Exam No. 4884

With respect to property distributions, under §731(a) and (b), when a partnership makes a non-liquidating distribution of property to a partner, generally neither the partnership or the partner recognizes gain or loss. Here Ruth is taking back property she contributed and cash. Since she is getting her own property out there is no issue under § 737. Under § 732 and § 733 a partner takes a transferred basis in the property distributed and the partner's outside basis is reduced by the basis of the property. Under § 732 (a)(2). A partner's basis in distributed property cannot, however, exceed the outside basis less money received in the same transaction. So, for Ruth she gets 30K of cash and under § 731 if the cash distribution does not exceed her outside basis there is no gain. Ruth's basis in her partnership interest is $85K less the 30K cash = 55K (§ 733 and 705). The Redacre inside basis is 10K so Ruth's outside basis is reduced by 10K more to $45K. (§ 732(a)(1) and §733(2). Because of the transfer of basis, Ruth's holding period continues to tack from the time she originally held the property and the psp held the property.

Sandra on the other hand took out 100K of cash only. Again, under §731 generally there is no gain or loss on the receipt of cash from the psp. However, under §731(a)(1) if the money distributed exceeds outside basis then the difference is treated as gain on the sale of a partnership interest. Here, Sandra's inside basis is only 90K and the distribution is 100K. Sandra will be treated as having 10K of gain on the distribution, and her basis will go to 0 in the psp. The character will be capital since there are no § 751 hot assets in the partnership.

The effects on the partnership of these two transactions are as follows. Under § 721(b), no gain or loss is recognized by the partnership when it transfers property, including money, to Ruth and Sandra. Under § 734(c) and since no § 754 election is in place, the inside basis of the assets are not adjusted as a result of a property distribution by the partnership. Because Sandra recognizes a gain on the transfer, there will be an imbalance between the inside andoutside basis of the partners when compared to the partnership. Under the regs to § 704 (1.704-1), each partner's capital account is reduced by the fair market value of the property received in the distribution. Both Sandra and Ruth will reduce their respective capital accounts by 100K each.
 

Exam No. 4914

§ 704(c)(1)(B) requires that a contributing partner must recognize the precontribution gain or loss inherent in the property if the property is distributed to another partner within 7 years. However, Ruth is the one who contributed Redacre. Under § 731(b), the partnership does not recognize gain or loss on the distribution of property to a partner. Ruth will take a transferred basis in Redacre ($10K) and her outside basis is reduced by the basis of the distributed property, 85K-10K = 75K. See §§ 732(a)(1) and §733(2). Also, Ruth's outside basis will be reduced by the $30K of cash distributed, 75K - 30K = 50K outside basis. See §§ 705(a)(2) and 733.

Sandra is receiving 10K more in cash than she has in basis. This excess 10K is recognized as a gain from the sale of exchange of a partner's interest (capital) under § 731(a)(1). Thus Sandra's outside basis will be reduced to zero and she will recognize $10K of gain.

Under § 724(a), the inside basis of the partnership's assets is not adjusted as a result of a property distribution by the partnership unless the partnership has a § 754 election in effect. In absence of a § 754 election, a distribution in excess of basis create an imbalance between the partnership's total inside basis and the total outside basis of the partners' interest, i.e. 10K.

Under §734(b), if a partnership has a § 754 election in effect, it increase the inside basis of its assets by the amount of any §731(a)(1) gain recognized by the distributee partner. Thus if there is a § 754 election in effect then the partnership would increase the inside basis by 10K, the amount of § 731(a)(1) gain recognized by Sandra. An adjustment as a result of § 731(a)(1) gain recognition must be allocated to capital assets and § 1231(b) property. § 1.755-1(b)(1)(ii). Thus the adjustment would be made by an inside basis adjustment to Sheepacre.
 
 

Created by:  bojack@lclark.edu
Update:  31 May 03
Expires:  31 Aug 04