Question

Benny is a partner in the BEN partnership. His outside basis is $250. He receives a distribution of $75 in cash.

a)Is the distribution taxable to Benny? If not, why not?

b)What is Benny’s outside basis after the distribution?

c)If instead the distribution was $275 would the answer to part (a) change (and if so how?)

Answer 1

a) Taxability of Distribution to Benny:

Outside Basis= $250

Cash Distribution = $ 75

No Gain is recognized from the distribution of Cash unless the distribution is more than the partners outside basis, in which case excess is taxable as a Capital Gain.

Capital Gain= Cash Distribution - Partner's Outside Basis

In this case, since the cash distribution is less than Partners outside basis, Capital Gain is not applicable.

b) Benny's Outside basis after distribution is as follows:

Partners Outside basis is calculated by adding and subtracting certain items:

Common Items that increase partners outside basis are:

• Any contribution of cash, property, or services
• The increased share of partnership liabilities in the year
• Any recognition of income, including tax-exempt income

Common items that decrease a partner’s outside basis is:

• Any distribution of cash or property
• The decreased share of partnership liabilities in the year
• Any recognition of losses or deductions, including nondeductible expenses.

Hence Partners Outside Basis after the distribution = Partners outside basis - Distribution of cash

=$250-$75= $175

c)If Cash Distribution was $275 instead of $ 75

Capital Gain would be applicable in this situation since cash distribution is more than Partners Outside Basis.

Hence Capital Gain=$275-$250=$25