Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Partner's share of nonrecourse liabilities. A

$10,000 in cash on the formation of the partner

only if that part is not treated as paid in ex

partnership liability is a nonrecourse liability if

ship. The adjusted basis of his partnership in

change for partnership property. See

Liquida-

no partner or related person has an economic

terest at the end of the current year is $20,000,

tion at Partner's Retirement or

Death, later.

risk of loss for that liability. A partner's share of

which includes his $15,000 share of partnership

liabilities. The partnership has no unrealized re

Unrealized receivables. Unrealized receiva

nonrecourse liabilities is generally proportionate

ceivables or inventory items. Kumar sells his in

bles include any rights to payment not already

to his or her share of partnership profits. How

terest in the partnership for $10,000 in cash. He

included in income for the following items.

ever, this rule may not apply if the partnership

had been paid his share of the partnership in

Goods delivered or to be delivered to the

has taken deductions attributable to nonre

extent the payment would be treated as re

course liabilities or the partnership holds prop

come for the tax year.

erty that was contributed by a partner.

Kumar realizes $25,000 from the sale of his

ceived for property other than a capital as

partnership interest ($10,000 cash payment +

set.

More information. For more information on

$15,000 liability relief). He reports $5,000

Services rendered or to be rendered.

the effect of partnership liabilities, including

($25,000 realized − $20,000 basis) as a capital

These rights must have arisen under a con

rules for limited partners and examples, see

gain.

tract or agreement that existed at the time of

sections 1.7521 through 1.7525 of the regula

sale or distribution, even though the partnership

Example 2. The facts are the same as in

tions.

may not be able to enforce payment until a later

Example 1, except that Kumar withdraws from

date. For example, unrealized receivables in

the partnership when the adjusted basis of his

Disposition of

clude accounts receivable of a cash method

interest in the partnership is zero. He is consid

partnership and rights to payment for work or

ered to have received a distribution of $15,000,

Partner's Interest

goods begun but incomplete at the time of the

his relief of liability. He reports a capital gain of

sale or distribution of the partner's share.

$15,000.

The basis for any unrealized receivables in

The following discussions explain the treatment

Exchange of partnership interests. An ex

of gain or loss from the disposition of an interest

cludes all costs or expenses for the receivables

change of partnership interests generally does

in a partnership.

that were paid or accrued but not previously

not qualify as a nontaxable exchange of

taken into account under the partnership's

likekind property. This applies regardless of

Abandoned or worthless partnership inter

method of accounting.

whether they are general or limited partnership

est. A loss incurred from the abandonment or

Other items treated as unrealized receiv-

interests or interests in the same or different

worthlessness of a partnership interest is an or

ables. Unrealized receivables include potential

partnerships. However, under certain circum

dinary loss only if both of the following tests are

gain that would be ordinary income if the follow

met.

stances, such an exchange may be treated as a

ing partnership property were sold at its fair

taxfree contribution of property to a partner

The transaction is not a sale or exchange.

market value on the date of the payment.

ship. See

Contribution of Property

under Trans-

The partner has not received an actual or

Mining property for which exploration ex

actions Between Partnership and Partners, ear

deemed distribution from the partnership.

penses were deducted.

lier.

Stock in a Domestic International Sales

If the partner receives even a de minimis actual

An interest in a partnership that has a valid

Corporation (DISC).

or deemed distribution, the entire loss generally

election in effect under section 761(a) of the In

Certain farm land for which expenses for

is a capital loss. However, see

Payments for

ternal Revenue Code to be excluded from the

soil and water conservation or land clear

Unrealized Receivables and Inventory

Items,

partnership rules of the Code is treated as an

later.

ing were deducted.

interest in each of the partnership assets and

Franchises, trademarks, or trade names.

For information on how to report an aban

not as a partnership interest. See

Exclusion

donment loss, see the Instructions for Form

From Partnership

Rules, earlier.

Oil, gas, or geothermal property for which

4797. See Revenue Ruling 9380 for more in

intangible drilling and development costs

formation on determining if a loss incurred on

Installment reporting for sale of partnership

were deducted.

the abandonment or worthlessness of a part

interest. A partner who sells a partnership in

Stock of certain controlled foreign corpora

nership interest is a capital or an ordinary loss.

terest at a gain may be able to report the sale

tions.

on the installment method. For requirements

Market discount bonds and shortterm obli

Partnership election to adjust basis of part

and other information on installment sales, see

gations.

nership property. Generally, a partnership's

Publication 537.

Property subject to recapture of deprecia

basis in its assets is not affected by a transfer of

tion under sections 1245 and 1250 of the

Part of the gain from the installment sale

an interest in the partnership, whether by sale

may be allocable to unrealized receivables or

Internal Revenue Code. Depreciation re

or exchange or because of the death of a part

inventory items. See

Payments for Unrealized

capture is discussed in chapter 3 of Publi

ner. However, the partnership can elect to

Receivables and Inventory

Items, later. The

cation 544.

make an optional adjustment to basis in the

gain allocable to unrealized receivables and in

Determining gain or loss. The income or

year of transfer.

ventory items must be reported in the year of

loss realized by a partner upon the sale or ex

sale. The gain allocable to the other assets can

change of its interest in unrealized receivables

Sale, Exchange,

be reported under the installment method.

and inventory items, discussed below, is the

or Other Transfer

amount that would have been allocated to the

Payments for Unrealized

partner if the partnership had sold all of its prop

Receivables and Inventory

erty for cash at fair market value, in a fully taxa

The sale or exchange of a partner's interest in a

Items

ble transaction, immediately prior to the part

partnership usually results in capital gain or

ner's transfer of interest in the partnership. Any

loss. However, see

Payments for Unrealized

gain or loss recognized that is attributable to the

Receivables and Inventory

Items, later, for cer

If a partner receives money or property in ex

unrealized receivables and inventory items will

tain exceptions. Gain or loss is the difference

change for any part of a partnership interest, the

be ordinary gain or loss.

between the amount realized and the adjusted

amount due to his or her share of the partner

basis of the partner's interest in the partnership.

ship's unrealized receivables or inventory items

Example. You are a partner in ABC Part

If the selling partner is relieved of any partner

results in ordinary income or loss. This amount

nership. The adjusted basis of your partnership

ship liabilities, that partner must include the lia

is treated as if it were received for the sale or

interest at the end of the current year is zero.

bility relief as part of the amount realized for his

exchange of property that is not a capital asset.

Your share of potential ordinary income from

or her interest.

partnership depreciable property is $5,000. The

This treatment applies to the unrealized re

partnership has no other unrealized receivables

Example 1. Kumar became a limited part

ceivables part of payments to a retiring partner

or inventory items. You sell your interest in the

ner in the ABC Partnership by contributing

or successor in interest of a deceased partner

Publication 541 (December 2013)

Page 11

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2013 Page 11

Related Articles

Related forms

Related Categories