Partnership Liquidation 731 732 731 No gain or

Partnership Liquidation 731 & 732 731: No gain or loss recognized to partner unless: - Gain to extent money distributed exceeds partner’s basis in partnership interest. - Loss recognized if only money and unrealized receivables and inventory distributed to extent basis in partner’s interest exceeds amount of money distributed and partnership’s basis in receivables and inventory. - Any recognized gain or loss is from sale or exchange of partnership interest. 732(b): If property distributed to partner in liquidation of partnership interest, basis in property shall equal partner’s interest in partnership less money receives in distribution. 751(b) Game: Applied full tilt. Note: 736 Roadmap not applicable on complete liquidation. Corporate & Partner Tax Instructor: Dwight Drake

Complete Liquidation: Impact on Partnership General Rule: No gain or loss to partnership on distributions of property to liquidate a partner’s interest in partnership. 731(b) 751(b) Impact: To extent of 736(b) payments not reflect partner’s proportionate share of unrealized receivables and inventory, deemed distribution of additional receivables and inventory to partner followed by partners sales to partnership for cash. Impact is ordinary income to partner and increased basis in such assets to partnership (result of deemed by back). Partnership’s Assets Basis: No change per 734(a) unless 754 election made. If 754 election, basis in capital or 1231 assets (1) increased by gain recognized by distributee partner and excess of partnership basis in distributed property over basis to distributee under 732 and (d) decreased by loss recognized by distributee and excess of distributee basis over partnership’s basis. 708 Termination: Liquidation terminates partnership. Also deemed termination if 50% or more of partners’ interest in profits and capital sold within 12 month period. Old partnership terminated and new partnership formed. Complete carryovers, but tax year closed out and new elections. Corporate & Partner Tax Instructor: Dwight Drake

Problem 340 Basic Facts: AB balance sheet. Cash AR Inventory Capital Asset Total A. B. FMV 20 k 0 20 k 30 k 20 k 40 k 70 k 120 k A. B. FMV A Capital 35 k 60 k B Capital 35 k 60 k 70 k 120 k AB liquidate. A receives AR plus capital asset. B receives cash and inventory. Issue is application of 751(b) for inventory and receivables. A receives 20 k and B 40 k. If equal, each would get 30 k. Two Options: Corporate & Partner Tax Instructor: Dwight Drake

Problem 340 Option 1: Deemed 10 k inventory distribution to A, followed by sale back to AB for 10 k of capital asset. - A outside basis reduced 5 k (basis of inventory) on distribution and A have 5 k ordinary income on inventory sale back. - AB partnership have 2. 5 k LTCG on sale of 10 l capital asset for inventory (excess of 10 k over 7. 5 basis). Gain allocated to B. After deemed distribution, sale back, AB inventory basis is 25 k (up 5 k), AB capital asset basis is 22. 5 k (down 7. 5 k), A outside basis down 5 k to 30 k and B outside basis up 2. 5 k to 37. 5 k. - No gain or loss to A on distribution of 20 k ARs and remaining 30 k capital asset per 731(a). Per 732, 30 k outside basis allocated 0 to ARs (AB’s basis) and 30 k to capital asset. Thus total capital asset basis is 40 k. - No gain or loss to B on distribution of 20 k cash and 40 k inventory per 731(a). Per 732, cash reduces basis to 17. 5 k, all of which allocated to inventory. B basis in inventory 17. 5 k. No gain or loss to partnership per 731(b). Corporate & Partner Tax Instructor: Dwight Drake

Problem 340 Option 2: Deemed 10 k inventory distribution to A, 10 k capital asset distribution to B and then exchange of assets by A and B. - A outside basis reduced 5 k (basis of inventory) on deemed distribution to A and B outside basis reduced 7. 5 k (25% of 40 k) on deemed distribution to B. - B have 2. 5 k LTCG on deemed exchange of 10 k capital asset for inventory (excess of 10 k over 7. 5 basis), and A have 5 k ordinary income. After deemed distributions, AB inventory basis is 15 k (down 5 k), AB capital asset basis is 22. 5 k (down 7. 5 k), A outside basis down 5 k to 30 k and B outside basis down 7. 5 k to 27. 5 k. A & B both have 10 k basis in deemed exchange asset. - No gain or loss to A on distribution of 20 k ARs and remaining 30 k capital asset per 731(a). Per 732, 30 k outside basis allocated 0 to ARs (AB’s basis) and 30 k to capital asset. Thus total capital asset basis is 40 k. (30 k plus 10 k) - No gain or loss to B on distribution of 20 k cash and remaining 30 k inventory per 731(a). Per 732, cash reduces basis to 7. 5 k, all of which allocated to inventory. B basis in inventory 17. 5 k (7. 5 k plus 10 k). No gain or loss to partnership per 731(b). Corporate & Partner Tax Instructor: Dwight Drake

Problem 346 Basic Facts: AC balance sheet. Inventory Capital Asset Total A. B. FMV 80 k 40 k 100 k 120 k 200 k A Capital C Capital A. B. FMV 60 k 100 k 160 k 200 k AC to be converted to corporation. Three options: Option 1: AC distributes assets in complete liquidation, and then A & C contribute to corp in 351 exchange. Basis in assets becomes 160 k on AB liquidation (Partner’s outside basis) per 732, which becomes corp’s basis in assets per 362 and A & C basis in stock per 358. Option 2: A & C transfer partnership interests to corp, which then liquidates AB partnership. A & C stock basis is 160 k per 358, corp’s basis in partnership interests 160 k per 362. On partnership liquidation, corp’s basis in assets becomes 160 k per 732. Same result as Option 1. Corporate & Partner Tax Instructor: Dwight Drake

Problem 346 Basic Facts: AC balance sheet. Inventory Capital Asset Total A. B. FMV 80 k 40 k 100 k 120 k 200 k A Capital C Capital A. B. FMV 60 k 100 k 160 k 200 k AC to be converted to corporation. Three options: Option 3: AC contributes assets to corp for stock and then liquidates by distributing stock to A & C. Now corp basis in assets 120 k, but A & C basis in stock still 160 k per 732. Thus, Option 3 produce lower asset basis - not good. Plus, no S election possible in year 1 and no 1244 stock treatment available on loss (shareholder must be original issuee). Corporate & Partner Tax Instructor: Dwight Drake

Problem 361 Basic Facts: ABCD balance sheet. Cash AR Inventory Total A. B. FMV 4 k 8 k 8 k 4 k 8 k 12 k 20 k 24 k A B E F Capital A. B. FMV 4 k 4 k 6 k 6 k 6 k 20 k 24 k (a) No election. Since 50% interests in partnership sold in 12 months, termination of old partnership under 708(b)(1)(B). Old partnership deemed to have contributed assets to new partnership with carryover basis and partners A, B, E, F each get interest in new partnership and keep old basis. Balance sheet of new partnership is above. (b) 754 election: E & F each entitled to 1 k inside adjustment in asset basis (excess of 6 k paid over 5 k (1/4 of 20 k) share of inside basis. Adjustment allocated to inventory, only asset with appreciation. Balance sheet as follows: Corporate & Partner Tax Instructor: Dwight Drake

Problem 361 (b) balance sheet. Cash AR Inventory Total A. B. FMV 4 k 8 k 10 k 4 k 8 k 12 k 24 k A Capital B Capital E Capital F Capital A. B. FMV 4 k 4 k 6 k 6 k 6 k 20 k 24 k c) No 754 election, but 732(d) invoked by E & F. Same answer as (a). 732(d) of no consequence because no distribution of property to E or F by new partnership. Corporate & Partner Tax Instructor: Dwight Drake

S Corp Complete Liquidation – Shareholder Impact General Rule: Per 331, complete liquidation treated as sale or exchange of stock, producing capital gain or loss equal to difference between cash and FMV of property received and shareholder’s basis in stock. Note, shareholder stock basis increased by corporate gain, so often little or no tax due. Timing Issues: - 453 installment sales treatment applies when liquidating distributions over time. Open transaction treatment very risky; appears trumped by 453. - 453 installment treatment permitted even as to installment obligations acquired by non-public corp in asset sell-off and distributed to shareholders. To qualify under 453, corp sale that created obligation must be with 12 month period after liquidation plan adopted and liquidation must be completed within same period. Inventory and “dealer” qualify only if part of bulk sale of assets. Corporate & Partner Tax Instructor: Dwight Drake

S Corp Complete Liquidation – Corporation Impact General Rule: Per 336, Corp recognizes gain or loss on property distributed or sold as part of complete liquidation. 267 related-party loss limitations not apply in complete liquidation. Gain or loss passed thru to shareholders. (d)(1) Related Party Exception: No loss at all on distribution to related party (per 267) in complete liquidation if: - Distribution note pro rata, or - Distributed property acquired by corp in 351 transaction or as contribution to capital within 5 yrs of distribution (“Disqualified Property”). (d)(2) Tax Avoidance Exception: No built-in loss (loss at time of acquisition) disallowed if property acquired in 351 transaction or contribution to capital and principal purpose was to recognize loss on liquidation. If acquired within 2 yrs of plan of liquidation, bad purpose a done deal unless there is “clear and substantial relationship” between property and conduct of business and solid explanation. If outside 2 yr window, probably safe except in “most rare” cases. Corporate & Partner Tax Instructor: Dwight Drake