Proportionate nonliquidating distribution examples
Given that P contributed cash of 0 and the partnership‟s only asset grew by 0 while P was a 50% owner, this means that the distribution will have reduced P‟s total return from 0 to 3. That reduction makes no sense, and a capital account restatement avoids this result. Although current law does not require the restatement, most advisors recommend it, and the regulations are clear that if a restatement is not made, the partnership will be closely scrutinized to determine if the failure to restatement capital accounts represents an inappropriate shifting of value between related parties. So let us return to the books of the partnership after the distribution and after the capital account restatement.It should not be difficult to figure out how to tax two individuals who contribute equal amounts of cash to start a joint business in which each will own a one-half interest.But it quickly becomes problematic when one if the two partners wants a greater share of early receipts in exchange for a lower share of back-end gains.Because while the amount of the section 734(b) adjustment is computed properly, the allocation of that adjustment is not right.Absent a correction, the statute as written offers significant tax reduction strategies.This means that the partnership’s basis in Blackacre will increase from to .  Prior to the distribution, Q‟s distributive share of the appreciation in the partnership‟s assets was 0 (half of the 0 increase in value), and after the transaction, that share remains the same.To be sure, presumably Q will be required to reduce his share in the venture to reflect a reduction in invested capital, but that should affect profits and losses only going forward: gains and losses accrued as of the date of distribution should remain unchanged.
For example, suppose that P and Q form the PQ partnership by contributing cash of 0 each.The partnership tax provisions – Subchapter K of the Internal Revenue Code – work pretty well.And they have a difficult job to do because they must provide a reasonable mechanism for taxing arrangements between parties that can be far from off-the-rack.Now– and despite the lack of any real statutory support – an incoming partner will in effect take a share of inside basis in each of the partnership‟s assets equal to that partner‟s share of each asset‟s fair market value, an outcome so reasonable that one could only have wished the Congress rather than Treasury had seen fit to specify it.But the regulations applicable to section 734(b) adjustments were not much changed, and that is unfortunate.