Liquidating distribution tax
since we've had a Tax Geek Tuesday, but that's not to say I've shirked my responsibility of trying to make sense of the nether regions of the Internal Revenue Code.
For the past few months, I've been traveling around the country teaching the finer points of the Affordable Care Act and the repair regulations in such exotic locales as Hartford, Grand Junction and Billings, which is every bit as depressing as it sounds.
The distribution of ,000 is treated as a current distribution because it is not part of a series of distributions that will result in the termination of A’s interest.
Under Section 731(b), a partnership that makes a current distribution does not recognize any gain or loss, and a partner who receives a current distribution cannot recognize a loss.
Ex: Partner A, with an adjusted basis of ,000 in his partnership interest, receives in a current distribution property having an adjusted basis of ,000 and a FMV of ,000 to the partnership immediately before distribution, and ,000 cash.
The downside of deferral, however, is that in order to ensure that any gain in the partnership's assets is preserved, a complex set of rules governing the distributee partner's basis in the distributed property is required.
The tax treatment of a distribution, however, depends on whether it is a Current Distributions A current distribution is a distribution that does not terminate a partner’s interest in the partnership.
If, however, a distribution is part of a series of distributions that will result in the termination of the partner’s interest, the distribution is not a current distribution.
As a result, if the partnership is liquidated and the remaining ,000 of cash is distributed to S, S will recognize ,000 of loss under the rules discussed below for liquidating distributions.
Remember, the partnership had one asset, property 1, with appreciation of ,000.