Proportionate liquidating distribution
These adjustments to basis work with the rules governing distributions to ensure that partnership income is taxed and deductions are taken only once.
If the partner acquired the interest in exchange for a contribution to the partnership, his basis generally equals the amount of money and the partner’s adjusted basis in any property contributed to the partnership. If the property is subject to indebtedness at the time of the contribution, the partner’s basis is reduced by the portion of the debt that is assumed by the other partners. If the partner acquired his interest in exchange for services, his basis equals the value of services provided. If the partner purchased his partnership interest, his basis equals his cost. The partner’s initial basis is adjusted to give effect to transactions affecting the partnership.In contrast, distributions of appreciated property by C corporations and S corporations are treated as though the property were sold to the shareholder at fair market value. For S corporations, this deemed sale results in gain recognized by the S corporation, which is passed through to the shareholders and increases their basis in the S corporation stock. The distribution then reduces the shareholder’s basis. Assuming the S corporation has no accumulated earnings and profits, the shareholder will have no gain on the later distribution except to the extent that the amount of the distribution exceeds his adjusted basis in the stock. A partner may withdraw from a partnership by either sale or liquidation of his partnership interest.A partner’s sale of his partnership interest is taxable.The partner’s basis in his partnership interest in increased by: These basis adjustments depend in large part on the allocation of partnership income, gains, losses, deductions, and credit among the partners.The partnership agreement determines the allocation of these items. If the partnership agreement is silent, these items are allocated in accordance with the partnership interests. If the partnership agreement allocates partnership items among the partners, the allocation is respected as long as one of the following is true: If an allocation does not meet one of these requirements, the allocation of income, gain, loss, deduction, or credit is reallocated in accordance with the partner’s interest in the partnership. Special rules apply to allocations of property with built-in gain and loss. Important Note: The rules governing substantial economic effect are complex and must be given special consideration if the partnership agreement or operating agreement provides for allocations other than in accordance with each partner’s interest in the partnership.