Liquidating vs nonliquidating distributions

by  |  06-Apr-2020 21:47

The value of marketable securities, such as stock investments that are traded on a public stock exchange, and decreases to your share of the partnership's debt are both treated as cash distributions.

When the total amount of cash distributed is more than a partner's basis in her partnership interest, the difference in the two amounts is a gain.

If the partnership distributes property -- anything other than cash and property treated as cash -- during its liquidation, it has no immediate tax effect.

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When property (rather than cash) is distributed, the amount of the dividend equals the fair market value (FMV) of the property on the date of the distribution, reduced by any liabilities assumed by the recipient or to which the property is subject (Sec. In addition, as is the case with cash dividends, the distribution must be from current or accumulated E&P to be classified as a dividend.

The recipient shareholder's basis in appreciated property received in a distribution equals the property's FMV (Sec. The shareholder's holding period begins on the date of distribution. The regulations are designed to harmonize the tax treatment of economically similar transactions.

Shareholders recognize a taxable dividend to the extent a distribution is paid out of corporate earnings and profits (E&P).

If the distribution exceeds E&P, the excess reduces the shareholder's stock basis.

To be taxed as a liquidating distribution, however, a partner's interest in the partnership must terminate.

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