Partners are generally not considered to be employees

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Partners are generally not considered to be employees for purposes of employee fringe benefits (e.g., cost of $50,000 of group-term life insurance, exclusion of premiums or benefits under an employer accident or health plan, etc.). The value of a partner's fringe benefits are deductible by the partnership as guaranteed payments and must be included in a partner's gross income.
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Partnership distributions Gain/Loss Deferral Partnerships generally do not recognize gains or losses on distributions. Partners can recognize gains on non-liquidating or liquidating distributions of cash. Cash distributed in excess of outside basis causes gain recognition. Non-liquidating distributions of property never trigger loss recognition , but losses may be recognized on a liquidating distribution. Non-liquidating (or Current) Distributions A distribution to a continuing partner, including a draw by the partner. Arm's-length sales to partners are not distributions. Basis Effects For partners, non-liquidating distributions are a return of capital that reduces outside basis (in a specific order) . First, the partner's adjusted basis is allocated to cash distributions and cash deemed distributed (reductions in liabilities). Second, the partner's adjusted basis is allocated to distributions of unrealized receivables and inventory in an amount equal to the partnership's basis in these assets. Finally, the partner's adjusted basis is allocated to other assets distributed . Any deficiency in the partner's adjusted basis is allocated to properties with unrealized losses , and any excess basis is allocated to properties with unrealized gains. Example Casey had a basis of $9,000 for his partnership interest at the time that he received a non- liquidating partnership distribution consisting of $5,000 cash and other property with a basis of $3,000 and an FMV of $8,000. No gain is recognized by Casey since the cash received did not exceed his partnership basis . Casey's $9,000 basis for his partnership interest is first reduced by the $5,000 cash and then reduced by the $3,000 basis of other property, to $1,000. Casey will have a basis for the other property received of $3,000. Distributed property retains its inside basis (in the hands of the partner) unless the partner runs out of outside basis, then the inside basis of the property is reduced to the outside basis.
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Example Sara receives a current distribution from her partnership at a time when the basis for her partnership interest is $10,000. The distribution consists of $7,000 cash and Section 1231 property with an adjusted basis of $5,000 and a FMV of $9,000. No gain is recognized by Sara since the cash received did not exceed her basis. After being reduced by the cash, her partnership basis of $3,000 is reduced by the basis of the property (but not below zero). Her basis for the property is limited to $3,000.
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  • Spring '17
  • Wendy Achiles
  • partner

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