Frequently Asked Questions
Who is eligible for the Tax-Free Partnership Property Distributions?
Partners in a partnership receiving distributions of property or cash that does not exceed their outside basis.
How does the Tax-Free Partnership Property Distributions work?
Generally, no gain is recognized by a partner upon a distribution of property (other than money) until the partner subsequently sells that property. Gain is only recognized if the money distributed exceeds the partner's adjusted basis in the partnership.
What law authorizes the Tax-Free Partnership Property Distributions?
The Tax-Free Partnership Property Distributions is authorized under IRC §731 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §731
Source: Internal Revenue Code, Title 26, United States Code
§ 731. Extent of recognition of gain or loss on distribution(a) PartnersIn the case of a distribution by a partnership to a partner—(1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest in the partnership immediately before the distribution, and
(2) loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner’s interest in a partnership where no property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner’s interest in the partnership over the sum of—(A) any money distributed, and
(B) the basis to the distributee, as determined under section 732, of any unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)).
Any gain or loss recognized under this subsection shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner.
(b) PartnershipsNo gain or loss shall be recognized to a partnership on a distribution to a partner of property, including money.
(c) Treatment of marketable securities(1) In generalFor purposes of subsection (a)(1) and section 737—(A) the term “money” includes marketable securities, and
(B) such securities shall be taken into account at their fair market value as of the date of the distribution.
(2) Marketable securitiesFor purposes of this subsection:(A) In generalThe term “marketable securities” means financial instruments and foreign currencies which are, as of the date of the distribution, actively traded (within the meaning of section 1092(d)(1)).
(B) Other propertySuch term includes—(i) any interest in—(I) a common trust fund, or
(II) a regulated investment company which is offering for sale or has outstanding any redeemable security (as defined in section 2(a)(32) of the Investment Company Act of 1940) of which it is the issuer,
(ii) any financial instrument which, pursuant to its terms or any other arrangement, is readily convertible into, or exchangeable for, money or marketable securities,
(iii) any financial instrument the value of which is determined substantially by reference to marketable securities,
(iv) except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal which, as of the date of the distribution, is actively traded (within the meaning of section 1092(d)(1)) unless such metal was produced, used, or held in the active conduct of a trade or business by the partnership,
(v) except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of marketable securities, money, or both, and
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