Lesson 3.3.1 Disproportionate Distributions: Concepts

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Del curso dictado por University of Illinois at Urbana-Champaign

Taxation of Business Entities II: Pass-Through Entities

10 calificaciones

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University of Illinois at Urbana-Champaign

Taxation of Business Entities II: Pass-Through Entities

10 calificaciones

Curso 4 de 5 en SpecializationU.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of pass-through business entities, including Subchapter S corporations, partnerships, and limited liability companies. The course focuses on the relevant provisions of Subchapters S and K of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing the formation, operation, and termination of pass-through entities. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

De la lección

Module 3 Partnership Distributions

In this module, you will be introduced to the tax treatments of partnership distributions. We will first determine what is a distribution and how it is different from a partner’s share of partnership earnings. Partnership distributions will be further classified into proportionate operating, proportionate liquidating, and disproportionate distributions. We will then discuss the nonrecognition principle of partnership distributions, loss limitations, and exceptions to these general rules.

Lesson 3.3.1 Disproportionate Distributions: Concepts2:27

Lesson 3.3.2 Disproportionate Distributions: Applications2:54

Conoce a los instructores

Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

A proportionate distribution occurs when a partner receives

a pro-rata share of partnership assets and other property,

as specified in the partnership agreement based on the partners capital interests.

Prior lessons examine the tax implications of

proportionate non liquidating and liquidating distributions.

In contrast, the distribution is disproportionate when it does not

reflect a partner's proportionate share of partnership property.

A disproportionate distribution can be either non liquidating or liquidating.

Regardless of type, disproportionate distributions are governed by complex rules.

Thus in this lesson, you will learn about the general concepts

governing the tax treatment of disproportionate distributions.

After learning the concepts,

you will apply them to Sunchaser Shakery.

As mentioned, disproportionate distributions are governed by very complex tax rules.

Thus, to illustrate the concepts of these distributions,

let's consider a situation in which partners receive

either more or less of their pro-rata share of hot assets.

For this purpose, hot assets include

substantially appreciated inventory and unrealized receivables.

For inventory to be considered substantially appreciated,

it must have a fair market value in excess of

120% of the partnership's inside basis in the inventory.

Based on the aggregate concept,

each partner should recognize

their proportionate share of ordinary income from hot assets.

Thus, section 751 (b) maintains each partner's proportionate share of ordinary income,

even when the distribution is disproportionate.

More specifically, it recasts any transaction in which

a disproportionate distribution of hot assets is made, and makes it proportionate.

Basically, if the partner receives less than a proportionate share of hot assets,

the transaction is treated as if two separate events occurred.

One, the partnership made a distribution of some hot assets to the distributor partner,

and two, that partner immediately sold the hot assets back to the partnership.

The partner recognizes ordinary income on the sale of

the hot assets and the partnership takes a cost basis for the assets purchased.

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