Partnership Taxation: Partnership Distributions - Lesson 1 - YouTube

Okay, let's talk about Partnership Distributions.

Now with Partnership Distributions that means "Hey!

The partnership is giving me cash.

The partnership is giving me property.

How much goes into my personal balance sheet?"

What we're looking at is "What is my basis that I'm gonna pick this asset up for?"

So a couple of questions.

First of all, what is the basis in the received asset?

What does it do to my outside basis?

And does it create income?

Do I have some sort of income that I have to recognize?

So, let's kind of draw this picture that we did earlier.

And we'll do it again and then we'll go through a bunch of beautiful examples to illustrate

what it is we're talking about.

So, we've got here, this is the Partner.

And remember, I'm putting an asset into the Partnership.

Then I take some, my share, out.

In other words, I own one third or 50 percent or 20 percent.

So let's say I take an asset, carry over basis 10 fair market value 20, I put it in.

What is it?

Carry over basis.

So they pick it up at 10.

Let's say we have income of 60 bucks.

60 dollars.

So my basis is 10.

That's outside the Partnership.

Then, we have 60 dollars.

I get 10 percent.

I pick up six bucks so my basis is now 16.

This is my basis outside the Partnership.

But the basis of the property to the Partnership is inside and that basis is 10 bucks.

So you can see the outside, my basis, standing outside the Partnership, is now what my initial

basis was plus my share of the income.

Minus this, plus that, whatever, is 16.

That's my outside, that's the word outside.

That is this number way over here.

Outside basis.

However, the Partnership is now gonna distribute an asset to me.

When they distribute this asset to me we have to look at, "What is the basis to them inside?

What is my basis outside?"

So when I talk about inside/outside?

That's what you need to understand.

So we're gonna go through a bunch of scenarios.

The rules are different for cash.

The rules are different for property.

So we've gotta understand the rules for cash.

We have to understand the rules for property.

And we've gotta see, is there gonna be some sort of income?

So the question is gonna be "what is my basis in the newly received asset and is there any

income?"

So now the Partnership is gonna give me an asset.

So that is called the basis in received asset.

How much do I pick it up for?

Does it create any kind of income?

That's what we're looking at with Partnership Distributions.

In your notes it says, "A distribution of assets from a Partnership to a Partner reduces

the Partner's basis in the Partnership.

The amount by which the Partner's basis has reduced depends on several factors."

Then it says "Non-liquidating, also called a Current Distribution, the Partner continues

in the business after the distribution."

So Current Distribution means, it's kind of like a dividend, where I own my stock and

they give me something.

So it's continuing, I'm still around.

It says "Liquidating," this is when "the distribution that I am receiving is in settlement of the

entire interest in the business."

That would be my entire outside interest.

Alright, so it says "Normally, Non-liquidating dividends versus Liquidating."

So it says "Non-liquidating" and you'll see the word cash distributions.

The excess of cash over the basis is a gain.

Property Distributions, the basis in the distributed assets in the hands of the Partner is equal

to the Partner's basis in the Partnership prior to the distribution."

And here's an example for Non-liquidating.

Then we'll go through Liquidating.

So let me kind of set this up so we can see the different options for both Liquidating

and Non-liquidating and see what happens.

So over here I'm gonna do Non-liquidating, called a "current distribution."

We'll do this first.

Okay, so let's say for example, I have my outside basis.

Let's say my outside basis in the Partnership is 10 dollars.

Let's say I'm getting cash.

So in the first case I'm gonna get cash of two dollars.

In the second case I'm gonna get 15 dollars.

Okay, so in the first case I have an outside basis of 10.

I'm gonna get cash of two.

That means, what's left?

Eight dollars.

So here is there any kind of gain or loss?

No.

'Cause I still have a basis.

Let's do the second one.

Cash.

I have an outside basis of 10.

They're giving me 15 bucks, that means, remember, wow!

Uh, can't go negative, right?

So it goes to zero.

I have a five dollar gain.

And that would be a capital gain.

Let's do property.

Outside basis is 10 and I get property.

And let's use the same numbers.

Let's say the inside basis of the property to the Partnership is two.

Or let's say it's 15.

Two or 15?

Alright, in the first case it's two, so I'm getting the property of two.

I still have a basis left of eight.

No gain or loss.

Next one, let's say the basis is 15.

So starting out I have an outside basis of ten.

I get 15 but guess what?

You only pick it up for ten.

Why?

Because you can never have "no gain or loss on Property Distribution."

Remember that!

No gain or loss on Property Distribution.

Hmm...

So then, what does that mean?

It really means that when we're looking that this side we're going to pick it up at the

lower of inside or outside.

Lower of inside or outside.

So what we're gonna do is when we're getting this Property Distribution remember, you always

pick it up for the lower of inside or outside.

What's lower?

Two or 10?

Two.

Pick it up at two.

What's lower, 10 or 15?

Pick it up at 10.

Because you can't have a gain or loss on property.

Can you have a gain or loss on cash?

Yes.

Here I still have balance left.

Here, it went negative.

What does that mean?

It means "Hey, I got my basis back the rest is like a capital gain."