Question

The December 31, 2019 balance sheet of the LCM Limited Partnership appears below:

Adjusted          Fair Market

                                                              Basis                Value

Cash                                                   $210,000         $210,000

Receivables                                                      0          108,000

Property, Plant & Equipment                  42,000             81,000

                                                            $252,000         $399,000

Larry, Capital                                      $  84,000         $133,000

Curly, Capital                                          84,000           133,000

Moe, Capital                                           84,000           133,000

                                                            $252,000         $399,000

Each partner shares equally in the partnership’s capital, income, gains, losses, deductions, and credits.  The partnership manufactures high-quality widgets and capital is a material income-producing factor.  On December 31, 2019, Curly, the General Partner, receives a distribution of $140,000 cash in retirement of his partnership interest. Nothing is stated in the partnership agreement about goodwill.  Curly’s outside basis in his partnership interest immediately before the distribution is $84,000.

Required:  

(1) What are the amount and nature of Curly’s gain that result from the distribution?  Explain your answer and provide supporting computations.

(2) What are the tax consequences to the partnership of making the distribution?

(3) What action should the partnership consider and what effect would that action have?

Answer 1

NOTE THESE POINTS BEFORE GOING TO THE ANSWER AS SUCH :

PARTNERSHIP DISTRIBUTIONS

Whether earnings are retained in the Partnership ,or Distribted to Partners has no effect on the taxation of those earnings , since the Partnership have to pay tax on the earnings , whether they are distributed or not.

Earnings are distributed to each partner's Capital account from which distributions if any made are charged against.

However , certain types of distributions that exceeds the Partner's basis may result in Gain or Loss that must be reported for the year in which they occur.

To understand the taxation of Partnerships and Distributions, it is necessary to know the 2 types of Tax Bases in Partnerships.

1 . The Inside Basis - is the partnerships Tax basis in the individual assets

2. Outside Basis - is the tax basis of each individual partner's interest in the partnership.

Similarly there are 2 types of Distributions too :

1. Current Distribution - decreases the partner's Capital Account , with out terminating it.

2. Liquidating Distribution _ pays the entire capital of the partner , there by eliminating the Partner's equity interest.

Generally losses only are recognised in a liquidating distribution . No gain is recognised from a cash distribution, unless the distribution is more than the partner's ouside basis. In that case , the excess is taxable as a Capital gain.

CAPITAL GAIN = CASH DISTRIBUTION - PARTNER'S OUTSIDE BASIS.

Answer to part 1. Curly's Capital Gain = $ 1,40,000 - $ 84,000 = $56,000

Answer to part 2 . Generally , there are no tax consequences of a current property distribution , there is never a taxable gain or loss to the partnership. The propert basis that remains after substracting the outside basis is taxable as a gain

Answer to part 3- Contributions to partnership funds , the transaction involves a Debit to the Cash Account and Credit to the Capital Account. When Profita / Losses are distribute to partner's the separate Capital Account are Credited /Debited respectively.

When Cash is distributed to Parners of Whe a Partner gets retired , the Capital Account is Debited and Cash account is Credited .