Publication 541 |
2000 Tax Year |
Partnership Distributions
Partnership distributions include the following.
- A withdrawal by a partner in anticipation of the current
year's earnings.
- A distribution of the current year's or prior years'
earnings not needed for working capital.
- A complete or partial liquidation of a partner's
interest.
- A distribution to all partners in a complete liquidation of
the partnership.
A partnership distribution is not taken into account in determining
the partner's distributive share of partnership income or loss. If any
gain or loss from the distribution is recognized by the partner, it
must be reported on his or her return for the tax year in which the
distribution is received. Money or property withdrawn by a partner in
anticipation of the current year's earnings is treated as a
distribution received on the last day of the partnership's tax year.
Effect on partner's basis.
A partner's adjusted basis in his or her partnership interest is
decreased (but not below zero) by the money and adjusted basis of
property distributed to the partner. See Adjusted Basis
under Basis of Partner's Interest, later.
Effect on partnership.
A partnership generally does not recognize any gain or loss because
of distributions it makes to partners. The partnership may be able to
elect to adjust the basis of its undistributed property, as explained
later under Adjusting the Basis of Partnership Property.
Certain distributions treated as a sale or exchange.
When a partnership distributes the following items, the
distribution may be treated as a sale or exchange of property rather
than a distribution.
- Unrealized receivables or substantially appreciated
inventory items distributed in exchange for any part of the partner's
interest in other partnership property, including money.
- Other property (including money) distributed in exchange for
any part of a partner's interest in unrealized receivables or
substantially appreciated inventory items.
See Payments for Unrealized Receivables and Inventory Items
under Disposition of Partner's Interest, later.
This treatment does not apply to the following distributions.
- A distribution of property to the partner who contributed
the property to the partnership.
- Payments made to a retiring partner or successor in interest
of a deceased partner that are the partner's distributive share of
partnership income or guaranteed payments.
Substantially appreciated inventory items.
Inventory items of the partnership are considered to have
appreciated substantially in value if, at the time of the
distribution, their total fair market value is more than 120% of the
partnership's adjusted basis for the property. However, if a principal
purpose for acquiring inventory property is to avoid ordinary income
treatment by reducing the appreciation to less than 120%, that
property is excluded.
Partner's Gain or Loss
A partner generally recognizes gain on a partnership distribution
only to the extent any money (and marketable securities treated as
money) included in the distribution exceeds the adjusted basis of the
partner's interest in the partnership. Any gain recognized is
generally treated as capital gain from the sale of the partnership
interest on the date of the distribution. If partnership property
(other than marketable securities treated as money) is distributed to
a partner, he or she generally does not recognize any gain until the
sale or other disposition of the property.
For exceptions to these rules, see Distribution of partner's
debt and Net precontribution gain, later. Also, see
Payments for Unrealized Receivables and Inventory Items
under Disposition of Partner's Interest, later.
Example.
The adjusted basis of Jo's partnership interest is $14,000. She
receives a distribution of $8,000 cash and land that has an adjusted
basis of $2,000 and a fair market value of $3,000. Because the cash
received does not exceed the basis of her partnership interest, Jo
does not recognize any gain on the distribution. Any gain on the land
will be recognized when she sells or otherwise disposes of it. The
distribution decreases the adjusted basis of Jo's partnership interest
to $4,000 [$14,000 - ($8,000 + $2,000)].
Marketable securities treated as money.
Generally, a marketable security distributed to a partner is
treated as money in determining whether gain is recognized on the
distribution. This treatment, however, does not generally apply if
that partner contributed the security to the partnership or an
investment partnership made the distribution to an eligible partner.
The amount treated as money is the security's fair market value
when distributed, reduced (but not below zero) by the excess (if any)
of:
- The partner's distributive share of the gain that would be
recognized had the partnership sold all its marketable securities at
their fair market value immediately before the transaction resulting
in the distribution, over
- The partner's distributive share of the gain that would be
recognized had the partnership sold all such securities it still held
after the distribution at the fair market value in (1).
For more information, including the definition of marketable
securities, see section 731(c) of the Internal Revenue Code.
Loss on distribution.
A partner does not recognize loss on a partnership distribution
unless all of the following requirements are met.
- The adjusted basis of the partner's interest in the
partnership exceeds the distribution.
- The partner's entire interest in the partnership is
liquidated.
- The distribution is in money, unrealized receivables, or
inventory items.
There are exceptions to these general rules. See the following
discussions. Also, see Liquidation at Partner's Retirement or
Death under Disposition of Partner's Interest, later.
Distribution of partner's debt.
If a partnership acquires a partner's debt and extinguishes the
debt by distributing it to the partner, the partner will recognize
capital gain or loss to the extent the fair market value of the debt
differs from the basis of the debt (determined under the rules
discussed in Partner's Basis for Distributed Property,
later).
The partner is treated as having satisfied the debt for its fair
market value. If the issue price (adjusted for any premium or
discount) of the debt exceeds its fair market value when distributed,
the partner may have to include the excess amount in income as
canceled debt.
Similarly, a deduction may be available to a corporate partner if
the fair market value of the debt at the time of distribution exceeds
its adjusted issue price.
Net precontribution gain.
A partner generally must recognize gain on the distribution of
property (other than money) if the partner contributed appreciated
property to the partnership during the 7-year period before the
distribution.
A 5-year period applies to property contributed before June 9,
1997, or under a written binding contract:
- That was in effect on June 8, 1997, and at all times
thereafter before the contribution, and
- That provides for the contribution of a fixed amount of
property.
The gain recognized is the lesser of the following amounts.
- The excess of:
- The fair market value of the property received in the
distribution, over
- The adjusted basis of the partner's interest in the
partnership immediately before the distribution, reduced (but not
below zero) by any money received in the distribution.
- The "net precontribution gain" of the partner. This is
the net gain the partner would recognize if all the property
contributed by the partner within 7 years (5 years for property
contributed before June 9, 1997) of the distribution, and held by the
partnership immediately before the distribution, were distributed to
another partner, other than a partner who owns more than 50% of the
partnership. For information about the distribution of contributed
property to another partner, see Contribution of Property,
under Transactions Between Partnership and Partners,
later.
The character of the gain is determined by reference to the
character of the net precontribution gain. This gain is in addition to
any gain the partner must recognize if the money distributed is more
than his or her basis in the partnership.
For these rules, the term "money" includes marketable
securities treated as money, as discussed earlier.
Effect on basis.
The adjusted basis of the partner's interest in the partnership is
increased by any net precontribution gain recognized by the partner.
Other than for purposes of determining the gain, the increase is
treated as occurring immediately before the distribution. See
Basis of Partner's Interest, later.
The partnership must adjust its basis in any property the partner
contributed within 7 years (5 years for property contributed before
June 9, 1997) of the distribution to reflect any gain that partner
recognizes under this rule.
Exceptions.
Any part of a distribution that is property the partner previously
contributed to the partnership is not taken into account in
determining the amount of the excess distribution or the partner's net
precontribution gain. For this purpose, the partner's previously
contributed property does not include a contributed interest in an
entity to the extent its value is due to property contributed to the
entity after the interest was contributed to the partnership.
Recognition of gain under this rule also does not apply to a
distribution of unrealized receivables or substantially appreciated
inventory items if the distribution is treated as a sale or exchange,
as discussed earlier.
Partner's Basis for
Distributed Property
Unless there is a complete liquidation of a partner's interest, the
basis of property (other than money) distributed to the partner by a
partnership is its adjusted basis to the partnership immediately
before the distribution. However, the basis of the property to the
partner cannot be more than the adjusted basis of his or her interest
in the partnership reduced by any money received in the same
transaction.
Example 1.
The adjusted basis of Beth's partnership interest is $30,000. She
receives a distribution of property that has an adjusted basis of
$20,000 to the partnership and $4,000 in cash. Her basis for the
property is $20,000.
Example 2.
The adjusted basis of Mike's partnership interest is $10,000. He
receives a distribution of $4,000 cash and property that has an
adjusted basis to the partnership of $8,000. His basis for the
distributed property is limited to $6,000 ($10,000 - $4,000, the
cash he receives).
Complete liquidation of partner's interest.
The basis of property received in complete liquidation of a
partner's interest is the adjusted basis of the partner's interest in
the partnership reduced by any money distributed to the partner in the
same transaction.
Partner's holding period.
A partner's holding period for property distributed to the partner
includes the period the property was held by the partnership. If the
property was contributed to the partnership by a partner, then the
period it was held by that partner is also included.
Basis divided among properties.
If the basis of property received is the adjusted basis of the
partner's interest in the partnership (reduced by money received in
the same transaction), it must be divided among the properties
distributed to the partner. For property distributed after August 5,
1997, allocate the basis using the following rules.
- Allocate the basis first to unrealized receivables and
inventory items included in the distribution by assigning a basis to
each item equal to the partnership's adjusted basis in the item
immediately before the distribution. If the total of these assigned
bases exceeds the allocable basis, decrease the assigned bases by the
amount of the excess.
- Allocate any remaining basis to properties other than
unrealized receivables and inventory items by assigning a basis to
each property equal to the partnership's adjusted basis in the
property immediately before the distribution. If the allocable basis
exceeds the total of these assigned bases, increase the assigned bases
by the amount of the excess. If the total of these assigned bases
exceeds the allocable basis, decrease the assigned bases by the amount
of the excess.
Allocating a basis increase.
Allocate any basis increase required in rule (2), above, first to
properties with unrealized appreciation to the extent of the
unrealized appreciation. (If the basis increase is less than the total
unrealized appreciation, allocate it among those properties in
proportion to their respective amounts of unrealized appreciation.)
Allocate any remaining basis increase among all the properties in
proportion to their respective fair market values.
Example.
Julie's basis in her partnership interest is $55,000. In a
distribution in liquidation of her entire interest, she receives
properties A and B, neither of which is inventory or unrealized
receivables. Property A has an adjusted basis to the partnership of
$5,000 and a fair market value of $40,000. Property B has an adjusted
basis to the partnership of $10,000 and a fair market value of
$10,000.
To figure her basis in each property, Julie first assigns bases of
$5,000 to property A and $10,000 to property B (their adjusted bases
to the partnership). This leaves a $40,000 basis increase (the $55,000
allocable basis minus the $15,000 total of the assigned bases). She
first allocates $35,000 to property A (its unrealized appreciation).
The remaining $5,000 is allocated between the properties based on
their fair market values. $4,000 ($40,000/$50,000) is allocated to
property A and $1,000 ($10,000/$50,000) is allocated to property B.
Julie's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and
her basis in property B is $11,000 ($10,000 + $1,000).
Allocating a basis decrease.
Use the following rules to allocate any basis decrease required in
rule (1) or rule (2), earlier.
- Allocate the basis decrease first to items with unrealized
depreciation to the extent of the unrealized depreciation. (If the
basis decrease is less than the total unrealized depreciation,
allocate it among those items in proportion to their respective
amounts of unrealized depreciation.)
- Allocate any remaining basis decrease among all the items in
proportion to their respective assigned basis amounts (as decreased in
(1)).
Example.
Tom's basis in his partnership interest is $20,000. In a
distribution in liquidation of his entire interest, he receives
properties C and D, neither of which is inventory or unrealized
receivables. Property C has an adjusted basis to the partnership of
$15,000 and a fair market value of $15,000. Property D has an adjusted
basis to the partnership of $15,000 and a fair market value of $5,000.
To figure his basis in each property, Tom first assigns bases of
$15,000 to property C and $15,000 to property D (their adjusted bases
to the partnership). This leaves a $10,000 basis decrease (the $30,000
total of the assigned bases minus the $20,000 allocable basis). He
allocates the entire $10,000 to property D (its unrealized
depreciation). Tom's basis in property C is $15,000 and his basis in
property D is $5,000 ($15,000 - $10,000).
Distributions before August 6, 1997.
For property distributed before August 6, 1997, allocate the basis
using the following rules.
- Allocate the basis first to unrealized receivables and
inventory items included in the distribution to the extent of the
partnership's adjusted basis in those items. If the partnership's
adjusted basis in those items exceeded the allocable basis, allocate
the basis among the items in proportion to their adjusted bases to the
partnership.
- Allocate any remaining basis to other distributed properties
in proportion to their adjusted bases to the partnership.
Partner's interest more than partnership basis.
If the basis of a partner's interest to be divided in a complete
liquidation of the partner's interest is more than the partnership's
adjusted basis for the unrealized receivables and inventory items
distributed, and if no other property is distributed to which the
partner can apply the remaining basis, the partner has a capital loss
to the extent of the remaining basis of the partnership interest.
Special adjustment to basis.
A partner who acquired any part of his or her partnership interest
in a sale or exchange or upon the death of another partner may be able
to choose a special basis adjustment for property distributed by the
partnership. To choose the special adjustment, the partner must have
received the distribution within 2 years after acquiring the
partnership interest. Also, the partnership must not have chosen the
optional adjustment to basis, discussed later under Adjusting the
Basis of Partnership Property, when the partner acquired the
partnership interest.
If a partner chooses this special basis adjustment, the partner's
basis for the property distributed is the same as it would have been
if the partnership had chosen the optional adjustment to basis.
However, this assigned basis is not reduced by any depletion or
depreciation that would have been allowed or allowable if the
partnership had previously chosen the optional adjustment.
The choice must be made with the partner's tax return for the year
of the distribution if the distribution includes any property subject
to depreciation, depletion, or amortization. If the choice does not
have to be made for the distribution year, it must be made with the
return for the first year in which the basis of the distributed
property is pertinent in determining the partner's income tax.
A partner choosing this special basis adjustment must attach a
statement to his or her tax return that the partner chooses under
section 732(d) of the Internal Revenue Code to adjust the basis of
property received in a distribution. The statement must show the
computation of the special basis adjustment for the property
distributed and list the properties to which the adjustment has been
allocated.
Example.
Bob purchased a 25% interest in X partnership for $17,000 cash. At
the time of the purchase, the partnership owned inventory having a
basis to the partnership of $14,000 and a fair market value of
$16,000. Thus, $4,000 of the $17,000 he paid was attributable to his
share of inventory with a basis to the partnership of $3,500.
Within 2 years after acquiring his interest, Bob withdrew from the
partnership and for his entire interest received cash of $1,500,
inventory with a basis to the partnership of $3,500, and other
property with a basis of $6,000. The value of the inventory received
was 25% of the value of all partnership inventory. (It is immaterial
whether the inventory he received was on hand when he acquired his
interest.)
Since the partnership from which Bob withdrew did not make the
optional adjustment to basis, he chose to adjust the basis of the
inventory received. His share of the partnership's basis for the
inventory is increased by $500 (25% of the $2,000 difference between
the $16,000 fair market value of the inventory and its $14,000 basis
to the partnership at the time he acquired his interest). The
adjustment applies only for purposes of determining his new basis in
the inventory, and not for purposes of partnership gain or
loss on disposition.
The total to be allocated among the properties Bob received in the
distribution is $15,500 ($17,000 basis of his interest - $1,500
cash received). His basis in the inventory items is $4,000 ($3,500
partnership basis + $500 special adjustment). The remaining $11,500 is
allocated to his new basis for the other property he received.
Mandatory adjustment.
A partner does not always have a choice of making this special
adjustment to basis. The special adjustment to basis must
be made for a distribution of property, (whether or not within 2
years after the partnership interest was acquired) if all of the
following conditions existed when the partner received the partnership
interest.
- The fair market value of all partnership property (other
than money) was more than 110% of its adjusted basis to the
partnership.
- If there had been a liquidation of the partner's interest
immediately after it was acquired, an allocation of the basis of that
interest under the general rules (discussed earlier under Basis
divided among properties) would have decreased the basis of
property that could not be depreciated, depleted, or amortized and
increased the basis of property that could be.
- The optional basis adjustment, if it had been chosen by the
partnership, would have changed the partner's basis for the property
actually distributed.
Required statement.
Generally, if a partner chooses a special basis adjustment and
notifies the partnership, or if the partnership makes a distribution
for which the special basis adjustment is mandatory, the partnership
must provide a statement to the partner. The statement must provide
information necessary for the partner to compute the special basis
adjustment.
Marketable securities.
A partner's basis in marketable securities received in a
partnership distribution, as determined in the preceding discussions,
is increased by any gain recognized by treating the securities as
money. See Marketable securities treated as money under
Partner's Gain or Loss, earlier. The basis increase is
allocated among the securities in proportion to their respective
amounts of unrealized appreciation before the basis increase.
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