Question

Assume a partnership makes a distribution of inventory to an 80% owner. The partnership purchased the inventory for $500,000. At the time of the distribution, the inventory has a FMV of $200,000. The partner’s outside basis is $440,000.

a. What is the tax result to the partnership and the partner on this distribution if it were a non-liquidating distribution? There is no gain or loss recognized by the partnership or partner. b. What is the tax result to the partnership and the partner on this distribution if it were a liquidating distribution?

Answer 1

a).

If this is a non-liquidating distribution,

Then the partnership will recognize loss of ($ 500,000 - $ 200,000) i. e, to $ 300,000,which will be allocated any partner's outside basis, more than FMV of the asset received. So, $ 440,000 will be reduced by $ 200,000 to $ 240,000 and no tax liability will occur in the hands of partnership.

b).

If this is a liquidating distribution,

Then the partnership will recognize loss of

($ 440,000 - $ 200,000). = $240,000

No tax consequences to partnership.