Liquidating vs nonliquidating distributions parnterships
When the withdrawal is a result of death, there may be other collateral income and transfer tax consequences. Allocation of Section 734(b) Adjustment Among Partnership Assets a.
Liquidating distributions may be accompanied by other retirement payments that do not represent consideration for the withdrawing partner's interest in partnership property, and may be deferred compensation, or other claims against past or future partnership income. Distribution of Property Subject to a 743(b) Basis Adjustment D. As with all other aspects of partnership taxation, the dual nature of a partnership for tax purposes — as at times an aggregation of its partners, and at times an entity — complicates the discussion, particularly because no one, including the author, has been able to articulate a comprehensive statement of when the aggregate, and when the entity, aspect should predominate. Further complication arises because the “tax” partnership includes not only entities organized as general partnerships or limited partnerships (“LP”) under state law, but also the newer forms of limited liability partnerships (“LLP”), initially primarily for professionals, and the increasingly popular limited liability company (“LLC”). Adjustment to Partnership's Basis in Assets Under 734(b) 1. The result would be similar if Madison is a regular corporation, except that the tax would have to be paid at the corporate level.However, in this case there would be a second tax at the shareholder level.first to properties with unrealized appreciation in proportion to their respective amounts of unrealized appreciation before such increase (but only to the extent of each property’s unrealized appreciation), and first to properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation before such decrease (but only to the extent of each property’s unrealized depreciation), and For purposes of subsections (a), (b), and (c), a partner who acquired all or a part of his interest by a transfer with respect to which the election provided in section 754 is not in effect, and to whom a distribution of property (other than money) is made with respect to the transferred interest within 2 years after such transfer, may elect, under regulations prescribed by the Secretary, to treat as the adjusted partnership basis of such property the adjusted basis such property would have if the adjustment provided in section 743(b) were in effect with respect to the partnership property.
The Secretary may by regulations require the application of this subsection in the case of a distribution to a transferee partner, whether or not made within 2 years after the transfer, if at the time of the transfer the fair market value of the partnership property (other than money) exceeded 110 percent of its adjusted basis to the partnership.
For purposes of paragraph (1), if a corporation acquires (other than in a distribution from a partnership) stock the basis of which is determined (by reason of being distributed from a partnership) in whole or in part by reference to subsection (a)(2) or (b), the corporation shall be treated as receiving a distribution of such stock from a partnership.
If the property held by a distributed corporation is stock in a corporation which the distributed corporation controls, this subsection shall be applied to reduce the basis of the property of such controlled corporation.
The gain is passed through to the shareholder and has to be reported on his tax return.
This can get messier if there's more than one shareholder.
The newer forms, particularly the LLC, have many more entity characteristics, particularly when full advantage of the freedom to contract that is part of the latest revisions of the governing statutes in most commercial states is taken into account, so that it is hard to distinguish them from corporations.