Example of nonliquidating distribution
Instead, the distribution is governed by the general nonrecognition rule of Code § 311(a), which prevent the corporation from recognizing loss on a transfer of depreciated property. § 302(b)(1), this test is usually used only when the safe harbors of I.
Liquidation is a taxable event for both the shareholder and the corporation. Like the “Redemptions Not Equivalent to Dividends” test of I.
When property is distributed to a partner, then the partnership must treat it as a sale at fair market value ().
The partner's capital account is decreased by the FMV of the property distributed.
Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.The partnership's inside basis of the property carries over to become the partner's basis, thereby reducing the partner's outside basis by the carryover basis.As with the cash distribution, if the FMV of the property exceeds the partner's outside basis in the partnership, then the partner's interest in the partnership is reduced to 0 and the receiving partner's basis in the distributed property equals his outside basis in the partnership before the distribution.If you sold your partnership interest for ,000, you would recognize a gain of ,000, whereas your partner, if she sold at the same price, would recognize no gain.There are 2 types of distributions: a current distribution decreases the partner's capital account without terminating it, whereas a liquidating distribution pays the entire capital account to the partner, thereby eliminating the partner's equity interest in the partnership.
Capital Gain = Cash Distribution – Partner's Outside Basis Distributions are generally made throughout the year, but they are taken into account on the last day of the partnership's tax year.