A disproportionate distribution occurs when a partnership makes a distribution of cash or property to a partner and that distribution increases or decreases the distributee partner’s proportionate interest in certain of the partnership’s ordinary income-producing assets. Do Partnership Distributions Have to be Equal.

What is a partnership cash distribution?

A distribution is a transfer of cash or property by a partnership to a partner with respect to the partner’s interest in partnership capital or income. In essence, partnership distributions are sums of money or property transferred or paid by the partnership to a partner in capital payments or income.

Can you take a distribution in excess of basis?

The IRS has the right to reassign distributions as salaries, making them subject to employment taxes. Distributions that exceed the stock basis will be generally taxed as long-term capital gains on the personal tax returns of shareholders. Currently, the rate for long-term capital gains is 15 percent.

How does a distribution affect the partner of a partnership?

– Distributee partner’s basis in his/herlits partnership interest is reduced by the amount of basis allocated to the distributed property. • Section 733. 0 Effect on Partnership Basis in Remaining Partnership Assets – Partnership’s bases in remaining partnership assets are unaffected by the distribution.

What happens to a partner’s basis in a liquidating distribution?

A partner’s basis in property distributed in kind as part of a liquidating distribution is the same as his basis in the partnership, reduced by money distributed to him in the same transaction.[26]

What happens when a partner withdraws from a partnership?

Assuming the S corporation has no accumulated earnings and profits, the shareholder will have no gain on the later distribution except to the extent that the amount of the distribution exceeds his adjusted basis in the stock. [31] A partner may withdraw from a partnership by either sale or liquidation of his partnership interest.

Is the distribution of a partnership tax free?

The basic principle underlying the tax treatment of partnership distributions is that the distribution should be tax free to the partnership and to the distributee partner if possible.