Tax consequences of liquidating a partnership consolidating two itunes folders
It is these rules -- those governing gain recognition and determination of partner basis -- that are the focus of this Tax Geek Tuesday.Next week, we'll address a slightly more nuanced issue -- the so-called "mixing bowl" rules of Sections 737 and 704. Partnership Distributions, Part 1: Gain/Loss and Basis Issues The primary Code sections that govern the treatment of partnership distributions are Section 731, Section 732, and Section 733, which determine the amount of gain or loss recognized by the partner, his basis in the distributed property, and the effect of the distribution on his basis in his partnership interest.The partner will recognize gain, however, to the extent that the money he receives in the distribution exceeds his basis in his partnership interest (also known as "outside basis") immediately before the distribution.If a distribution includes both money and other property, the partner’s gain resulting from the distribution of money is calculated the effects of the other property on the partner’s outside basis are taken into account. AB makes a current distribution to A of cash of ,000 and property with a FMV of ,000.To the contrary, when a partnership distributes appreciated property, the general rule is one of no gain is recognized by the partnership, and instead the gain will be recognized when the distributee partner sells the property.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.Thus, current distributions include both distributions of a partner’s distributive share of partnership income as well as distributions in partial liquidation of a partner’s interest (Ex: A is a 50% partner in partnership AB.AB distributes cash of ,000 to A, and A’s ownership decreases from 50% to 30%.
A number of problems have emerged, particularly for LLCs treated as disregarded entities, including a controversial decision by the IRS to treat the disregarded entity as the one responsible for payroll taxes for its employees, and questions about the status of recourse liabilities of a disregarded entity, particularly one that owns a partnership interest.
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.
As with all other aspects of partnership taxation, the dual nature of a partnership for tax purposes — as at times an aggregation of its partners, and at times an entity — complicates the discussion, particularly because no one, including the author, has been able to articulate a comprehensive statement of when the aggregate, and when the entity, aspect should predominate.
Further complication arises because the “tax” partnership includes not only entities organized as general partnerships or limited partnerships (“LP”) under state law, but also the newer forms of limited liability partnerships (“LLP”), initially primarily for professionals, and the increasingly popular limited liability company (“LLC”).