Unit 11 - Partnership Distributions and Liquidations

When property is distributed by a partnership to a partner, the distributee partner's holding period for property:

A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. In other words, if property is held by a partnership for five years, and then distributed to a partner, then the partner is also treated as if he or she had held the property for five years. This is also commonly called a "tacked on" holding period.

Who selects the tax year and accounting method for a partnership

The partnership itself.

It is the partnership that selects the tax year and method of accounting for the partnership, not any individual partner. A partnership must generally use the same tax year as the majority of its owners, however, an exception may be made if the partnership can establish to the satisfaction of the IRS that there is a substantial business purpose for using a different tax year (for example, a seasonal-type business).

Generally, a partner does not recognize LOSS on a partnership distribution unless all of the following requirements are met:

1) The adjusted basis of the partner's interest in the partnership exceeds the distribution

2) The partner's entire interest in the partnership is liquidated

3) The distribution is in money, unrealized receivables, or inventory items

 

Kendall was a 20% partner in Ericsson Attorneys, LLP, a calendar-year legal firm that was taxed as a partnership. The partners are not getting along and they decide to dissolve the firm. Kendall, a distributee partner, received her share of accounts receivable when the law firm dissolved (i.e., Kendall's share of the outstanding client invoices that were still unpaid when the company dissolved). Ericsson Attorneys, LLP uses the cash method of accounting, so the receivables had a basis of zero. If Kendall later collects the receivables from clients (or sells them), the amount she receives will be taxed as _______________.

The partnership used the cash method of accounting, so the receivables had a basis of zero. If Kendall later collects the receivables or sells them, the amount she receives will be ordinary income. In general, any gain or loss on a sale or exchange of unrealized receivables or inventory items a partner received in a distribution is an ordinary gain (or loss).

Kateryna is a general partner in the Viewbay Partnership. On July 1, Kateryna withdrew $3,250 in cash from the partnership in anticipation of the current year's earnings. How is this withdrawal treated on the partnership return (for tax purposes)?

Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss.

Premiums for health insurance paid by a partnership on behalf of a partner are treated as guaranteed payments. The partnership can deduct the payments as a:

Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. The partnership can deduct the payments as a business expense, and the partner must include them in gross income when he or she files their own individual tax return. The partner then may deduct the amounts as an adjustment to income as a "self-employed health insurance" deduction.