[jeff]

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Post by Another71.

[PasstheCPA7]

@ s2sylvi – let's assume the question below was a Partnership non-liquidating distribution. What would be the answer?

Dahl Corp. was organized and commenced operations in 1930. At December 31, 2013, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.

On December 31, 2013 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl's only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.

What was Green's taxable dividend income in 2013 from these distributions?

$9,000

$14,000

$44,000

$49,000

Gabe and I came up with $4,000 cash. The property distribution that is in excess of the adjusted basis = gets ignored. Becker says “stop at zero” Thus, no gain on that. But, we do need to recognize the cash gain of $4,000.

Our question was: Where on the Schedule K-1 do we recognize this $4,000 gain? I don't see any heading where this would get put in.

[PasstheCPA7]

@ s2sylvir – another question I am a little confused is why does the property distribution that is in excess of the adjusted basis get ignored? Why don't we recognize gain on that? It's very confusing. Becker just says in the book “Stop at zero.” But – why stop at zero? What's the logic there?

IF it were a C-Corp – we would NOT stop at zero and thus – we would recognize the gain immediately. Notice the HUGE difference here.

Why do we have this big difference between C-Corps and Partnership property non-liquidating distributions?

[s2sylvir]

@PasstheCPA7

Okay, one question at a time. Let's assume the guy's basis in partnership is $9k. “Real world speaking”, no sane person would distribute $9k when they only have a $9k basis. At $9k, a sane person would be contributing to the partnership to increase their basis.

Let's put the $9k cash distribution aside to make things SIMPLER and just think about the property distributed.

Facts: NBV = $5k, FMV = $40k.

– C Corporation = $35,000 of taxable gain NOW to the corporation.

– The basis in the hands of the receiving party = $40k.

– The receiving party immediately turns around and decides to sell the property for $50k. The receiving party is taxed on the $10,000 gain.

– Total gain taxed by all parties = $45k. (35k by corporation, 10k by receiving party)

For C Corporations, you use FMV, because taxable transactions by a rule of thumb = use FMV.

– Partnership = $0 gain now. The basis in the hands of the receiving partner = $5k

– The receiving partner immediately turns around and decides to sell the property for $50k. The partner is taxed on the $45k gain.

– Total gain taxed by all parties = $45k. (0k by partnership, 45k by the partner)

For partnership, non-liquidating distributions are not taxed. And non taxed by a rule of thumb = use NBV. <– I think this is where you guys are getting confused. The basis for the partner is NBV, not FMV.

So to answer your question, nothing is “ignored” — In the long run, it's the same. It's just who and when the gain is taxable.

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[PasstheCPA7]

@ s2slyvir, thoughts on the 2nd question?

[s2sylvir]

@PasstheCPa7

My understanding is that it's a capital gain (either long term if they've been a partner for over a year, and short term if they've been a partner for less than year).

I've only encountered a real life example of this once, but my understanding is that the entire amount of the distribution is on K-1 Line 19, Distributions.

There is a shareholder basis worksheet, where we must look at when preparing the individual's tax return. The last time distribution was in excess of basis I had to manually break out the taxable amount and put it on Form 1040 Schedule D, Gains and Losses.

BEC - PASS (79)
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[PasstheCPA7]

@ s2sylvir – if I get a cash distribution in excess of my adjusted basis (in our example – it was a $4,000 excess cash distribution) – you're saying it would go under Line 19 – Distributions, right?

How about Line 11 “Other Income (loss)? Gain on cash we got – how come we wouldn't put it under Line 11 “Other income?” Or does something else go under this Line 11 instead?

[s2sylvir]

@PasstheCPA7

The gain occurs because of the partner's outside basis. The fact that the $4k is taxable to the partner makes no difference to the partnership, because it's $9k cash out, and $0 taxable effect. The partnership then does not take into account and split out the gain.

Since the individual taxpayer himself knows his outside basis and has the distribution amount from line 19, he has all the information to report the amount of capital gain on his individual return as a consequence of the distribution.

BEC - PASS (79)
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Becker for all + FAR 10 Point Combo

[s2sylvir]

Just to add — like I've said, in a real world example, no person would have the partnership distribute $9k when their basis is so low. They would instead record an asset on the partnership's books called “Due from Partner/Owner/Shareholder/etc”, rather than run it through equity as a distribution.

BEC - PASS (79)
AUD - PASS (63, 71, 74, 74, 83)
REG - PASS (88)
FAR - PASS (58, 89)

Becker for all + FAR 10 Point Combo

[PasstheCPA7]

@ s2sylvir

In a Partnership, why does the property distribution that is in excess of the adjusted basis get ignored? Why don't we recognize gain on that? It's very confusing. Becker just says in the book “Stop at zero.” But – why stop at zero? What's the logic there?

IF we were a C-Corp – we would NOT stop at zero and thus – we would recognize the gain immediately (double taxation!). Notice the HUGE difference here.

However, for Partnerships, why do we have this big difference between C-Corps and Partnership property non-liquidating distributions in which we IGNORE property distributions in excess of our adjusted basis (no gain recognition), and we ONLY recognize a cash distribution that is in excess of our adjusted basis only? Why?

[s2sylvir]

^Did you mean to post that? I thought I answered that in the reply you HIYA'd.

BEC - PASS (79)
AUD - PASS (63, 71, 74, 74, 83)
REG - PASS (88)
FAR - PASS (58, 89)

Becker for all + FAR 10 Point Combo

[PasstheCPA7]

In your example, you said IF the partnership sells the property, then, yes, there's a tax and we are taxed on that. But, for a C-Corp – we DON'T have to sell the asset in order to recognize a gain on the property distribution. Do you see that difference? For a C-Corp, we are taxed if the property distribution exceeds adjusted basis – this is a capital gain taxed at 15%.

For Partnerships, no tax IF property distribution exceeds adjusted basis.

That's what I keep getting thrown off!

[s2sylvir]

@PasstheCPA7

To clarify, in both examples it's just a distribution of property. The partnership is not selling anything.

The corporation is being taxed, but is it 15%? The 15% is a preferential LTCG tax rate for individuals — corporations do not get this preferential 15% tax rate. Once again, eventually the tax is going to go back to the IRS sooner or later, it's just a matter of who is paying this tax.

Anyway, I think you're trying to ask why the Earth is round…

BEC - PASS (79)
AUD - PASS (63, 71, 74, 74, 83)
REG - PASS (88)
FAR - PASS (58, 89)

Becker for all + FAR 10 Point Combo

[PasstheCPA7]

@ s2sylvir – I got it. It's just something to memorize it (I guess). I feel like in REG – there's a lot of memorization and it's hard to understand the reasoning because it's just the rule made up by the IRS. When I studied FAR, complete opposite. I felt there was less memorization of certain rules and if you knew the concepts and journal entries – that would be sufficient.

But, anyways, thank you so much!! I really appreciate it. Sorry to ask so many questions haha. It's my last exam, so, you know how that is!

[Anonymous]

I think I know what your asking PasstheCPA7. Are you asking why arent you being taxed on the distribution of property? Cause in your example, where they run out of basis, yes, the cash is taken out first and the excess cash is a gain. Then with the property, the basis in the property goes to zero like you said in your response to Gabe but it is only recognized once it is sold. Notice that now that you dont have any basis in the property you will recognize 40,000 gain instead of 35,000 (if you had that 5,000 basis still). So in the end you are getting taxed on everything that was distributed less the cost (or basis) in the partnership. 9000-5000= 4000 gain and when u sell the property 40,000-0=40,000 (44,000 in total). its not just memorization, it does kind of make sense. i think making sure u understand is better then memorizing it

[s2sylvir]

@cprv19

I think you make an awesome point, which is:

@PasstheCPA7 Do you actually understand what a corporation is and what a partnership is? Like *really* understand? Not just “memorize” that corporations you're double taxed, partnerships you're not. Do you actually understand why a company organized as a C corporation is double taxed and why a company organized as a partnership is not?

BEC - PASS (79)
AUD - PASS (63, 71, 74, 74, 83)
REG - PASS (88)
FAR - PASS (58, 89)

Becker for all + FAR 10 Point Combo

[Author]

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