[Anonymous]

Non-liquidating distributions:

-Recognize gain only to the extent cash (or the liability assumed) distributed exceeds the adjusted basis.

Liquidating distributions:

Gain: Only to the extent cash is received.

Loss: Only if money, unrealized receivables, or inventory are received and if the basis of the assets received is less than his adjusted basis.

My question: What if unrealized receviables or interventories are received as part of liquidating distributions? Will there be a gain in that case? Ordinary gain? uhh confused. Anyone can shed some light on this? Appreciate it:!)

[Anonymous]

Which section of CPA is this ??

[jokami]

@CPA628

I am starting that topic TODAY!!!! I know late, but lets see how it goes and how I understand it… and if I can explain it… give me 'till tomorrow…

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[nolifecpa]

it's my understanding that if you receive distributions in cash, inventory, or unrealized receivables WITHOUT receiving any other property in excess of your basis, it will be a capital gain

Example:

cash, inventory, unrealized receivable 5000

partner basis (1000)

capital gain = 4000

if you receive distributions in cash, inventory, or unrealized receivables WITHOUT receiving any other property and you still have basis left over, it is a capital loss

Example:

cash, inventory, unrealized receivable 5000

partner basis (6000)

capital loss = (1000)

please correct me if i'm wrong

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[Anonymous]

“What if unrealized receviables or interventories are received as part of liquidating distributions? Will there be a gain in that case? Ordinary gain? uhh confused. Anyone can shed some light on this? Appreciate it:!) “

Only money triggers a gain. If you receive unrealized receivables and inventory as part of a liquidating distribution, you allocate the remaining basis. Allocate the remaining basis in the partnership in the following order… Basis of properties, Appreciation of properties, and FMV of properties.

So let's say, your remaining basis in the partnership is $20,000. And the remaining assets you have are..

Cash: $1,000

Unrealized Receivable: Basis $2,000; FMV $4,000

Apprec Inventory: Basis $3,000; FMV $5,000

$1,000 of the $20,000 goes to cash. You now have $19,000 left.

First allocated using Basis of Property…

Unreal Rec: $2,000

Apprec Inv: $3,000

You now have $14,000 left from your Partnership Basis. Now allocate based on Appreciation.

Unreal Rec: $2,000 (4k – 2k)

Apprec Inv:$2,000 (5k-3k)

You now have $10,000 left from your Partnership Basis. Now allocate all of that based on FMV.

Unreal Rec: $4,444 (4k/9k * 10,000)

Apprec Inv: $5,556 (5k/9k * 10,000)

So, after the liquidation the Cash will have a basis of $1,000, the Unreal Rec will have a basis of $8,444 and the Apprec Inv will have a basis of $10,556.

Now, that is when Basis in Property is lower than your Partnership Basis. What if, in a liquidating distribution, your Partnership Basis is $5,000 and you receive the following…?

Cash: $1,000

Unreal Rec: $2,000 basis

Apprec Inc: $3,000 basis

In this case, basis in the Property is HIGHER than your Partnership basis. Of the $5,000 in your Partnership Basis, $1,000 gets allocated to Cash, and the remaining $4,000 gets allocated using the Basis of the remaining properties.

So, Unreal Rec gets $1,600 (2k/5k * 4000) and Apprec Inv gets $2,400 (3k/5k * 4,000).

[Anonymous]

“it's my understanding that if you receive distributions in cash, inventory, or unrealized receivables WITHOUT receiving any other property in excess of your basis, it will be a capital gain”

That only applies to Capital Losses in a LIQUIDATING distribution. Non-liquidating distributions don't recognize loss. Money received has to exceed your partnership basis in order to recognize gain in a distribution.

[Anonymous]

Ok, major boo boo on my example above….

=====

So let's say, your remaining basis in the partnership is $20,000. And the remaining assets you have are..

Cash: $1,000

Unrealized Receivable: Basis $2,000; FMV $4,000

Apprec Inventory: Basis $3,000; FMV $5,000

=====

You remaining basis SHOULD get allocated as follows

Cash: $1,000

Unrealized Receivable: $2,000

Apprec Inventory: Basis $3,000

The remainder is Capital Loss. Sorry about that. I was thinking about liquidating distributions that includes property. So, I got mixed up there.

My second example should be correct tho….I think.

But actually, Receivables usually has a 0 basis. So, most of the time, they wouldn't include Receivables in the question. Most of the time, they would only include Cash and Inventory. And also, they normally wouldn't ask questions where Cash, Unrealized Rec & Apprec Inv exceed your partnership basis.

[Anonymous]

Unrealized receivables and substantially appreciated inventory items are § 751 property, i.e., “hot assets”, the distribution of which is a deemed sale which results in ordinary income to the extent FMV exceeds basis. You don't reduce basis when a partner receives hot assets, you recognize ordinary income.

The difference between the amount of capital gain or loss that the partner would realize in the absence of section 751 and the amount of ordinary income or loss determined under section 751 is the partner's capital gain or loss on the sale of its partnership interest, so increase the loss or decrease the gain to the extent you recognize ordinary income on the distribution.

[Anonymous]

I thought ordinary gain exist when the partnership interest is sold. Usually selling the interest results in a capital gain unless it's hot assets.

As far as the liquidating distribution goes: It's gain only when cash is received, and loss only when inventory, unrealized receivable and cash received are less than the basis. This is what I'm gathering from everyone's AMAZING explanations on here. Btw, thanks everyone for those!! Appreciate it!!

So am I right??

[Anonymous]

I think drg1983 is right on this one. I think my whole explanation was screwed up, lol. My Gleim book is rather vague with this nor do they have any practice questions on this particular situation. Like I said, they normally wouldn't ask questions where Cash, Unrealized Rec & Apprec Inv exceed your partnership basis. They've only asked questions where Cash exceeds your partnership basis.

But it is very interesting that all my sources tell me that you ONLY recognize gain when money exceeds your partnership basis. I guess by “gain” they mean capital gain and not Ordinary Income?? Very odd!

[Anonymous]

If FMV of property received > adjusted basis, you have a gain. Whether you have a gain or loss, 751 can create ordinary income out of unrealized receivables, appreciated inventory, or depreciation recapture. The recognition of ordinary income will reduce the capital gain (if any) or increase the capital loss.

The distribution of money isn't a prerequisite for gain recognition. There could also be a distribution of property or a reduction of a partner's share of liabilities, either of which could create gain.

[Anonymous]

Actually, if a property is received…gain is NEVER recgonized.

For example: In a complete Liquidation case

Partnership Basis: $10,000

Received property NBV: $12,000, FMV: $14,000

Your basis in the property will be $10,000

It can't exceed your basis, thus you never recognize gain.

Gain is only recognized when you receive excess cash over your basis. That gain will be capital gain. Remember, partnership interest is considered passive activity and thus is capital gain/loss…not ordinary.

If a partner decided to sell his partnership interest, capital gain/loss is created. Unless it's hot assets, then ordinary gain/loss is created.

So confusing, but reading Becker couple times this is what I gathered.

[Anonymous]

Yes, you can't recognize gain when you receive property.

[Anonymous]

Ditto that

Liquidating

In general, **neither partnerships nor partners recognize gain or loss from liquidating distributions**. However,

there are exceptions. **For example, when a terminating partner receives more money in the distribution than her outside basis, she will recognize gain**.33 See Example 21-11 for an illustration in the context of operating distributions. In contrast to operating distributions, a partner may recognize a loss from a liquidating distribution, but only when two conditions are met. These conditions are (1) the distribution includes only cash, unrealized receivables, and/or inventory; and (2) the partner’s outside basis is greater than the sum of the inside bases of the distributed assets.34 The loss on the distribution is a capital loss to the partner.

Commonly, the terminating partner’s share of partnership debt decreases after a liquidating distribution. Any reduction in the partner’s share of liabilities is considered a distribution of money to the partner and reduces the outside basis available for allocation of basis to other assets, including inventory and unrealized receivables.

Non Liquidating

The general rule for operating distributions states that the partnership **does not recognize gain or loss on the distribution of property or money** Nor do the general tax rules require a partner to recognize gain or loss when she receives distributed property or money The general rule of no gain is impractical when the partner receives a greater amount of money than her outside basis. She cannot defer gain to the extent of the excess amount because the outside basis is insufficient for a full reduction. **Therefore, the partner reduces her outside basis to zero and recognizes gain (generally capital) to the extent the amount of money distributed is greater than her outside basis**. A partner never recognizes a loss from an operating distribution

[Anonymous]

There is no gain recognition on a proportionate distribution of property, but in a situation where 751 applies (which in practice is nearly every case but not so on the CPA exam) there are frequently disproportionate distributions where the FMV of 751 property is not distributed pro rata.

If the distributee partner receives more than his prorata share of Section 751 property, the partner is deemed to have sold other partnership property to the partnership in exchange for a larger interest in Section 751 property and the partnership has sold a portion of its Section 751 property to the distributee partner. The partner recognizes capital gain or loss and the partnership recognizes ordinary income or loss. If the distributee partner receives less than his prorata share of Section 751 property, the partner has sold Section 751 property to the partnership in exchange for other property. The partner recognizes ordinary income or loss and the partnership recognizes gain or loss, the character of which is determined by the character of the other assets it exchanges.

However, the above is probably well beyond the scope of the average CPA exam question.

[Author]

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