19.6 Partnership Distributions
Key Takeaways
Current distributions are generally tax-free to extent of basis.
Partner recognizes gain only if cash exceeds basis.
Property distributions reduce basis but generally no gain.
Hot assets (§751) can trigger ordinary income.
Liquidating distributions can result in loss recognition.
Basis in distributed property = lesser of partnership basis or partner remaining basis.
Why This Matters for the Exam
Distribution rules are heavily tested. The exam tests cash vs. property distributions, the basis limitation, and hot asset rules.
Types of Distributions
| Type | Description |
|---|---|
| Current (non-liquidating) | Partner remains a partner |
| Liquidating | Partner's interest is completely liquidated |
Cash Distribution Rules
| Scenario | Tax Treatment |
|---|---|
| Cash ≤ Basis | Tax-free; reduce basis |
| Cash > Basis | Capital gain on excess |
| No loss | Cannot recognize loss on cash distribution |
Cash Distribution Example
| Scenario | Amount |
|---|---|
| Partner basis | $50,000 |
| Cash distributed | $70,000 |
| Tax-free portion | $50,000 |
| Capital gain | $20,000 |
| Ending basis | $0 |
Property Distribution Rules
| Rule | Description |
|---|---|
| No gain or loss | Generally neither partner nor partnership recognizes |
| Carryover basis | Partner takes partnership's basis |
| Basis limit | Cannot exceed partner's remaining basis |
| Basis reduction | Partner's partnership basis reduced |
Property Distribution Example
| Item | Amount |
|---|---|
| Partner basis in partnership | $80,000 |
| Property partnership basis | $30,000 |
| Property FMV | $50,000 |
| Partner's basis in property | $30,000 (carryover) |
| Ending partnership basis | $50,000 |
Hot Assets (§751)
Hot assets trigger ordinary income instead of capital gain:
| Hot Asset | Description |
|---|---|
| Inventory | Items held for sale |
| Unrealized receivables | A/R, depreciation recapture |
| Effect | Result |
|---|---|
| Distribution includes hot assets | Ordinary income recognition |
| Disproportionate distribution | Partner may recognize gain |
Liquidating Distributions
| Rule | Description |
|---|---|
| Gain | If cash > basis |
| Loss | Only if receiving cash, receivables, or inventory |
| Loss character | Capital loss |
Liquidating Distribution - Loss Example
| Item | Amount |
|---|---|
| Partner basis | $100,000 |
| Cash received | $80,000 |
| Loss recognized | $20,000 capital loss |
Real-World Scenario
Scenario: Partner has $40,000 basis. Partnership distributes $50,000 cash in a non-liquidating distribution.
- Tax-free portion: $40,000.
- Capital gain: $10,000 ($50,000 - $40,000).
- Ending basis: $0.
- Character: Capital gain (no hot assets involved).
On the Exam
Question types to practice on distributions:
- Cash Questions: "Partner receives $X cash. What is the gain?"
- Property Questions: "What is the partner's basis in distributed property?"
- Hot Asset Questions: "Which is a hot asset?"
- Loss Questions: "When can a partner recognize a loss?"
The key is to remember: Cash > basis = capital gain. Property = carryover basis. Hot assets = ordinary income. Loss only on liquidation with cash/receivables/inventory.
Partner has $30,000 basis. Partnership distributes $40,000 cash (non-liquidating). Tax consequence?
No gain or loss
$10,000 capital gain
$10,000 ordinary income
$10,000 capital loss
Partner receives property (FMV $50,000, partnership basis $30,000). Partner basis is $80,000. What is partner basis in property?
$50,000
$30,000
$80,000
$20,000
Which is a "hot asset" that triggers ordinary income?
Land held for investment
Unrealized receivables
Corporate stock
Partnership goodwill
Sections you finish are checked off in the contents.