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731(a) (2), or 2) the excess of a distributee partner's basis in any property distributed in liquidation of the partner's interest over the partnership's pre-distribution basis in such property.
Example 4: Partners A and B each have a basis of ,000 in their respective partnership interests.
Tax Treatment of Partnership Distributions IRC Sec.
731(a) (1) generally provides that a partner receiving a distribution of cash or other property from a partnership, recognizes gain only to the extent that cash distributed exceeds the partner's basis in his or her partnership interest immediately before the distribution.
Only Partner C recognizes a gain on the distribution (,000) since she received cash in excess of her partnership basis.
A distribution may result in a recognized loss to a partner only where the partner's interest in the partnership is being completely liquidated and he or she receives only cash, unrealized receivables as defined in IRC Sec. cash-basis accounts receivable), or inventory as defined in IRC Sec. Loss in recognized to the extent the partner's basis in the partnership exceeds the amount of cash and basis of such other assets received in liquidation of the interest.
A more sensible alternative is to adopt an approach that would allow the IRC Sec. 12 (2/16/93), with respect to the special basis adjustment available to a partnership under IRC Sec.
Although the new revenue ruling explains the IRS's stance on the issue more clearly, it unfortunately will lead to unfair results at the partnership level in many instances.
A partner takes a basis in distributed property equal to 1) in the case of a nonliquidating distribution, the partnership's basis in such property, not to exceed the recipient partner's predistribution basis in the partnership less any cash received in the same transaction; and 2) in the case of a distribution in liquidation of a partner's interest, the partner's predistribution basis in the partnership reduced by any cash received in the same transaction. 734 basis adjustment will be made in cases where the partnership is distributing more cash and/or asset basis than the distributee partner's basis in his or her partnership interest prior to the distribution. 734 basis adjustment is the mechanism by which Subchapter K preserves partnership asset basis, which would otherwise be lost as a result of the distribution of assets (including cash) having a basis in excess of the distributee partner's basis in the partnership.