also receives other property, outside basis is first reduced by cash received, then his outside basis is allocated to the remaining assets received. (a) Section 732(c) allocates the basis first to inventory items and unrealized receivables. These are tentatively assigned a basis equal to the partnership’s basis. (b) IF the partnership’s basis exceeds the partner’s outside basis (less cash received) then the bases in these assets must be reduced by the excess. 1. First allocate basis decreases
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Partnerships Chapters 8 and 9 - CHAPTER 8 LIQUIDING...

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