Liquidating Distributions

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Presentation transcript:

Liquidating Distributions Payments in liquidation of the interest of a retired or deceased partner. Sec. 736 governs the treatment of the payments Payments must be in complete liquidation for Sec. 736 treatment to apply. Does not apply to current distributions or partial liquidations. Sec. 736 requires that payment be split into two categories Sec. 736(b) payments for the partner’s interest Sec. 736 (a) all other payments

Payments to Retired/Decesased Partners for Ptshp Interest Sec. 736 A retired partner or a deceased partner’s successor is treated as a partner until his interest in the partnership has been completely liquidated Sec 736 (b) - amounts paid for interest in ptshp property Sec. 736 (a)(1) - distributive share of pthsp items Sec. 736 (a)(1) - guaranteed payment Sec. 736 (a) payments usually taxed as ordinary income

Payments in Retirement of Partner Interests (continued) The taxability of the Sec. 736(b) payments shall be determined by Sec. 731 and Sec. 751. Special rules exist regarding the treatment of payments to general partners for which capital is not a material income-producing factor For service partnership Goodwill (unless the partnership agreement provides for it the payment of goodwill) and Unrealized receivables are not considered Sec. 736(b) payments. Therefore, they will be treated as 736(a) payments and more than likely be taxed as ordinary income. Be aware, that payments in retirement of interests often take several years. The regulations provide examples of how to allocate the payments between Sec 736(a) and Sec (b) amounts.

Sec 743 adjustments Occur only when a Sec. 754 election is in place. Once the election is made, it is in place for all subsequent years unless the revocation of election is approved by the IRS. Adjustments designed to ensure that a partner’s outside basis and inside basis are the same. Total amount of the adjustment is equal to the difference between the outside tax basis and the inside tax basis. (adjustment can be positive or negative Sec. 755 mandates that the adjustment be allocated among the assets of the partnership using 2 categories (Sec 1221/1231 assets & other assets)

Sec. 734 - Partnership Adjustments Designed to eliminate differences between inside and outside bases of the partnership interests that occur because of partnership property distributions. This section provides the partnership to adjust the tax bases of partnership assets in situations where the transferee partner does not take the asset at the adjusted basis in the hands of the partnership. This ultimately suggest that an effective or real gain or loss has been recognized by the recipient partner. Therefore, the partnership should adjust their bases to prevent double recognition of any gain or loss.