liabilities_in_excess_of_basis - Liabilities in Excess of...

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Liabilities in Excess of Basis: Formation of Corporation vs. Partnership Recall from chapter 4, under Section 357(c) – the transferor/shareholder will recognize a gain when property is transferred to a corporation & the liabilities assumed by the corporation are in excess of basis of the property (this prevents a negative basis in the stock). There is no similar Code Section that applies to partnerships, but the interaction of several rules will produce the same result. Here is the logic…. [1] Section 733 provides a general rule that a cash distribution from a partnership to a partner represents a nontaxable reduction in the partners’ outside basis. This same Section prohibits a negative basis in a partnership interest. [2] Section 731 resolves the potential conflict between these rules by providing that a partner who receives a cash distribution in excess of outside basis must recognize the excess as a gain from a sale of a partnership interest. [3] Debt relief is considered a “constructive” cash distribution.
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This note was uploaded on 09/09/2011 for the course TAX 5015 taught by Professor Kelliher,c during the Spring '08 term at University of Central Florida.

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liabilities_in_excess_of_basis - Liabilities in Excess of...

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