Distributions
 Actual and Deemed
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Actual – real distribution of assets by the
partnership to the partner
Deemed – adjustments to capital account where
partner, per se, has not actually received an asset,
but received a benefit or reallocation of their capital
account – expenses paid on behalf of partner etc.
 Whenever capital account is adjusted not due
to operations, likelihood is some form or
distribution
 Look at general rule in Sec 731
Common Capital Account
Adjustments
 Distributions treated as sales for purposes or
partnership taxation – Disguised Sales
 Payments made on behalf of partner but not
deducted by partnership–
 Charity / Medical Expenses / Foreign Taxes
Paid, Alimony / Health Insurance / Personal
expenses
 Sec 736 Payments (liquidating re-classed as
Guaranteed Payments (ordinary income)
Special Situations
 Distributions of Encumbered Property
Relief of Debt / Assumption of debt deemed to
occur concurrently
 Relief of Debt = Cash Distribution
 Assumption of Debt = Cash
 Distribution of marketable securities included as cash
 Exclude the appreciation related to his share of the
gain since will be recognized upon sale
 Marketable securities – actively traded financial
instruments (stocks, equity contracts, debt, options,
futures contracts and foreign currencies)
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Sections Related to
Distributions
 Sec 731
 Sec 732
 Sec 733
 What is the rationale behind the
distribution rules?
Current and Liquidating Distributions
(excluding Sec. 751(b) assets
 Most common distributions are cash
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In the case of cash distributions - gain is recognized to
the extent cash distributions exceed basis (Sec.731)
Loss is never recognized on current distributions
Test cash distributions at year end, provides opportunity
to correct basis problem before year end.
 Distributions other than cash - no gain/loss is recognized
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Basis of the property in the hands of the partner after
distribution is the basis in the hands of the partnership
unless the partners basis is less than the amount of the
asset distributed.
 If combination of cash and property, first reduce basis by
cash
Other current distributions
 If unrealized receivables and/or inventory are distributed
as a current distribution - allocate basis to them first to
preserve basis in ordinary income property
 Ordering of distributions
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First to cash (Sec. 731)
Next to 751(b) assets - unrealized receivables / Inv.
Residual is allocated to the remaining property
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allocate first to the adjusted basis in the hands of the
partnership
allocate next to the relative appreciation of the assets
finally, the residual allocated is based on fair market
values.
Liquidating Distributions
 Loss is recognized on complete liquidations
only if cash, unrealized receivables or inventory
is distributed.
 Other property distributions - basis of the
property is determined under sections 732(b)
and 732 (c)
 Basis of the property distributed - value of the
partners basis. No loss recognized.
 Unrealized receivables and Inventory are
allocated first.