Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

ter the distribution at the fair market value

ship immediately before the distribution,

•

A distribution of property to the partner

in (1).

were distributed to another partner, other

who contributed the property to the part-

than a partner who owns more than 50%

nership.

For more information, including the definition

of the partnership. For information about

of marketable securities, see section 731(c) of

•

Payments made to a retiring partner or

the distribution of contributed property to

the Internal Revenue Code.

successor in interest of a deceased part-

another partner, see Contribution of Prop-

ner that are the partner’s distributive share

erty, under Transactions Between Partner-

Loss on distribution. A partner does not rec-

of partnership income or guaranteed pay-

ship and Partners, later.

ognize loss on a partnership distribution unless

ments.

all the following requirements are met.

The character of the gain is determined by

•

reference to the character of the net precontribu-

The adjusted basis of the partner’s interest

Substantially appreciated inventory items.

tion gain. This gain is in addition to any gain the

in the partnership exceeds the distribution.

Inventory items of the partnership are consid-

partner must recognize if the money distributed

•

ered to have appreciated substantially in value

The partner’s entire interest in the partner-

is more than his or her basis in the partnership.

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

ship is liquidated.

For these rules, the term “money” includes

market value is more than 120% of the

•

The distribution is in money, unrealized re-

marketable securities treated as money, as dis-

partnership’s adjusted basis for the property.

ceivables, or inventory items.

cussed earlier.

However, if a principal purpose for acquiring

inventory property is to avoid ordinary income

Effect on basis. The adjusted basis of the

There are exceptions to these general rules.

treatment by reducing the appreciation to less

partner’s interest in the partnership is increased

See the following discussions. Also, see Liqui-

than 120%, that property is excluded.

by any net precontribution gain recognized by

dation at Partner’s Retirement or Death under

the partner. Other than for purposes of deter-

Disposition of Partner’s Interest, later.

Partner’s Gain or Loss

mining the gain, the increase is treated as occur-

ring immediately before the distribution. See

Distribution of partner’s debt. If a partner-

A partner generally recognizes gain on a part-

Basis of Partner’s Interest, later.

ship acquires a partner’s debt and extinguishes

nership distribution only to the extent any money

the debt by distributing it to the partner, the

The partnership must adjust its basis in any

(and marketable securities treated as money)

partner will recognize capital gain or loss to the

property the partner contributed within 7 years

included in the distribution exceeds the adjusted

extent the fair market value of the debt differs

(5 years for property contributed before June 9,

basis of the partner’s interest in the partnership.

from the basis of the debt (determined under the

1997) of the distribution to reflect any gain that

Any gain recognized is generally treated as cap-

rules discussed in Partner’s Basis for Distributed

partner recognizes under this rule.

ital gain from the sale of the partnership interest

Property, later).

Exceptions. Any part of a distribution that is

on the date of the distribution. If partnership

The partner is treated as having satisfied the

property the partner previously contributed to

property (other than marketable securities

debt for its fair market value. If the issue price

the partnership is not taken into account in de-

treated as money) is distributed to a partner, he

(adjusted for any premium or discount) of the

termining the amount of the excess distribution

or she generally does not recognize any gain

debt exceeds its fair market value when distrib-

or the partner’s net precontribution gain. For this

until the sale or other disposition of the property.

uted, the partner may have to include the excess

purpose, the partner’s previously contributed

For exceptions to these rules, see Distribu-

amount in income as canceled debt.

property does not include a contributed interest

tion of partner’s debt and Net precontribution

Similarly, a deduction may be available to a

in an entity to the extent its value is due to

gain, later. Also, see Payments for Unrealized

corporate partner if the fair market value of the

property contributed to the entity after the inter-

Receivables and Inventory Items under Disposi-

debt at the time of distribution exceeds its ad-

est was contributed to the partnership.

tion of Partner’s Interest, later.

justed issue price.

Recognition of gain under this rule also does

Net precontribution gain. A partner gener-

not apply to a distribution of unrealized receiv-

Example. The adjusted basis of Jo’s part-

ally must recognize gain on the distribution of

ables or substantially appreciated inventory

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

property (other than money) if the partner con-

items if the distribution is treated as a sale or

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

tributed appreciated property to the partnership

exchange, as discussed earlier.

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

during the 7-year period before the distribution.

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

Partner’s Basis for

exceed the basis of her partnership interest, Jo

A 5-year period applies to property

does not recognize any gain on the distribution.

Distributed Property

contributed before June 9, 1997, or

Any gain on the land will be recognized when

under a written binding contract:

CAUTION

she sells or otherwise disposes of it. The distri-

Unless there is a complete liquidation of a

bution decreases the adjusted basis of Jo’s part-

partner’s interest, the basis of property (other

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

1) That was in effect on June 8, 1997, and

than money) distributed to the partner by a part-

$2,000)].

at all times thereafter before the contri-

nership is its adjusted basis to the partnership

bution, and

immediately before the distribution. However,

Marketable securities treated as money.

the basis of the property to the partner cannot be

2) That provides for the contribution of a

Generally, a marketable security distributed to a

more than the adjusted basis of his or her inter-

fixed amount of property.

partner is treated as money in determining

est in the partnership reduced by any money

whether gain is recognized on the distribution.

The gain recognized is the lesser of the fol-

received in the same transaction.

This treatment, however, does not generally ap-

lowing amounts.

ply if that partner contributed the security to the

Example 1. The adjusted basis of Beth’s

partnership or an investment partnership made

1) The excess of:

partnership interest is $30,000. She receives a

the distribution to an eligible partner.

distribution of property that has an adjusted ba-

a) The fair market value of the property

The amount treated as money is the

sis of $20,000 to the partnership and $4,000 in

received in the distribution, over

security’s fair market value when distributed,

cash. Her basis for the property is $20,000.

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

b) The adjusted basis of the partner’s in-

any) of:

terest in the partnership immediately

Example 2. The adjusted basis of Mike’s

before the distribution, reduced (but not

partnership interest is $10,000. He receives a

1) The partner’s distributive share of the gain

below zero) by any money received in

distribution of $4,000 cash and property that has

that would be recognized had the partner-

the distribution.

an adjusted basis to the partnership of $8,000.

ship sold all its marketable securities at

His basis for the distributed property is limited to

their fair market value immediately before

$6,000 ($10,000 − $4,000, the cash he re-

2) The “net precontribution gain” of the part-

the transaction resulting in the distribution,

ner. This is the net gain the partner would

ceives).

over

recognize if all the property contributed by

2) The partner’s distributive share of the gain

the partner within 7 years (5 years for

Complete liquidation of partner’s interest.

that would be recognized had the partner-

property contributed before June 9, 1997)

The basis of property received in complete liqui-

ship sold all such securities it still held af-

of the distribution, and held by the partner-

dation of a partner’s interest is the adjusted

Page 10

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 10

Related Articles

Related forms

Related Categories