Liquidating distribution from partnership
hen a partner withdraws from a partnership, it usually does not matter to the principals whether the withdrawing partner receives compensation for his partnership interest from third parties, from the partnership, or from the remaining partners themselves.
After all, there is generally little, if any, actual economic difference between the liquidation of a partner’s interest and a sale of that interest.
751(b) hinges on the gross value of the partnership’s assets, focusing on a given partner’s share in all partnership assets, as opposed to the partner’s allocable share of the unrealized gain or loss in the property.
If the partnership has no unrealized receivables and/or inventory, the provisions of Sec. However, if the partnership owns hot assets, as well as other assets, calculating gain or loss on the sale or exchange of a partner’s interest in the partnership can become quite complex, as a deemed-sale analysis of the relinquished asset is required. 751(b), the IRS issued Notice 2006-14 asking for comments on the following alternative approaches: While the suggested alternatives have drawbacks as well, the general consensus from practitioners was that these proposed rules would simplify the Sec.
Consider the taxation of payments for unrealized receivables.
In a liquidation, these payments will be taxed as ordinary income to the distributee (departing partner) under Section 736(a) of the Code, and the remaining partners will receive ordinary deductions.
The newer forms, particularly the LLC, have many more entity characteristics, particularly when full advantage of the freedom to contract that is part of the latest revisions of the governing statutes in most commercial states is taken into account, so that it is hard to distinguish them from corporations. However, the differences in tax consequences between a sale and liquidation can be quite significant.In many cases, structuring a partner’s withdrawal as a liquidation will provide more favorable tax treatment than if it is structured as a sale to the remaining partners.Additionally, whereas corporate distributions of appreciated property give rise to tax under Sec.311(b), similar distributions of appreciated property from partnership entities are generally not subject to tax until the asset is sold or disposed of by the distributee partner.