ACC610 Week 3 Discussion 2 Liquidating Distribution

At the beginning of the tax year, Melody’s basis in the MIP LLC was $60,000, including her $40,000 share of the LLC’s liabilities. At the end of the year, MIP distributed a cash amount of $10,000 and inventory (basis of $6,000, fair market value of $10,000) to Melody. In addition, MIP repaid all of its liabilities by the end of the year.

• If this is a proportionate non-liquidating distribution, what is the tax effect of the distribution to Melody and MIP? Respond to at least two of your classmates' posts.

Monica received $50,000. Monica’s tax basis drops to $10,000. A partnership’s distribution from current or cumulative profits is not taxable because Congress once taxed partnership income. Because a partner pays taxes on partnership income, it is not taxed again when dispersed. Melody and MIP’s distributions are tax-free, but their tax basis is lowered. Non-liquidating distributions are paid to partners who remain partners after receiving them. A partner gets their share of regular income-producing assets in a proportionate distribution. Melody received $10,000 cash and $6,000-valued items as distribution. When a proportional non-liquidating distribution happens, neither the partner nor the partnership realizes gain or loss (Hoffman et al., 2015). Melody will have no profit or loss.

• After the distribution, what is Melody’s basis in the inventory and her MIP interest?

Her MIP basis drops from $6,000 to $4,000 because of the stock. Given that MIP has settled all of its debts, Melody must have received a payment of $40,000. (Her share of the liabilities). Lowering a partner’s share of partnership debt is viewed as a distribution of money from the company to the partner, as stated in our text (Hoffman et al., 2015). Therefore, first, Melody’s foundation in the partnership will drop by $40,000. Finally, there comes the disbursement of cash and stock, totalling $10,000 plus $6,000, or $16,000 altogether. So. Melody has a $6,000 carryover basis in her inventory and a $4,000 basis in MIP (after subtracting $40,000 and $16,000).

• Would your answers to (a) change if this had been a proportionate liquidating distribution? Explain.

If this were a proportional liquidation distribution, she would have lost $4,000 already. Her inventory basis was $6,000. After the distribution, the inventory can’t absorb $10,000. Monica can declare the loss as she only received cash and stock. “Proportionate liquidation distributions are a single distribution or series of distributions that end the partner’s partnership interest” (Hoffman et al., 2015). Melody would lose if the initial transaction had a proportional liquidated distribution. A partner acknowledges a loss on a liquidation distribution if “the partner receives cash, unrealized receivables, or inventory solely” and “the partner’s outside basis in the partnership property exceeds the partnerships inside basis for these assets.” This excess is the partner’s loss (Hoffman et al., 2015). Melody can claim a failure because her partnership basis exceeds the distribution basis. Melody would lose $4,000 ($60,000 - ($40,000 + $16,000)), the difference between her partnership and distribution basis.

References

Hoffman, W. H., Raabe, W. A., & Maloney, D. M. (2015). South-Western Federal Taxation 2016: Corporations, Partnerships, Estates and Trusts (39th ed.). Cengage Limited. Retrieved from https://uaglobalcampus.vitalsource.com/books/9781337013215Links to an external site.