Tax partnership liquidating distributions
S corporations typically are more expensive to organize and require greater attention to the maintenance of corporate formalities than is required with partnerships.
When it comes time to part ways, the partnership distributes its assets back to the partners and dissolves.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. All but the traditional general partnership have limited liability, and a general partnership can, in most states, achieve limited liability by a simple filing to become an LLP, but, particularly for professionals that limited liability protects against vicarious liability but not against liability for one's own malpractice, including, of course malpractice in giving advice related to partnership tax matters. Distribution to Contributing Partner - Section 737 C. Certain Liquidating Distributions to Corporate Partners 2. Basis Allocations in a Series of Liquidating Distributions 4. All but the general partnership can also have continuity of life, centralized management and free transferability of interest, subject only to the usual practical problems of transferring interests in closely held businesses. Basis of Property Received in Liquidation of a Partner's Interest 1. To recognize a loss, the partner’s basis has to exceed the distribution, and the distribution can only be money, unrealized receivables or inventory.
Basis in a partnership is a moving target, requiring frequent adjustments.
Liquidating a partnership results in a gain or loss depending on how each partner’s distribution compares to his basis.
If the distribution exceeds his basis, he recognizes a gain.
Because the partnership is not a separate tax entity, any gains or losses pass through to the partners when the partnership liquidates.
Liquidating distributions might generate capital gains, ordinary income, a loss or no effect at all.
716-2nd, Partnerships—Current and Liquidating Distributions; Death or Retirement of a Partner, provides a detailed discussion of the tax consequences of distributions by partnerships to partners, including those arising from distributions of a partner's share of the results of partnership operations, and other distributions by the partnership that do not result in termination of the distributee's interest in the partnership even though accompanied by a change in the distributee's and remaining partners' shares of capital or profits and losses, whether in money or property—all called current distributions—and distributions of money or property on the withdrawal of a partner whether on death or withdrawal—called liquidating distributions.