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Describe a Section 754 election and the subsequent 743(b) adjustment.
A partner decides to sell his share of the partnership. The value of that sale results in either a gain or a loss compared to the pro rata change in value of the assets held in the partnership. An adjustment is allocated to the selling partner to ensure the inside basis of the assets = his sales value.
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A section 743(b) adjustment was made for $200,000 to recognize gain by a selling partner. How does this affect the book value of the partnership’s assets? What happens when the asset is sold?
The recognized gain is allocated to the assets on a pro rata basis ONLY to “step-up” the book value for tax purposes and does not actually adjust the book value of the asset. When those assets are sold the difference between the “book value plus step-up” and the selling price is the gain allocated to the remaining partners.
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What are the 3 ways a partner may liquidate a partnership interest?
- Complete withdrawal
- Sale of partnership interest
- Retirement or death
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When a partner liquidates his share of the partnership, which account is used for the liquidation: (1) partner’s basis, or (2) capital account.
The capital account is used, but then adjusted to include the partner’s share of liabilities (capital acct + liabilities = outside basis)`
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A partner liquidates his share of the partnership. The partner receives a cash distribution that is more than his adjusted outside basis. How is the excess distribution treated for tax purposes?
The excess cash is recognized as gain by the partner
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A partner liquidates his share of the partnership. The partner receives a cash distribution that is more than his adjusted outside basis, plus property. How is the distribution treated for tax purposes?
- The excess cash is a recognized gain by the partner
- The basis of the property received is reduced to $0, such that when sold the entire amount received would be a gain.
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A partner liquidates his share of the partnership. The partner receives a cash distribution that is less than his adjusted outside basis, but property that results in an excess distribution above basis. How is the excess distribution treated for tax purposes?
The cash is a non-taxable distribution, the excess amount reduces the fair market value basis to the partner such that gain will be recognized when sold.
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A partner liquidates his share of the partnership. The partner receives a cash distribution that is less than his adjusted outside basis. No other distribution is made. How is the loss treated for tax purposes?
The loss is recognized.
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What 3 items are treated as ordinary income (not capital gains) if it creates a gain in a liquidation of a partnership?
- When you sell, your portion of…
- Unrealized receivables (as if exchanged for cash)
- Appreciated inventory (as if exchanged for cash)
- Recapture Income regarding depreciable assets owned by the partnership.
- … is regarded as ordinary income b/c if you had stuck around, it would have come to the partnership as ordinary income, so when you sell your portion you can’t claim it as capital gains.
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When you sell your share of the partnership interest to another party, what type of gain/(loss) is it?
Capital
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