Question

Please discuss the concept of partnership distributions.

Answer 1

Partnership distributions:

1) A non liquidating distribution to a partner is non taxable, both to the partner and the partnership.

2) Distributions of cash or property to a partner reduce the partner's basis by the cash or adjusted basis (NBV) of the property distributed.

3) In a non liquidating distribution, the basis of property received will be the same as the basis in the hands of the partnership immediately prior to the distribution.

4) When a partner's bais in the partnership is greater than the book value of an asset received, no gain is recognized because the partner's basis in the partnership is simply reduced by the net book value of the property distributed (and a positive bais in the partnership still remains). The bais of the distributed asset to the partner will be the prior basis to the partnership.

5) If the partner's basis in the partnership is less than the book value of the asset received, however, there is a limit to the partnership basis reduction. Although no gain is recognized in this case either, the partner's basis in the partnership cannot go below zero.This means that the partner's basis in the asset received as a distribution will equal his basis in the partnership just before the distribution (after any cash paid in the same transaction). The partner's remaining basis in the partnership will then be zero.

6) Gain on excess cash : Gain is recognized to the partner only to the extent that cash distributed exceeds the adjusted basis of the partner's interest in the parrtnership immediately before the distribution.