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Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,*,CCH Federal TaxationComprehensive Topics,Chapter 20,PartnershipsDistributions,Sales,and Exchanges,2006,CCH,a Wolters Kluwer business,4025 W.Peterson Ave.,Chicago,IL 60646-6085,800 248 3248,1,DistributionsGeneralEffect on Partners,How is“amount distributed”to owners computed?,Cash+debt relief,i.e.,for purposes of determining gain,only cash+debt relief are subject to capital gains.Other property received by a partner is tax-free.,What is the owners tax treatment for the“amount distributed?”,Cash+debt relief:,Tax-free up to outside basis;,Capital gain to a partner on the excess of cash or debt relief in excess of outside basis.(Loss is never recognized.),Other property:Tax-free.,Chapter 20,Exhibit 1a,2,What is the basis of property distributed to an owner?,Same as the partnerships inside basis.,However,if a partners outside basis is less than the partnerships inside basis in property distributed to a partner,then the partners basis of property received is taken from his outside basis,not from the partnerships inside basis.This makes sense,given that a partners outside basis must be reduced by the“amount”of distributions and that it cannot be negative,Chapter 20,Exhibit 1b,DistributionsGeneralEffect on Partners,3,DistributionsGeneral Rules Code Sections 731 to 733,The rules indicated below assume that the partnership DOES NOT make a disproportionate distribution of the Code Sec.751“hot assets.,What is a distribution?,A distribution is a transfer of value from the P/S to a partner in reference to his interest in the partnership.A distribution may be in the form of money,debt relief,or other property.Any decrease in a partners allocable share of P/S debt is treated as a distribution of money.This can result from payment of principal by the P/S on its debt.Also,a draw against a partners share of partnership income is a distribution.,Chapter 20,Exhibit 3a,4,DistributionsGeneral Rules Code Sections 731 to 733,Will the partnership recognize either a gain or loss on the distribution of property to a partner?,Generally no.Even distributions of Code Sec.1245 or Code Sec.1250 property do not trigger recognition unless Code Sec.751(b)applies.,Exception:Disproportionate distributions.,Chapter 20,Exhibit 3b,5,DistributionsGeneral Rules Code Sections 731 to 733,Will the partner recognize either a gain or loss on the distribution?,Capital gain is recognized only if,cash,or,debt relief,received is greater than her outside basis.Loss is never recognized.Code Sec.731(a);Reg.1.731-1(a)(1).If the cash received is a draw against profits and the amount received is greater than outside basis,gain is NOT recognized.The reason:A distribution reduces outside basis as shown below.However,the profits implied in a draw against profits increases basis by an equal amount.Thus,a cash draw would have a zero effect on outside basis.,What effect does the distribution have on the partners outside basis?,Her outside basis is reduced by the amount of cash plus the partnerships inside basis in the distributed asset(s).However,her outside basis cannot be reduced below zero,Chapter 20,Exhibit 3c,6,DistributionsGeneral Rules Code Sections 731 to 733,What is the basis of the transferred asset(s)to the partner?,Follow this step-by-step formula:,(1)Reduce her outside basis by the amount of cash received.,(2)(a)If her remaining outside basis is sufficient,she will take a basis equal to the partnerships inside basis in the distributed asset.,(2)(b)If her remaining outside basis is NOT sufficient,she will allocate the“step-down in basis first to assets with a basis in excess of FMV.,(2)(c)Any excess of the“step-down over the amount in(2)(b)is allocated among remaining assets in accordance with their remaining bases.,Chapter 20,Exhibit 3d,7,DistributionsGeneral Rules Code Sections 731 to 733,What is the holding period and character of assets distributed from a partnership to a partner?,The holding period begins on the day after the date that the partnership acquired the asset.The character is determined by the use that the partner makes of the asset.,8,Proportionate DistributionsExample,FACTS:,On July 1,Y1,ABC Partnership distributes to each of its,equal,partners$10,000 cash and land with a fair market value(FMV)of$10,000 and basis(AB)of$5,000.,The three parcels of land were acquired by ABC on 12/31/80.,A,B and C have outside bases of$20,000,$10,000,and$5,000 respectively.,The partnership has the following tax/book balance sheet prior to the distribution.,Chapter 20,Exhibit 4a,9,Tax/Book Balance Sheet at July 1,Y1,Assets,Equities,Description,Inside Basis,Current FMV,Description:,Outside Basis,Current FMV,Cash,$50,000,$50,000,Debt,0,Receivable,0,20,000,Inventory,20,000,30,000,CapitalA,$20,000,$70,000,Land,30,000,60,000,CapitalB,10,000,70,000,Building,10,000,50,000,CapitalC,5,000,70,000,TOTALS,$110,000,$210,000,$35,000,$210,000,Proportionate Dis
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