Damon owns a 20% interest as a general partner in the Vermillion Partnership, wh

Question

Damon owns a 20% interest as a general partner in the Vermillion Partnership, which provides consulting services. The partnership distributes $60,000 cash to Damon in complete liquidation of his partnership interest. Damons share of partnership unrealized receivables immediately before the distribution is $20,000. The partnership has no other hot assets. Assume that none of the cash pay- ment is for goodwill. Damons basis for his partnership interest immediately before the distribution is $30,000.

a. How is the cash payment treated under § 736?

b. How much gain or loss must Damon recognize on the distribution? What is the character of these amounts?

c. How does the partnership treat the distribution to Damon?

d. What planning opportunities might the partnership want to consider?

e. How would your answers to (b) and (c) change if Damon was a limited partner?

Explanation / Answer

A. Upon making Cash payments to Damon for his interest in partnership assets the partnership may not deduct the amount, as the partnership is not owning any hot assets it is treated as normal distribution.

B. Damon should recognise $30000 (60000-30000) as his capital gain and $20000 as his ordinary income.

C. As the partnership is not owning any hot assets they should treat it as normal distribution.

D. The firm should consider the tax consequences and the payment to the retiring or deceased partner.

E. If Damon was a limited partner the total amount received by him for liquidation would have been taxable i.e.$60000 as 736(b) payment.

The partnership needs to treat this a as porperty payment.

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