Advanced Tax Strategies for LLCs and Partnerships

Chapter 5Advanced Distribution Rules

Learning objectives

• Calculate the basis of each property received by a partner or member receiving multiple properties in a non-liquidating distribution from a partnership or LLC.
• Calculate the basis of each property received by a partner receiving multiple properties in a liquidating distribution from a partnership or LLC.
• Recognize which properties will receive a step-up or step-down in basis when multiple properties are received from a partnership or LLC.
• Allocate basis increases or decreases among multiple properties for federal income tax purposes.

Non-liquidating distributions generally

Non-cash distributions

The Internal Revenue Code lays out a relatively straightforward framework for analyzing the tax consequences of proportionate non-liquidating distributions. This framework begins with the general rule of Section 731(a)(1), which states that neither the partner nor the partnership recognizes gain on receipt of property other than cash in a non-liquidating distribution.¹ Partners must realize that relief of liabilities is treated as a distribution of cash, but aside from this caveat, it is relatively easy to structure a distribution to ensure tax-free treatment to both the partner and the partnership.

Any gain realized by the partner on the receipt of a non-cash, non-liquidating distribution is deferred until the partner disposes of the property received. Under Section 732(a)(1), partners generally take a carryover basis in ...