Partnership%20Cash%20Distributions

1
Partnership Cash Distributions
Cash Distributions 1. Reduce outside
basis of partner. 733. 2. No gain or loss
to extent of outside basis. 731(a). 3. If
exceed outside basis, excess treated as gain from
sale of partnership interest. 731(a)(1).
Usually capital gain. 4. 752 twist
reduction in partners share of liabilities
deemed cash distribution.
2
Partnership Property Distributions
Property Distributions 1. No gain or loss to
partnership or partner unless -
Marketable securities distributed. -
Property distributed is same property contributed
by another partner within last 7 years
704(c)(1)(B) exception. - Distributions
of property to contributing partner within 7
years of contribution 737 exception. -
Unrealized receivables and substantially
appreciated inventory is distributed the 751(b)
nightmare exception.
3
Partnership Property Distributions No
Exceptions Apply
Consequences 1. No gain or loss to
partnership or partner. 2. Partners basis in
distributed property equals partnerships basis,
but cant exceed partners basis in partnership
reduced by money realized in same transaction.
732. New Partner Election If partner who
receives property distribution acquired
partnership interest within last 2 yrs by
purchase, exchange or inheritance, may elect to
increase such partnerships inside basis in
property allocable to such partner to equal
partners outside basis. Election only good for
determining basis of distributed property.
732(d), 743(b). 3. Partners outside basis
reduced by 732 basis of property to partner. 4.
If unrealized receivables distributed, ordinary
income taint always sticks to partner. 735(a).
4
Partnership Property Distributions No
Exceptions Apply
Consequences 5. If inventory of partnership
distributed, ordinary income taint to partner
sticks for 5 years. 735(2). 6. Nonrecognition
transaction cannot be used to remove the taint.
7. Depreciation recapture ordinary income
taint (1245) carries over to partner who gets
property. 8. Holding period of partnership
tacked onto to partners holding period. 735(b).
9. Partnerships distribution of property have
no impact on inside basis of other property held
by partnership. 734(a). Partnership may make
754 election and increase inside basis of assets
for (1) any gain recognized by partner under
731(a)(1) ( money in excess of basis) and (2)
excess of partnerships adjusted basis in
property before distribution over basis actually
picked up by partner under 732.
5
Partnership Property Distributions No
Exceptions Apply
Consequences 10. When property distributed
to partners, inside capital accounts of all
partners must be adjusted to reflect gain or loss
that would be realized if property had been sold
for its fair market value on date of
distribution. This is to keep capital accounts
in balance even though no gain or loss recognized.
6
The Marketable Securities Exception 731(c)
Rule Distribution of marketable securities
treated like distribution of cash. -
Marketable securities are financial instruments
and foreign currencies that are actively traded.
- Gain recognized by partner if FMV exceeds
outside basis. - Partners basis is 732 basis
plus gain recognized by partner. - Amount
deemed distributed to partner reduced by decease
in partners distributive share of net gain in
partnerships marketable securities.
7
Mixing Bowl Exception 704(c)
When Apply Property contributed by one partner
distributed to another within 7 years. Impact
under 704(c) Contributing partner must
recognize 704(c) built-in gain as if property had
been sold for FMV on date of distribution to
other partner.
8
Contributing Partner Exception 737
When Apply Partner contributes property with
built-in gain and partnership distributes other
property to partner within 7 years. Impact under
737 Contributing partner must recognize gain
equal to lesser of - FMV of distributed
property over outside basis, or -
Pre-contribution gain gain that would be
recognized under 704 if contributed property had
been distributed to other partner within 7 yrs.
9
Problem 296 - 1

• Facts ABC Partnership distributes 10k cash and
  land (value 10k, basis 10k) to each partner. A
  o/s basis 20k B 10k, C 5k.
• Tax impact each partner. A has 10k return of
  capital on cash (731), no income on land receipt
  (733), land basis of 5k transfers to A (732), A
  outside basis reduced to 5k. B receipt of cash
  tax free, o/s basis reduced to zero by cash,
  basis in land is zero. C has 5k capital gain per
  731(a)(1) because cash exceeds basis. C basis in
  land and outside basis reduced to zero per
  732(a)(2).
• What impact if C received land first, then cash?
  Land receipt would reduce outside basis to zero
  per 733 and C takes 5k basis in land. All 10k of
  cash later received would be taxable LTCG per
  731(a)(1).
• What impact in (b) if 10k cash is draw against
  income for year? Deemed cash distribution on
  last day of year per Reg. 1.731-1(a). Offset by
  income basis increase for year. Smart to couple
  with repay obligation if income not enough to
  cover.

10
Problem 296 - 2

• Facts Partner with 40k basis receives in pro
  rata distribution Asset 1 (basis 40k, value 10k)
  and Asset 2 (basis 20k, value 10k). What will
  be partners basis in assets under 732(c) if
• 1 is inventory, 2 is capital asset? Per
  732(c)(1)(A), outside basis first allocated to
  inventory. So inventory has 40k basis, capital
  asset has zero basis.
• 2 is inventory, 1 is capital asset. Inventory
  gets first 20k basis, and capital asset is
  allocated next 20k.
• Both assets inventory. Carryover basis reduced
  by 20k excess of inventory basis over outside
  basis. Allocated based on unrealized
  depreciation. 1 basis reduced from 40k to 25k
  2 reduced to 15k.
• Both assets capital. Same reduction allocation
  and answer as (c).
• Both assets inventory. 1 has value of 60k 2
  has value of 50k. No depreciation to allocate
  basis reduction. Thus 20k reduction allocated by
  asset basis (each 1/3). 1 basis is 26.667k 2
  basis is 13.333k.

11
Problem 296 - 3

• Facts NP buys 1/3 interest for 40. Partnership
  has receivables (basis 0, value 30k) and land
  (basis 60k, value 90k). 10k of receivables
  distributed to each partner.
• NP impact on receivable distribution if no 732(d)
  election? NP takes zero basis in receivables,
  retains 40k o/s basis, and recognizes 10k
  ordinary income on collection per 735.
• Receivable distribution impact if NP make 732(d)
  election? 743(b) adjustment would give NP 10k
  basis in receivables so no income on collection.
• NP outside basis after 10k AR distribution if
  732(d) election made? Outside basis goes from
  40k to 30k per 733.
• Partnership approval required for 732(d)
  election? No. Personal to partner. Very
  different than 754 election.
• 732(d) election impact on land basis? No
  immediate impact on basis. If land distributed to
  NP within 2 years of acquisition, then election
  would impact.

12
Problem 299 - 1

• Facts A, with 10k o/s basis in ABC Partnership,
  receives as part of pro rata distribution land
  inventory (basis 2k, value 3k) and receivable
  (basis 0, value 3k). Six years later, collects
  receivable, sells land for 3k.
• Tax results? On distribution, A takes carryover
  basis of 0 in receivables and 2k in land per
  732(a) and As o/s basis reduced to 8k per 733.
  On collection of receivables, A has 3k ordinary
  income as taint is permanent under 735 (a).
• On sale of land in year 6, A has 1k of
  LTCG. Five year inventory taint has expired.
• (b) Will 5 year inventory taint apply if A
  immediately gift land to daughter and then
  daughter sells as a capital asset? Yes 5 year
  taint will stick with any gift. 735(c)(2)(A),
  7701(a)(42), 7701(a)(45).

13
Problem 299 - 2
Facts A, with 1k o/s basis in two person taxi
partnership, receives as part of pro rata
distribution a taxi (basis 2k, value 3k)
purchased one year ago for 5k. A immediately
sells taxi for 3k? Tax results? As basis in
taxi is limited to 1k, his o/s basis before
distribution. 732(a)(2). On sale, 2k of income
recognized, of which only 1k is 1245 recapture
because that is max 1245 partnership would have
realized on 3k sale. 1245(b)(6)(A). Thus, A has
1k of 1245 ordinary income and 1k of 1231 or LTCG
income.
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14
Problem 305

• Facts A, 1/3 partner in ABC partnership with
  70k basis capital account valued at 80k, receives
  asset 1 with 90k basis and 60k value and reduces
  interest to one-ninth.
• Impact if no 754 election? A takes 1 with basis
  of 70k per 732(a)(2) and his o/s basis reduced to
  zero. Partnership recognizes no loss per 731(b)
  and makes no adjustments under 734. Post
  distribution balance sheet as follows
• A.B FMV
  A.B FMV
• Cash 60k 60k
  A 0 20k
• Asset 2 40k 60k
  B 70k 80k
• Asset 3 20k 60k
  C 70k 80k
• Totals 120k 180k
  140k 180k

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15
Problem 305
Facts A, 1/3 partner in ABC partnership with
70k basis capital account valued at 80k, receives
asset 1 with 90k basis and 60k value and reduces
interest to one-ninth. (b) Impact if 754
election? Same impact to A - takes 1 with basis
of 70k per 732(a)(2) and his o/s basis reduced to
zero. Partnership recognizes no loss per 731(b)
but makes asset adjustments under 734. Post
distribution balance sheet as follows
A.B FMV
A.B FMV Cash
60k 60k
A 0 20k Asset 2 46.7k
60k B 70k
80k Asset 3 33.3k 60k
C 70k 80k Totals
140k 180k
140k 180k
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16
Problem 305
Facts A, 1/3 partner in ABC partnership with
70k basis capital account valued at 80k, receives
asset 1 with 90k basis and 60k value and reduces
interest to one-ninth. (c) How should 20k 743
allocation be allocated among partners? Asset1
had 30k built-in loss that would have been
allocated equally (10k) each if sold. A may
still net 10k loss because his basis in asset is
70k and value is 60k. Since B and C can no
longer recognize any loss on that asset, best to
allocate the upward asset basis adjustment to
them so they may recognize 20k less income (or
more loss) down the road.
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17
Problem 310

• Facts ABC partnership formed with A
  contributing land 1 (basis 2k, value 10k) B
  contributing land 2 (basis 5k, value 10k) and C
  contributing land 3 (basis 10k, value 10k). Tax
  impact if
• ABC sells 1 for 10k? 8k allocated to A per
  704(c) As outside basis goes to 10k per
  705(a)(1)(A).
• ABC distributes 1 to C six years post formation?
  Per 704(c)(1)(B), A recognizes 8k income, As
  o/s basis goes to 10k, and ABCs basis in asset
  goes to 10k prior to distribution to C. Normal
  distribution rules for C.
• ABC distributes 3 to A six years post formation?
  Per 737 seven year rule, A must recognize of
  lesser of FMV of 3 over o/s basis (8k) or
  built-in gain on 1 (also 8k). So A has 8k LTCG,
  A o/s basis before distribution increased to 10k,
  As basis in 3 is 10k following distribution,
  As o/s basis after distribution is zero, and
  partnerships basis in 1 increased to 10k.
  737(c)(2).

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18
Problem 310

• Facts ABC partnership formed with A
  contributing land 1 (basis 2k, value 10k) B
  contributing land 2 (basis 5k, value 10k) and C
  contributing land 3 (basis 10k, value 10k). Tax
  impact if
• ABC distributes 2 to A six years after
  formation? Double whammy. Per 704, B has 5k
  LTCG, B o/s basis goes to 10k, and partnerships
  basis in 2 goes to 10k. Per 737, results to A
  are same as in (c) 8k income to A and
  associated basis increases.
• ABC distributes 2 to A one year post formation?
  Results same to B as in (d). But for A, transfer
  with 2 years deemed exchange of 1 for 2.
  707(a)(2)(B). This could produce higher income
  if values have increased.
• ABC distributes 1 to B and 2 to A six years out
  and properties like kind? Like kind exchange
  trumps 704(c)(1)(B) and normal distribution rules
  apply. Neither A or B recognize income. As
  basis in 2 is 2k and As o/s bais goes to zero.
  Bs basis in 1 is 2k and Bs o/s basis goes to
  3k.

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19
Problem 310
Facts ABC partnership formed with A
contributing land 1 (basis 2k, value 10k) B
contributing land 2 (basis 5k, value 10k) and C
contributing land 3 (basis 10k, value 10k). Tax
impact if (g) ABC distributes like kind
property to A six years post formation? Does
like kind exchange change application of 737 if
there is not related distribution to another
partner that would trigger 704(c)(2)? No per
Reg. 1.737-1(d). A would recognize 8k income,
basis in exchange property would be 10k.
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20
Problem 319-1

• Facts A, 1/3 partner in ABC partnership with 3k
  basis capital account valued at 6k, receives in
  non pro rata distribution receivables with 0
  basis and 3k FMV and As interest reduced to
  one-fifth.
• Triple tax impact.
• - A deemed to have received 2k phantom
  distribution of 741 assets 800 cash (40) and
  1200 capital asset (60). As basis in capital
  asset is transferred 400 and As o/s basis
  reduced 1200 to 1800.
• - A then deemed to have sold cash and
  capital asset for 2k of receivables. A
  recognizes 800 capital gain and B and C
  recognizes 1k each on receivable transfer. B and
  C o/s basis each go up 1k. Partnerships basis
  in capital asset goes to 1200.
• - Partnership deemed to have distributed
  1k of receivables to A in pro rata distribution.
  A takes basis in these receivables of zero. As
  o/s basis remains at 1800.

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21
Problem 319-1

• Facts A, 1/3 partner in ABC partnership with 3k
  basis capital account valued at 6k, receives in
  non pro rata distribution receivables with 0
  basis and 3k FMV and As interest reduced to
  one-fifth.
• Balance sheet at end is as follows
• A.B FMV
  A.B FMV
• Cash 6k 6k
  A 1.8k 3k
• Capital Asset 3.8k 9k
  B 4k 6k
• 
  C 4k 6k
• Totals 9.8k 15k
  9.8k 15k

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22
Problem 319-1
Facts A, 1/3 partner in ABC partnership with 3k
basis capital account valued at 6k, receives in
non pro rata distribution receivables with 0
basis and 3k FMV and As interest reduced to
one-fifth. (b) How is increase in
partnerships asset basis from deemed purchase
allocated to partners? Since purchase, there
really should be no need for special allocation
of basis increase. No 704(c) allocation because
not contributed. Nevertheless, some think should
be allocated to non-distributee partners (B and
C) here because they are taxed on the deemed
transfer of the excess receivables for the 741
assets. See Reg. 1.704-1(b)(5)-Example 14(i).
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23
Problem 319-2
Facts A, 1/3 partner in ABC partnership with
12k basis capital account valued at 18k, receives
accounts receivables with 0 basis and 9k FMV and
other two partners each receive 9k inventory
which has basis of 9k. (a) Does 751(b)
apply? No. Each partner received equal share of
751 assets. Fact that all appreciation went to A
is not controlling. Big factor is that there was
no misallocation of 751 and 741 assets. (b)
Lesson is that 751 does not stop assignment of
income among partners. It works to prevent
disproportionate allocations of classes of
property among partners.
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