Liquidating Distributions. The AB Partnership pays its only liability (a $100,00
ID: 2454986 • Letter: L
Question
Liquidating Distributions. The AB Partnership pays its only liability (a $100,000 mortgage) on April 1 of the current year and terminates that same day. Alison and Bob were equal partners in the partnership but have partnership bases immediately preceding these transactions of $110,000 and $180,000, respectively, including his or her share of liabilities. The two partners receive identical distributions with each receiving the following assets:
Assets Partnership’s Basis FMV
Cash $ 20,000 $ 20,000
Inventory 33,000 35,000
Receivables 10,000 8,000
Building 40,000 60,000
Land 15,000 10,000
Total $118,000 $133,000
The building has no depreciation recapture potential. What are the tax implications to Alison, Bob, and the AB Partnership of the April 1 transactions (i.e., basis of assets to Alison and Bob, amount and character of gain or loss recognized, etc.)? Assume that no Sec. 754 election is in effect.
Explanation / Answer
When Partners Report Gains and Losses
Only partners who receive a liquidating distribution of cash may have an immediate taxable gain or loss to report. When the total amount of cash distributed is more than a partner's basis in her partnership interest, the difference in the two amounts is a gain. A loss results when the liquidating distribution is less than the partner's basis in the partnership. Partners, however, can only take a loss on their returns if it's solely the result of a liquidating distribution of cash, outstanding partnership receivables or inventory items.
Liquidation of Partnership Property
If the partnership distributes property -- anything other than cash and property treated as cash -- during its liquidation, it has no immediate tax effect. Instead, gain or loss is delayed until you sell the property. Provided the liquidation terminates your entire interest in the partnership, your tax basis in the distributed property is equal to your adjusted basis in the partnership interest minus the cash distributed to you. Regardless of the amount of cash you receive, your basis in the distributed property is never less than zero. If your basis is zero, this means the amount you eventually sell the property for is all taxable gain.
Tax implications therefore are:
Profit / Loss = Cash distributed - Partnership Basis
Alison = 10000 - 110000 = -$110000 (Loss)
Bob = 10000 - 180000 = -$170000 (Loss)
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