Cash distributions include decreases in a partners share of partnership liabilities.
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Today is 11/12/2022 Free Resources Loading... Subscriptions Loading... CONTACT USAMERICAS:400 S. Maple Avenue, Suite 400 Falls Church, VA 22046 United States INTERNATIONAL:Nieuwezijds Voorburgwal 104/108 1012 SG Amsterdam The Netherlands PHONE:800-955-2444CONNECT:Tax Analysts is a tax publisher and does not provide tax advice or preparation services.POPULAR TAX TOPICS© Tax Analysts 2022. | 400 S. Maple Avenue, Suite 400, Falls Church, VA 22046 A distribution is a transfer of cash or property by a partnership to a partner with respect to the partner's interest in partnership capital or income. Distributions do not include loans to partners or amounts paid to partners for services or the use of property, such as rent, or guaranteed payments. A partnership distribution may consist of cash, property, or both. In addition, any reduction of a partner's share of partnership liabilities is treated as an actual distribution of cash (Sec. 752(b)). Transactions that should be carefully reviewed for such potential gain include distributions of encumbered property, distributions in partial liquidation of a partner's interest, and the admission of a new partner. A like-kind exchange involving encumbered property can also result in a deemed distribution under Sec. 752 to the extent the mortgage assumed in the exchange is less than the mortgage transferred. Regs. Sec. 1.1031(b)-1(c) provides that a net reduction in debt due to the exchange of encumbered property is considered boot, and gain is recognized. Under Rev. Rul. 2003-56, if such a like-kind exchange straddles two tax years, the gain that is recognized due to the receipt of boot that resulted from a net decrease in liabilities is reported in the tax year in which the partnership transfers the relinquished property and not the year in which the partnership receives the replacement property. Distinguishing Loans From Distributions In some situations, it may be difficult to distinguish between distributions and partnership loans to partners. Moreover, partners may sometimes attempt to avoid immediate taxation on a distribution by characterizing it as a loan. The substance of the transaction determines whether the transfer of funds is a loan or a distribution. An advance of funds to a partner is characterized as a loan only if there is an unconditional and legally enforceable obligation to repay a sum certain—the amount of the advance—at a determinable date (Regs. Sec. 1.731-1(c)(2)). A mere deficit balance in a partner's capital account does not constitute a loan for this purpose, even if the partner is obligated by law or by the partnership agreement to repay the deficit to the partnership (Rev. Rul. 73-301; Mangham, T.C. Memo. 1980-280; Seay, T.C. Memo. 1992-254). When a loan from a partnership to a partner is intended, there should be a written loan document with commercially reasonable terms that provides a market interest rate. If a true loan is made, a later cancellation of the debt constitutes a distribution of money at the time of cancellation (Rev. Rul. 57-318, clarified by Rev. Rul. 73-301). On the other hand, if the IRS successfully argues there never was a loan, the purported loan is treated as a partnership distribution at the time it was made. Preferred Returns Frequently, partnership agreements call for preferred distributions to partners. These are normally included in the partnership agreement to provide a preferred return on the capital invested by a partner. The provisions regarding preferred returns can take many forms that may lead to different tax treatment. Preferred returns are usually equal to a stated rate times a partner's unreturned capital. Depending on the partnership agreement, a partner's unreturned capital may be defined as the partner's capital contribution less non-pro-rata distributions to that partner, as the partner's capital contribution less distributions other than the preferred return, as the partner's capital contribution less all distributions, or in some other manner. The return may be mandatory or discretionary and may be cumulative or noncumulative. The form of a preferred return governs its tax consequences. Following is a list of the common tax treatments that may apply to a preferred distribution:
Planning tip: Practitioners should make sure that partners are very clear on how any preferred distribution requirements will interact with the allocation provisions of the partnership agreement to impact the distribution of sale or liquidation proceeds. This case study has been adapted from PPC's Tax Planning Guide—Partnerships, 29th Edition, by William D. Klein, Sara S. McMurrian, Linda A. Markwood, Cynthia Zatopek, Sheila A. Owen, and M. Andrew Vance, published by Thomson Reuters/Tax & Accounting, Carrollton, Texas, 2015 (800-431-9025; tax.thomsonreuters.com).
Contributor What are cash distributions to partners?A distribution is a transfer of cash or property by a partnership to a partner with respect to the partner's interest in partnership capital or income.
In which type of distribution may a partner recognize a loss on the distribution?A partner may recognize a loss on a liquidating distribution if the distribution consists only of cash, inventory or unrealized receivables.
Do distributions reduce basis in partnership?A partner's adjusted basis in their partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner.
Do distributions increase partnership basis?The basis of the partner's interest in a partnership is decreased (but not below zero) by distributions to the partner from the partnership ( ¶453).
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