§§301.7701-2 and -3, recognize partnership as the default tax classification for all domestic entities that are not organized as corporations or joint stock companies, or engaged in certain regulated businesses like banking and insurance. A number of problems have emerged, particularly for LLCs treated as disregarded entities, including a controversial decision by the IRS to treat the disregarded entity as the one responsible for payroll taxes for its employees, and questions about the status of recourse liabilities of a disregarded entity, particularly one that owns a partnership interest. All but the general partnership can also have continuity of life, centralized management and free transferability of interest, subject only to the usual practical problems of transferring interests in closely held businesses. Basis of Property Received in Liquidation of a Partner's Interest 1. Even the general partnership can achieve most of these characteristics by a carefully drafted partnership agreement. Judicially Created IRD Working Papers Table of Worksheets Worksheet 1 Excerpts from House Ways and Means Committee Report to H. Worksheet 3 Excerpt from Committee on Ways and Means, U. This mainly occurs during voluntary liquidations of solvent corporations. 716-2nd, Partnerships—Current and Liquidating Distributions; Death or Retirement of a Partner, provides a detailed discussion of the tax consequences of distributions by partnerships to partners, including those arising from distributions of a partner's share of the results of partnership operations, and other distributions by the partnership that do not result in termination of the distributee's interest in the partnership even though accompanied by a change in the distributee's and remaining partners' shares of capital or profits and losses, whether in money or property—all called current distributions—and distributions of money or property on the withdrawal of a partner whether on death or withdrawal—called liquidating distributions.
All but the traditional general partnership have limited liability, and a general partnership can, in most states, achieve limited liability by a simple filing to become an LLP, but, particularly for professionals that limited liability protects against vicarious liability but not against liability for one's own malpractice, including, of course malpractice in giving advice related to partnership tax matters. Distribution to Contributing Partner - Section 737 C. Certain Liquidating Distributions to Corporate Partners 2. Basis Allocations in a Series of Liquidating Distributions 4.
The tax consequences of liquidating distributions are discussed in Part IV, including the different rules for the basis of distributed property, and the effect on the partnership's inside basis of gain or loss recognized by the distributee partner.
Finally, Part V analyzes §736, which characterizes partnership payments made to a retiring partner or the successors of a deceased partner, dividing them between those that are liquidating distributions allocable to the retiring or deceased partner's interest in the partnership (including goodwill and similar intangibles) that are governed by the principles discussed in Part IV, and any other withdrawal payments, which are classified as either distributive share payments, with their character determined by the allocable share of partnership income, or guaranteed payments, which are ordinary income to the distributee without regard to partnership income, depending on whether their amount is determined by partnership income or not, and are, in effect, deductible (or excludible) by the partnership (remaining partners). Comparison of a Current Distribution with a Loan Transaction 3.
This Portfolio analyzes not only the relevant statutory and regulatory materials, but also the large body of case law, revenue rulings, and other IRS pronouncements, including technical advice memoranda and private letter rulings, that are all part of this, unfortunately complex, body of tax law.
Part I, Introduction, briefly discusses important general principles not directly related to distributions, but that will nevertheless frequently be referred to throughout the Portfolio, including partnership capital accounts, §704(c) and reverse §704(c) allocations. Basis of Property Received in a Current Distribution 1.