Question

What is the tax treatment to a partner who receives the distribution assuming the partnership has made a Section 754 election. The distribution was cash of $60,000 and inventory of $30,000. The partner's basis before the distribution was $50,000. What is the gain or loss for the partner, the cash basis after the distribution, inventory basis, and Section 734 Adjustment?

Answer 1

Section 734 Adjustments

Under Section 734, a partnership that has a Section 754 election may also be required to make adjustments to its retained property when it makes a distribution to a partner if i) the partner’s basis of the property after the distribution is not equal to the basis of the property in the hands of the partnership, or ii) the partner recognizes a gain or loss on the distribution.

Amount of Section 734(b) Basis Adjustment

If a partnership makes a distribution and a Section 734 adjustment is required, the partnership must increase the inside basis of its retained property by the sum of (i) the amount of gain recognized by the distributee partner on the distribution under Section 731(a)(1) and (ii) the amount the basis of distributed property is reduced as a result of the distribution under Section 732(a)(2). This is done to prevent the same economic gain from being taxed twice, once by the distributee partner, and again by the partnership.

In the given question The distribution was cash of $60000 and inventory of $30,000.The partner's basis before the distribution was $50,000.Hence Gain for the partner is $10,000.(i.e $60,000 - $50,000).because when the partner receive $60,000 as cash his basis has been reduced to zero,he takes a zero basis in the distributed inventory under section 732.

If a partnership makes a distribution and a Section 734 adjustment is required, the partnership must also reduce the basis of its retained property by (i) the amount of loss recognized by the liquidated partner on the distribution under Section 731(a)(2) and (ii) the amount the basis of the distributed property is increased as a result of the distribution under Section 732(b).

Since in the given case the liqidated partner are incurred the gain no such above mentioned adjustments is required.