Proportionate nonliquidating distribution examples

Before the distribution, the appreciation inherent in the asset held by the partnership was ,000 (,000-,000).

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AB distributes cash of ,000 to A, and A’s ownership decreases from 50% to 30%.

But now that I'm settled in, I'm excited to get back to providing what no one ever really asked for: an in-depth look at a narrow area of the tax law. As you will see, the regime governing partnership distributions is drastically different from the one governing corporate distributions.

This is primarily attributable to the fact that when a corporation (whether C or S) makes a distribution of appreciated property, the corporation recognizes gain as if it sold the asset for its FMV.

If the basis reduction exceeds the properties’ unrealized depreciation, the remaining basis reduction is allocated according to their relative bases (taking into account the reduction allocated to unrealized depreciation). Thus, after the distribution, X and Y each have a basis, giving A the total basis of 0 required by Section 732.

, and the partner’s outside basis after reduction for money received exceeds the basis of the hot assets then (i) the partner’s basis in hot assets equals their pre-distribution bases and (ii) the basis reduction is allocated among the other property distributed as discussed above.

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