Non-liquidating distributions, unlike liquidating distributions, are distributions that do not result in the termination of a partner's entire interest in a partnership. <2>

734; Reg. Gain will not be recognized by the partner except to the extent that the amount of cash distributed in partial liquidation of the partner’s interest – which will include the amount by which the distributee-partner’s share of partnership liabilities is reduced as a result of the reduction of the partner’s interest in partnership profit and lossThe gain recognized will be considered as gain from the sale of the partnership interest,What’s more, even if the amount of cash distributed in a partial liquidation of a partner’s interest does not exceed the distributee-partner’s adjusted basis in such interest, the partner may still be required to recognize gain from the deemed sale of certain partnership property.Specifically, if the distributee-partner’s receipt of cash in partial liquidation of their interest results in a reduction of their share of the partnership’s unrealized receivables or inventory – as one might expect it would – the distributee-partner will be treated as having sold a portion of their interest in such receivables and inventory in exchange for a portion of the cash distribution, thereby realizing ordinary income.It is likely that a number of readers never thought that the “simple” distribution of cash by a corporation or a partnership to its owners could raise so many issues or present so many traps from a tax perspective.The fact remains, however, that shareholders and partners are not going to turn their backs on a proffered, agreed-upon, or planned cash distribution, notwithstanding the potential tax consequences.For that reason, it will behoove them to plan carefully for, and sufficiently in advance of, any such distributions in order that they may first identify any lurking tax issues and, having done so, to consider how to best address them.As Fran Lebowitz once said, “A dog who thinks he is man’s best friend is a dog who obviously never met a tax lawyer.”They may be structured as directly as described in the text, or they may be accomplished indirectly, as where the business entity pays an owner’s personal expense or allows the owner to use business property without adequate consideration.In these cases of constructive or imputed withdrawals of value, the taxpayer and the taxing authorities are left to determine the parties’ intentions (for example, was the payment a form of compensation or a dividend), and the tax treatment of the withdrawal, based on the facts and circumstances.Although the converse of these situations – as where an owner receives the services of the entity, or uses or purchases its property – does not result in the withdrawal of funds from the entity, it may nevertheless enrich the owner if the terms of the arrangement are other than arm’s-length.For our purposes, we will assume that neither the built-in gains tax, nor the tax on excess passive investment income, applies.
%PDF-1.4 %���� What’s more, because an interest in a closely held business is, by definition, not readily marketable, this owner is unlikely to find someone outside the entity who would be willing to purchase some of their equity; in fact, it may be that the owners have agreed not to sell their equity to any outsider.An effective way by which some businesses have addressed this issue is by “creating” a market for the owner who requires more liquidity than may be provided by a current distribution. Pt~ Companies A- ,m E d012c1eiame,-v-# Partnership Terminology Distribuin Z/ q> "Liquidating distribution" A distribution of money or other property that is made in liquidation of a partners interest. Legal Updates & Commentary for Tax & Estate PlanningAs most readers are aware, the initial choice of entity and tax classification for a business is no small matter, as it will result in certain tax and economic consequences for both the entity and its owners.A change in a business entity’s tax classification will likewise have a significant impact upon the business, and may even generate an immediate income tax liability.Among the several factors to be considered in determining the form and tax status for a business entity, and one that many individual owners appear not to fully appreciate,In general, an owner of a closely held business may have several options by which they can withdraw funds from the business without necessarily removing themselves from the business, as distinguished from receiving value in exchange for the business.In each of these situations, the owner and the business will often agree to terms that are on the “generous” end of the spectrum of what is reasonable.Finally, the owners may withdraw funds from the business by causing the business entity to make a distribution with respect to their equity interests therein (a corporation-shareholder or partnership-partner relationship).Generally speaking, a cash distribution from a business entity to an owner with respect to their equity interest may be effected in one of two ways: a “current” distribution of cash (which does not change the owners’ relative equity in the business); and a distribution in exchange for some of the owner’s equity in the business (a partial redemption of an owner’s shares of stock, or a partial liquidation of the owner’s partnership interest).A current distribution is the most common type of cash distribution made by a business entity. Only after the shareholder’s entire stock basis is exceeded will any remaining cash be treated as gain from the sale of a capital asset by the shareholder.A distribution which is not in liquidation of a partner’s entire interest is treated as a current distribution for tax purposes. . 199A deduction must be considered after 2017.If the partnership makes, or has in effect, a Sec. 1374 and IRC Sec. Description. Because the shares were likely a capital asset in the hands of the shareholder, this gain may be long-term capital gain if the shareholder’s holding period for such shares was more than one year, in which case it would taxable at a federal rate of 20 percent; the 3.8 percent federal surtax may also apply.The Code provides a “safe harbor” which, if satisfied, will cause the redemption of a portion of a shareholder’s shares to be treated as a sale of such shares. Cash: $1,000 In that case, and in every case in which the redemption does not result in a “meaningful” reductionHowever, if only one shareholder sold all but one of their shares of stock in the corporation, and such reduction was meaningful – for example, the percentage ownership represented by that one remaining share may be so small relative to the percentage of the total number of outstanding shares of the corporation that the shareholder owned before the redemption – that the redemption may be treated instead as “not essentially equivalent to a dividend;”In that case, the shareholder will be treated as having sold the redeemed shares to the corporation and will realize gain equal to the excess of the amount paid by the corporation over the shareholder’s adjusted basis for the redeemed shares. In addition, the redemption distribution must be “substantially disproportionate” with respect to the shareholder; meaning that the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of its voting stock at that time, is less than 80 percent of the ratio which the shareholder’s voting stock before the redemption bore to all of the voting at such time.

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