Question

Partnership Distributions What is the difference between the definition of a non-liquidating distributions and a liquidating distribution? What is the tax significance between the two? What issues arise if a partner contributes appreciated property to a partnership and other appreciated property is distributed to that partner? For example, a partner has a $60,000 basis in the partnership interest just before receiving a parcel of land as a liquidating distribution, the partner will have no remaining precontribution gain and will receive no other distribution. What will be the partners basis in the land once it is distributed upon termination? Explain fully.

Answer 1

Answer

Difference between the definition of a non-liquidating distributions and a liquidating distribution:

Non liqidating Distribution drecrease the partners capital without terminating it,whereas a liqidating distribution pays entire capital account to the partner, thereby eliminating the partners equity interest in the partnership. Generally Losses are only recognized in a liquidating distribution.

The tax significance between the two:

Earnings are either retained or distributed to partners it has no effect on the taxation of those earnings, since the partners have to pay tax on the earnings whether they are distrbuted or not. To understand the taxation of partnership anddistribution , It necessary to know the 2types of tax bases concerning partnerships. The inside basis and outside basis,the inside basis is partnership tax basis in the individual asset. The outside basis is the tax basis of each individul partner's interest in the partnership. When a partner contributes property to the partnership, the partnership's basis in the contributed property is equal to its Fair market value (FMV). Wheras, the outside basis of the partner increases only by the amount of the basis that the partner had in the property.

When appreciated property is distributed to partnership increase capital account or increses the capital account of individuals.

A partner has a $60,000 basis in the partnership interest just before receiving a parcel of land as a liquidating distribution, the partner will have no remaining precontribution gain and will receive no other distribution. What will be the partner’s basis in the land once it is distributed upon termination? Explain fully.

A partner has a $60,000 basis in the partnership so on liquidating land his basis would be same as per his partnership basis.