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Unformatted text preview: 11-1Chapter 11 – Partnership: Distributions, Transfers of Interest, and Termination (2011 edition) updated: February 23, 2011 Learning Objectives: •Determine the tax treatment of nonliquidating partnership distributions. •Describe the generalconcepts governing the tax treatment of disproportionate distributions. •Determine the tax treatment of liquidating partnership distributions. •Determine the tax treatment of income/property payments to a retiring or deceased partner. •Calculate the selling partner’s amount & character of gain or loss on the sale of a partnership interest. •Outline the methods of terminating a partnership. I. Distributions from a Partnership – In General A. All distributions of cash and property fall into two categories: 1. liquidating distributions 2. nonliquidating distributions B. A liquidating distribution occurs when either: 1. the partnership itself liquidates and distributes all its property to all of its partners, or 2. an ongoing partnership redeems an interest of one of its partners (e.g., a partner retires or a partner dies) C. A nonliquidating distribution is any distribution from a continuing partnership to a continuing partner; there are two types of nonliquidating distributions 1. a current distribution or draw – a distribution of partner’s share of current or accumulated profits 2. partially liquidating distributions – reduce a partner’s interest in partnership capital but does not liquidate partner’s interest D. Furthermore, distributions from a partnership may be either: 1. proportionate – partner receives his or her share of certain ordinary income-producing assets 2. disproportionate – partner’s share of certain ordinary income-producing assets increases or decreases (disproportionate distributions involve Sec. 751 or “hot” assets) 11-2II. Proportionate Nonliquidating Distributions A. Partnership 1. general rule – no gain or loss is recognized by partnership B. Partner 1. general rule – no gain or loss is recognized by partner 2. partner usually takes a carryover basis in the assets distributed 3. distribution is treated as a nontaxable return of capital 4. basis in partnership interest is reduced by the amount of cash and the basis of property distributed (as of the last day of the partnership tax year) 5. partner continues to have a basis in partnership interest (in contrast to a liquidating distribution where basis in partnership interest must go to $0) 6. exceptions: •money received > partner’s basis in partnership interest •inside basis of property distributed > outside basis in partnership interest •property distributed with pre-contribution gain (distribution occurs within 7 years; two triggers) •disproportionate distributions of “hot assets” (Sec. 751) C. More on the exceptions 1. if money distributed exceeds partner’s basis in partnership interest – then the partner recognizes a gain… •money received > partner’s basis in partnership interest...
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