Question

Timothy is a 35% partner in the Total Partnership, a calendar-year-end entity. Timothy has an outside basis in his interest in Total Partnership of $198,000, which includes his share of the $45,000 of partnership liabilities. On December 31, Total makes a proportionate distribution of the following assets to Timothy:

	BASIS	FMV
Cash	$50,000	$50,000
Inventory	$65,000	$75,000
Land	$50,000	$65,000
Totals	$165,000	$180,000

For an operating distribution, outline the tax consequences (amount and character of recognized gain or loss, basis in distributed assets) of the distribution to Timothy.

For a liquidating distribution, outline the tax consequences (amount and character of recognized gain or loss, basis in distributed assets) of the distribution to Timothy.

Discuss the similarities and differences between the tax consequences of the operating distribution and the tax consequences of the liquidation distribution.

In your analysis, include the following:

An introduction

Requirements (don’t forget to show your work)

Conclusion

Answer 1

solution:

1)

• Cash distribution is taxable to Timothy when the cash distribution will excees of the outside basis of Timothy interest in the partnership; therefore, the cash distribution is not taxable in this scenario because his distribution did not exceed the basis of interest in the partnership.
• When Inventory is distributed, which is distributed second (cash is always first), the Fair Market Value is taken from the original amount of 198000-50000=148000
• the distribution did not exceed the 148000$
• Tthe last thing is distributed is the property. The rule is no gain or loss recognized on a property distribution from a partnership unless it meets certain special tax treatment rules such as “Disguised Sales”, “Marketable Securities” or “Precontribution Gain”.

The asset received in an operating distribution are non-taxable generally in hands of partner and the firm.?

2) For liquidating distribution will attract tax only,when distributed assets are more than reduced outside intrest of partners.

• Timothy’s basis is 198,000 and her cash distribution is 50,000. This cash distribution in this scenario is not a gain or a loss because the amount distributed was not exceeding the partner’s basis.
• The inventory is distributed next and again, the distribution does not exceed the reduced basis after the cash distribution so there is no tax consequence.
• The inventory is distributed next and again, the distribution does not exceed the reduced basis after the cash distribution so there is no tax consequence.

The balance left of the distribution goes toward this category so that there is nothing left and the company is then liquidated.

3)

Proportionate distributions to partners of a partnership run parallel for the most part whether it is for a non-liquidating or a liquidating distribution. The ordering of distribution is the same, which is:

• Cash
• Unrealized receivables and inventory
• All other assets

The difference is when liquidating, “the partner’s entire basis in the partnership interest is allocated to the assets received in the liquidating distributions unless the partner is required to recognize a loss”.