Partnership Taxation Operating Distributions

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Partnership TaxationOperating Distributions

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Sec. 731 - Distributions
Liquidating
Current
Proportionate
Proportionate
Disproportionate
Disproportionate
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Section 731

• Sec. 731(a)
• Gain - only to extent that gt Adj.Basis
• Loss - only on liquidating distributions
• only items , URR, Invent.
• Sec. 731(b)
• No gain or loss for the partnership
• Sec. 731(c) Exceptions
• Payments to Retiring Partners (Sec. 736)
• Disproportionate Distributions (Sec. 751(b))
• Distributions of Marketable Securities

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Distributions of Cash

• Reduce basis
• Return of capital concept
• Distribution in excess of basis gain
• Treat reduction of liabilities as a cash
  distribution on the last day of the year
• Tread a draw against income as a distribution
  on the last day of the year

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Non LiquidatingDistributions of Property

• General rule -- Carryover basis
• Cant exceed outside basis
• Multiple properties distributed
• 1st. URR inventory items
• 2nd. Other Properties
• Pre 1997 Act Allocate basis on relative
  adjusted basis
• Post 1997 Act Allocate basis on relative
  depreciation first

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Post 1997 ActBasis Allocation - S. 732(c)

• If a decrease in basis is required
• First, to assets with unrealized depreciation in
  proportion to the unrealized depreciation (up to
  its unrealized depreciation)
• If some unallocated basis still remains, allocate
  remainder in proportion to the assets adjusted
  basis

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Example
Partnership Distributes Land (FMV 15 Adj.
Basis 15) Building (FMV 5 Adj. Basis
15) Partners outside basis 20
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Distributions of Marketable Securities

• General Rule - treat as cash
• Exceptions
• Investment partnership distributes marketable
  securities to a partner who contributed no
  property other than cash or marketable
  securities
• Distribution of a marketable security to a
  partner who contributed the security
• The distributed security was not a marketable
  security when acquired by the partnership
• Reduce distribution by distributees share of
  the net gain in the in partnerships marketable
  securities (before and after computation)

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Marketable Securities

• Financial instruments convertible to money or
  marketable securities
• Foreign currencies
• Must be actively traded

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Sec. 732(d) Election

• Treat distributed properties as if a Sec. 754
  election is in effect when distributee purchased
  his/her interest (Assets distributed to new
  partner eligible for Sec. 743(b) adjustment)
• Available only if
• Distributions made w/i 2 years of distributees
  partnership interest acquisition
• No Sec. 754 election in effect
• Distributee partners election
• IRS may require this adjustment
• If FMV of partnership assets gt 110 of adj. basis
  at acquisition and a shift in basis from
  non-depreciable assets to depreciable would occur

p277
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Sec. 735 - Character of Gain or Loss on
Disposition of Distributed Property
Character - Subsequent Sale (or holding
period)
Type of Asset
Ordinary gain or loss
1. Unrealized Receivables
2. Inventory Items (A)
Sold within 5 years
Ordinary gain or loss
Character of asset in hands of distributee
partner determines character of gain or loss
(B) Sold after 5 years
3. Non-Section 751 Assets
Distributee partners holding period includes
partnerships holding period
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Distributions Partnership Consequences

• No gain or loss recognized - Sec. 731
• No effect on inside basis - Sec. 734(a)
• May cause possible distortion
• Relief - Sec. 754 election
• Sec. 734(b) Amount of adjustment
• Sec. 755 - Governs adjustment allocation

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Sec. 743(b) - Adjustments
Direction of Adjustment
Effect on Distributee

Gain
Increase Basis
Loss
Decrease Basis
Lost Basis
Increase Basis
Decrease Basis
Found Basis
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Sec. 704(b) Capital Account Adjustments

• Reduce capital account by cash and FMV of
  property distributed
• Adjust capital accounts of all partners by their
  share of gain or loss as if the property had
  been sold for its FMV on date of distribution

P
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Mixing Bowl TransactionsAbuse Fighters ---
Sec. 704(c)(1)(B) 737

• 704(1)(B) Distributions of Contributed
  Property to Another Partner

B
A
Partnership
Property contributed by A and distributed to B
(w/i 7 years) --- 1 A recognizes the BIG/L as
if the property had been sold for its FMV at
time of distribution 2 Character of G/L is the
same as if the partnership had sold the
contributed property to B 3 As O/S basis is
increased/decreased by the G/L 4 Partnerships
basis in the property in increased prior to
distribution (FMV)
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Exceptions to Sec. 704(c)(1)(B)

• The contributed property is distributed back to
  the contributing partner
• Contributing partner receives a distribution of
  like-kind property (1031) w/i 180 days after
  the distribution
• Treat the contributing partner as if he received
  the same property (up to the FMV of the like-kind
  property actually received.

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Sec. 737 - Distributions of Other Property to the
Contributing partner
A
Partnership
x
y

• A must recognize a gain if he receives property
• (other than money) as a distribution (w/i 7
  years)
• ---- only applies to appreciated property
• Amount of the gain Lesser of
• 1. FMV of the distributed property just before
  the
• distribution less outside basis prior to
  distribution
• 2. Net pre-contribution gain of A
• Character of the gain determined by contributed
  property
• Adj. basis -A increased O/S basis by gain
• Decrease O/S basis by the distribution.
• Partnership increases basis of X
  by gain

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Sec. 704(c)(1)(B) Distribution of Contributed
Property to another partner
w/i 7 years
B
Partnership
Treat as if a sale at the time of distribution
Sec. 737 -- Dist. of other property to
contributing partner w/i 7 yrs.
x
y
Partnership
Gain Lesser of (1) FMV of property
less O/S basis (2) Net BIG (only applies to
appreciated property)
P
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Phantom Gains
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Disproportionate Distributions Sec. 751(b)

• A distribution that alters a partners interest
  in Sec. 751(b) property
• Applies to current and liquidating distributions
• Treats disproportionate distribution of assets as
  a sale or exchange between the partnership and
  the distributee
• Sec. 731 controls the portion not covered by Sec.
  751(b)

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Mechanics of Sec. 751(b)

• Step One - Classify the partnership assets into
  Sec. 751 assets (URR Substantially Appreciated
  Inventory)
• Step Two - Assign gross values to
• 1 Distributee partners interest in each asset
  before the distribution
• 2 Distributee partners interest in each asset
  after the distribution
• 3 The actual property which was distributed

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Step 3 (Mechanics of Sec. 751(b))

• Determine the amount of any increase or
  decrease in the distributees share of the two
  classes of assets.
• (Compare the distributees interest in each
  asset before the distribution with the sum of his
  interest after the distribution plus the actual
  property distributed)

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Step 4 (Mechanics of Sec. 751(b))

• Determine which assets have been deemed sold
  or purchased in the sec. 751(b) exchange.
• Assign basis to those assets deemed sold
  using the general rules of sec. 732.

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Step 5 (Mechanics of Sec. 751(b))

• Determine tax consequences of sec. 751(b)
  exchange. Gain or loss is computed for
  distributee and partnership on assets sold
• Character of gain/loss determined by character
  of assets exchanged for the property sold
• Basis of the purchased assets will be their
  cost
• Basis of any property not involved in the sec.
  751(b) exchange is determined under the general
  rules of sec. 731 732

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Problem 2, page 299
1/3
Cash
12,000
Land
12,000
Total
24,000
8,000
19,000
Inventory
12,000
8,000
Received 8,000 in phantom dist.
Phantom dist. 8,000 of inventory to A with a
0 basis sold it back for 8,000
gain Partnership - Purchased the inventory for
8,000
Beg. Basis 18,000 751 gain 8,000 741
gain 1,000 27,000 -
Dist. (27,000) 0
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Dist. (27,000) Purch. 8,000 --751(b)
Cash Inventory Land
A B C
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The End