UCF School of Accounting Tax 5015

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UCF School of AccountingTax 5015

• Partnerships
• Distributions, Transfers and Terminations
• Chapter Eleven

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Outline

• Non-liquidating partnership distributions
• Liquidating Partnership Distribution
• Sale of a partnership with Sec 751 assets
• Retirement and/or Death of a Partner
• Termination of a partnership

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Non-liquidating Distributions- Partnership

• General Rule No gain or loss recognized by
  partnership
• Exception Disproportionate distributions may
  result in gain recognition. Note these
  distributions will be described briefly, but can
  get extremely complex.
• A disproportionate distribution occurs when a
  partnership makes a distribution of cash or
  property to a partner and that distribution
  changes the partners proportionate interest in
  the partnerships ordinary income (Sec 751)
  assets.

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Non-liquidating Proportionate Distributions-Partne
r

• Partners only recognize gain if
• money received gt adjusted basis of pship
  interest
• money cash, FMV of marketable securities,
  discharge of liabilities
• gain money received - basis in Pship interest
• Precontribution Gain rules apply
• Section 704 Contributing property is distributed
  to any other partner within 7 years.
• Section 737 Contributing partner receives other
  property with FMV greater than his adjusted basis
  in partnership interest.
• Gain recognized lesser of 1) unrecognized
  precontribution gain or 2) FMV of prop - adj
  basis of pship interest
• sometimes less than FMV if marketable securities
  are appreciated (see pg 12-14)

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Distributions Effect on Basis

• Partner takes carryover basis in property
  received (limited to pre-distribution basis in
  partnership). If allocation necessary, order
• cash and deemed cash
• unrealized receivables and inventory
• Ex. Of unrealized receivable AR of cash basis
  taxpayer
• Inventory defined as all assets except cash,
  capital assets or Sec 1231 assets.
• other property
• If within class allocation of basis is
  necessary, the following 3 step process is used
• Step One Carryover Basis
• Step Two Reduced to FMV (as appropriate)
• Step Three Remaining reduction allocated based
  on adjusted basis from step Two.

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Other Attributes of Property Received in
Distribution

• Holding period includes holding period of
  partnership
• Character
• Unrealized Receivable - always ordinary to
  partner
• Inventory - if sold w/in 5 years, ordinary. After
  5 years, depends on use in hands of partner

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Proportionate Nonliquidating Distribution Examples

• Bill's basis in partnership interest 30,000
• Proportionate nonliquidating distributions
• ( independent fact situations)
• A B C
• Cash 15,000 15,000 5,000
• Land - basis N/A 6,000 N/A
  (Fair mkt value) N/A 10,000
  N/A
• Accts rec -basis N/A N/A
  -0-
• (Fair mkt value) N/A N/A
  16,000
• SEE HANDOUT

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Liquidating Distributions

• Definition One of a series of distributions that
  terminates a partners interest in the
  partnership.
• May terminate one (or more) partners interests
  OR the entire partnership
• Partnership usually does not recognize gain
  (unless Sec 751 applies)

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Liquidating Distributions-Partner

• Gain recognized when
• money distributed exceeds the Partners
  pre-distribution basis of partnership interest
• Recall money includes cash, marketable securities
  and liability discharge
• Gain Money distributed - Ps basis in Pship
• Precontribution gain rules and disproportionate
  distribution rules still apply
• Loss is recognized if
• distribution consists only of money, unrealized
  receivables, and inventory
• and adjusted basis of assets received lt Partners
  basis in partnership interest

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Basis Allocation

• Order
• money
• unrealized receivables and inventory
• other property (remaining pship basis)
• Within-Class Basis Decrease Allocation
• Same as with nonliquidating distribution
• Other Property Basis Increase Allocation
• Step One Carryover Basis
• Step Two Increase to FMV (as appropriate)
• Step Three Remaining increase allocated based on
  relative FMVs

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Disproportionate Distributions

• Occur when partnership distributes cash or
  property to a partner which increases or
  decreases the partners share of ordinary
  income-producing assets (hot assets)
• If partner receives less than proportionate share
  of hot assets, then treated as if
• Partnership distributed some of the assets, and
• Partner sold these hot assets back to partnership
• Partner recognizes ordinary income on sale of the
  hot assets Partnerships basis in hot assets is
  cost
• Hot assets include
• Substantially appreciated Inventory
• Inventory includes all assets other than cash,
  capital and 1231 assets
• Substantially appreciated means FMV gt 120 of
  partnerships adjusted basis in inventory
• Unrealized receivables
• Rights to receive future amounts that will result
  in ordinary income recognition
• See example 21 page 11-17 for example

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Retirement or Death

• Payments made for Partners Interest in
  Partnership Property are taxed under the
  liquidating distribution rules
• Exception Retiring partner is general partner
  for a service partnership. Payments for
  unrealized receivables and goodwill treated as
  Income Payments (736(a) payments)
• Income Payments
• Payments as a function of partnership income -
  distributive share (character flows through to
  partner)
• Payments not a function of partnership income -
  guaranteed payment (and can be deducted by
  partnership)

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Sale of a Partnership Interest

• Treated as the sale of a capital asset
• Amount realized includes Partners release from
  his/her share of partnership liabilities because
  they are assumed/acquired by the purchaser
• Gain or loss is calculated separately for the hot
  assets (creates ordinary income/loss) and non-hot
  asset (creates capital gain/loss) portions of
  transaction
• Basis Calculation for income/loss and liabilities
  needs to be made up to the date of sale

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Termination of the Partnership

• The tax code and state laws treat this issue
  differently.
• If a partner completely liquidates (including
  retirement or death), the partnership tax year
  closes for that partner only.
• Termination of the partnership occurs when any of
  the following events occur
• Discontinuation of partnership operations
• sale/exchange of 50 of the ownership within 12
  months
• One partner in a two-party partnership buys out
  the other partner (i.e. must have at least TWO
  partners to have a partnership)