Start Disproportionate liquidating distributions

Disproportionate liquidating distributions

Yet another is for distributions from certain “investment partnerships” to “eligible partners.” There are particular limitations on each of these exceptions as well as detailed requirements for investment partnerships and eligible partners.

If so, it may be time to dissolve and liquidate the company and distribute its assets to its owners.

Under partnership tax law if a partner contributes property to a partnership and if, at the time of the contribution, the fair market value of the property exceeds the partner’s basis in the property, the partnership must note and keep up with this “built-in gain.” There are several reasons for this. At the time of contribution, A has a basis of $500 in property P, and property P has a value of $800. ABC’s initial basis in property P is $500, the same as A’s basis in property P. At the time of the sale ABC’s basis in property P is still $500.

Fundamentally, the tax law requires that any gain realized by the partnership on the disposition of the contributed property, for example, if the partnership sells the contributed property, must be allocated to the contributing partner to the extent of the property’s built-in gain. A’s built-in gain with respect to property P is $300 ($800 value at contribution less A’s $500 basis).

The concept of taxing the contributing owner on the built-in gain in contributed property also extends to of the distribution, but the calculation is more complicated.