CPA Regulation (REG) : Tax Treatment of Distributions to Partnerships & Shareholders
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Example Questions
Example Question #1 : Tax Treatment Of Distributions To Partnerships & Shareholders
Two individuals are planning to start a business and need advice on selecting the appropriate form of entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of the following is a pair of business entities each of which can make a distribution of appreciation property to its owners that would not be taxable to the business entity or to its owners?
C corporation and a limited liability company
General partnership and a limited liability partnership
S corporation and a general partnership
Limited liability company and an S corporation
General partnership and a limited liability partnership
Property distributions by C corporations that are the result of earnings and profits are treated as taxable distributions to shareholders (as dividends), while distributions by S corporations may be taxable if the basis of the property is in excess of a shareholder’s basis or if the S corporation had undistributed prior C corporation earnings. Only in general partnerships, LLCs, or LLPs would a nonliquidating property distribution not be taxable.
Example Question #2 : Tax Treatment Of Distributions To Partnerships & Shareholders
Partner A’s basis in partnership ABC is $5,000 at the beginning of the year. During the year, Partner A received a nonliquidating distribution of $3,000 cash and property with an adjusted basis of $4,000 and fair market value of $5,000. What was Partner A’s basis in the property received?
$2,000
$4,000
$3,000
$5,000
$2,000
For nonliquidating distributions, the basis of the cash and property received cannot exceed the partner’s basis in the partnership, unless cash alone exceeds the partner’s basis. Cash is considered first in reducing the partner’s basis, which would lower the partner’s basis from $5,000 to $2,000. Then, if the partner’s basis is less than the NBV of the property received, the basis in the property is equal to the partner’s remaining basis, bringing the partner’s basis in the entity to zero.
Example Question #3 : Tax Treatment Of Distributions To Partnerships & Shareholders
Slate’s basis in Arch Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Arch and a fair market value of $83,000. Arch had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was Slate’s recognized gain or loss in the distribution?
$5,000 capital loss
$0
$13,000 capital gain
$18,000 ordinary income
$0
For nonliquidating distributions, none of the amount is taxable so long as the basis of the property and cash received (FMV is not considered) are not in excess of partner basis. Since the partner’s basis was $70,000, there was no cash received, and the property received had a NBV of $65,000, no gain or loss is recognized.
Example Question #4 : Tax Treatment Of Distributions To Partnerships & Shareholders
Harry’s adjusted basis in a partnership interest was $30,000. He received a nonliquidating distribution of $24,000 cash and land with a FMV and basis of $9,000. Harry’s basis for the land is:
$9,000
$6,000
$3,000
$0
$6,000
$30,000 - $24,000 = $6,000. The basis of property received in a distribution other than in liquidation of a partner’s interest, will generally be the same as the basis in the hands of the partnership immediately prior to distribution.
Example Question #5 : Tax Treatment Of Distributions To Partnerships & Shareholders
Alex is an individual and a partner in ABC Partnership with an adjusted basis of $30,000 in partnership interest. Alex received a non-liquidating distribution of $25,000 cash and property with an adjusted basis of $7,000 and a FMV of $10,000. What amount of gain should Alex recognize?
$12,000
$0
$2,000
$5,000
$0
Gain is only recognized to the extent that cash distributed exceeds the adjusted basis of the partner’s interest in the partnership immediately before the distribution.
Example Question #6 : Tax Treatment Of Distributions To Partnerships & Shareholders
Partners of a partnership are subject to _______ provisions which are basic limitations on losses and such any passive loss limitations on the losses passed through from their partnership.
Ordinary
At-risk
IRS
Adjusted basis
At-risk
At-risk provisions apply when determining a possible deduction for a partner on their share of the partnership’s losses.
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