Distributions and taxation - Part 2
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Distributions and taxation - Part 2 A previous version of this article had some
inaccurate statements, and has been withdrawn. The following is the corrected
version.
This is the second in a series of
articles about Distributions and Taxation of Partnerships.
In the first article of this series, I made the following statement: Distributions made to partners, whether in total or partial liquidation of the partnership interest, are not taxable to the partners unless cash distributed is in excess of the partner's basis in the partnership. This has prompted several questions, which I would like to discuss in some detail. Rip, let's explore this for the sake of my own understanding, please. CASE 1:
Yes, that is exactly what I am saying. The member's basis will
be reduced to $5,000, and he/she can receive $5,000 more before there is any
taxable consequences.
CASE 1A:
No, there is still no tax due. But let's explore the
$2500 in stock. If the $2500 represents the basis of the stock in the
hands of the partnership, then the member's basis in the partnership becomes
$5000 (10000-2500-2500), and his/her basis in the stock is the same as the
partnership's - $2500. Note that this would be true even if the value of the
stock distributed were $20,000. Yes the member can receive cash of $2500 and
stock worth $20000, and pay no immediate tax. Of course, when the stock is sold,
the gain that will be reported will be the difference between the proceeds
realized and $2,500.
In a partial withdrawal, the member's basis in the partnership is reduced
by the total of cash received
and basis of the stock transferred.
CASE 2:
Correct. The member's cash distributions have exceeded his/her
basis by $5,000, and tax will have to be paid on that excess.
CASE 2A:
In this case, we reduce the basis by the amount of cash
received plus the basis of stock transferred, but we can't reduce the basis
below zero. Therefore, the cash has exceeded basis by $2,500, which is taxable,
and the stock has no basis in the hands of the member. In other words, when the
member sells the stock, all the proceeds will be taxable.
It is important to remember that distributions are never taxed at the partnership level. If a member receives cash in excess of his/her basis, such excess will be declared as taxable income on the partner's individual return. In the next article, we will explore how that excess is reported on the individual return. Rip West Ridgway, CO trez_talk@bivio.com |
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