Taxation Essentials of LLCs and Partnerships

Chapter 3Partnership Distributions

Learning objectives

• Distinguish between current and liquidating distributions.
• Determine the basis in the investor's hands of property received as a distribution from a partnership or limited liability company (LLC).
• Calculate the partner's or member's remaining basis in his or her interest following a distribution of cash or property from the partnership or LLC.
• Indicate the effects of liabilities assumed by a partner or LLC member in connection with a property distribution.
• Determine the proper tax treatment of retirement payments to a partner.

Introduction

Distributions of partnership assets are classified as either current distributions or liquidating distributions. Distributions are current when the partners receiving the distributions retain all or part of their partnership interest.¹ Even if a distribution reduces a partner's interest from 50% to 1%, it still would be a current distribution. Distributions are liquidating only when a partner's entire interest in the partnership is liquidated.

Partnership distributions can be further divided into distributions that do not change the partners' proportionate interests in the “hot assets” of the partnership (proportionate distributions), and distributions that do change the partners' proportionate interest in the “hot assets” of the partnership (disproportionate distributions).² “Hot assets” or “Section 751 assets” are those assets of the partnership that would generate ordinary income ...