Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

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They reserve the right separately to take

or loss from the distribution is recognized by the

For exceptions to these rules, see Distribu-

in kind or dispose of their shares of any

partner, it must be reported on his or her return

tion of partner’s debt and Net precontribution

property produced, extracted, or used.

for the tax year in which the distribution is re-

gain, later. Also, see Payments for Unrealized

ceived. Money or property withdrawn by a part-

Receivables and Inventory Items under Disposi-

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They do not jointly sell services or the

ner in anticipation of the current year’s earnings

tion of Partner’s Interest, later.

property produced or extracted. Each sep-

is treated as a distribution received on the last

arate participant can delegate authority to

Example. The adjusted basis of Jo’s part-

day of the partnership’s tax year.

sell his or her share of the property pro-

nership interest is $14,000. She receives a dis-

duced or extracted for the time being for

Effect on partner’s basis. A partner’s ad-

tribution of $8,000 cash and land that has an

his or her account, but not for a period of

justed basis in his or her partnership interest is

adjusted basis of $2,000 and a fair market value

time in excess of the minimum needs of

decreased (but not below zero) by the money

of $3,000. Because the cash received does not

the industry, and in no event for more than

and adjusted basis of property distributed to the

exceed the basis of her partnership interest, Jo

one year.

partner. See Adjusted Basis under Basis of

does not recognize any gain on the distribution.

Partner’s Interest, later.

Any gain on the land will be recognized when

However, this exclusion does not apply to an

she sells or otherwise disposes of it. The distri-

unincorporated organization one of whose prin-

Effect on partnership. A partnership gener-

cipal purposes is cycling, manufacturing, or

bution decreases the adjusted basis of Jo’s part-

ally does not recognize any gain or loss because

nership interest to $4,000 [$14,000 − ($8,000 +

processing for persons who are not members of

of distributions it makes to partners. The part-

$2,000)].

the organization.

nership may be able to elect to adjust the basis

of its undistributed property.

Marketable securities treated as money.

Electing the exclusion. An eligible organiza-

Generally, a marketable security distributed to a

Certain distributions treated as a sale or ex-

tion that wishes to be excluded from the partner-

partner is treated as money in determining

change. When a partnership distributes the

ship rules must make the election not later than

whether gain is recognized on the distribution.

following items, the distribution may be treated

the time for filing the partnership return for the

This treatment, however, does not generally ap-

as a sale or exchange of property rather than a

first tax year for which exclusion is desired. This

ply if that partner contributed the security to the

distribution.

filing date includes any extension of time. See

partnership or an investment partnership made

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section 1.761-2(b) of the regulations for the pro-

Unrealized receivables or substantially ap-

the distribution to an eligible partner.

cedures to follow.

preciated inventory items distributed in ex-

The amount treated as money is the

change for any part of the partner’s

security’s fair market value when distributed,

interest in other partnership property, in-

reduced (but not below zero) by the excess (if

cluding money.

any) of:

Partnership Return

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Other property (including money) distrib-

1. The partner’s distributive share of the gain

(Form 1065)

uted in exchange for any part of a

that would be recognized had the partner-

partner’s interest in unrealized receivables

ship sold all its marketable securities at

or substantially appreciated inventory

Every partnership that engages in a trade or

their fair market value immediately before

items.

business or has gross income must file an infor-

the transaction resulting in the distribution,

mation return on Form 1065 showing its income,

over

See Payments for Unrealized Receivables

deductions, and other required information. The

and Inventory Items under Disposition of

2. The partner’s distributive share of the gain

partnership return must show the names and

that would be recognized had the partner-

Partner’s Interest, later.

addresses of each partner and each partner’s

ship sold all such securities it still held after

This treatment does not apply to the follow-

distributive share of taxable income. The return

ing distributions.

the distribution at the fair market value in

must be signed by a general partner. If a limited

(1).

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liability company is treated as a partnership, it

A distribution of property to the partner

must file Form 1065 and one of its members

who contributed the property to the part-

For more information, including the definition

must sign the return.

nership.

of marketable securities, see section 731(c) of

the Internal Revenue Code.

A partnership is not considered to engage in

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Payments made to a retiring partner or

a trade or business, and is not required to file a

successor in interest of a deceased part-

Loss on distribution. A partner does not rec-

Form 1065, for any tax year in which it neither

ner that are the partner’s distributive share

ognize loss on a partnership distribution unless

receives income nor pays or incurs any ex-

of partnership income or guaranteed pay-

all the following requirements are met.

penses treated as deductions or credits for fed-

ments.

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The adjusted basis of the partner’s interest

eral income tax purposes.

in the partnership exceeds the distribution.

See the instructions for Form 1065 for more

Substantially appreciated inventory items.

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information about who must file Form 1065.

Inventory items of the partnership are consid-

The partner’s entire interest in the partner-

ered to have appreciated substantially in value

ship is liquidated.

if, at the time of the distribution, their total fair

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The distribution is in money, unrealized re-

market value is more than 120% of the

Partnership

ceivables, or inventory items.

partnership’s adjusted basis for the property.

However, if a principal purpose for acquiring

Distributions

There are exceptions to these general rules.

inventory property is to avoid ordinary income

See the following discussions. Also, see Liqui-

treatment by reducing the appreciation to less

dation at Partner’s Retirement or Death under

Partnership distributions include the following.

than 120%, that property is excluded.

Disposition of Partner’s Interest, later.

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A withdrawal by a partner in anticipation of

Partner’s Gain or Loss

Distribution of partner’s debt. If a partner-

the current year’s earnings.

ship acquires a partner’s debt and extinguishes

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A distribution of the current year’s or prior

A partner generally recognizes gain on a part-

the debt by distributing it to the partner, the

nership distribution only to the extent any money

partner will recognize capital gain or loss to the

years’ earnings not needed for working

capital.

(and marketable securities treated as money)

extent the fair market value of the debt differs

included in the distribution exceeds the adjusted

from the basis of the debt (determined under the

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A complete or partial liquidation of a

basis of the partner’s interest in the partnership.

rules discussed in Partner’s Basis for Distributed

partner’s interest.

Any gain recognized is generally treated as cap-

Property, later).

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A distribution to all partners in a complete

ital gain from the sale of the partnership interest

The partner is treated as having satisfied the

liquidation of the partnership.

on the date of the distribution. If partnership

debt for its fair market value. If the issue price

property (other than marketable securities

(adjusted for any premium or discount) of the

A partnership distribution is not taken into

treated as money) is distributed to a partner, he

debt exceeds its fair market value when distrib-

account in determining the partner’s distributive

or she generally does not recognize any gain

uted, the partner may have to include the excess

share of partnership income or loss. If any gain

until the sale or other disposition of the property.

amount in income as canceled debt.

Page 4

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 4

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