What are the relevant facts per IRC 704(b) property distributions to partners, for tax purposes?
The most relevant facts are: Is there substantial economic effect? Is there economic effect? Is that effect substantial? Do the facts and circumstances support, that the taxpayer participated in the activity on a “regular, continuous, and substantial basis” during the taxable year?
Detailed Analysis:A good place to start our analysis, would be by reading the statute, which is stated below:
“704 (b)DETERMINATION OF DISTRIBUTIVE SHARE A partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances), if—(1) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect.”
Based on a simple reading of the statute, some relevant facts that may be relevant to resolve any tax issues revolving property distributions to a partner, may include: Is there a partnership agreement? What does the partnership agreement say? What type of partnership is this? Is this partner a general partner? Is this partner a limited partner? Is there a build in gain or loss on the property which is distributed? What type of property is the one which is distributed?
A current distribution is a distribution that does not completely terminate the partner’s interest in the partnership. Generally, a current distribution of either cash or property is a nontaxable transaction to both the recipient partner and the partnership. The partnership reduces the recipient partner’s capital account and recognizes no taxable gain or loss (but would recognize a book gain or loss). A partner receiving a current distribution generally recognizes no gain or loss
Exception: if the partner receives cash in excess of the tax basis of the partnership interest, the partner is required to recognize taxable capital gain to the extent of the excess. The partner reduces the outside basis of the partnership interest by the basis of property received - limitation: basis cannot be reduced below zero.
The partner takes a carryover basis in the distributed property if basis of property received exceeds tax basis in partnership interest, partner’s basis in such property is limited to pre-distribution basis in partnership interest.
The deductibility of partnership losses passed through to a partner, is subject to three separate limitations: First, the loss may not exceed the partner’s tax basis in the partnership interest-§704(d). Second, any losses surviving the tax basis limit are subject to the at-risk limitation- §465. Finally, losses may be disallowed under the passive loss limitations - §469
A broader list of potentially relevant facts, may include the following:What type of partnership is this?
Is this a General Partnership?
Is this a Limited Partnership?
Is the partner a general partner or a limited partner?
Is there a build in gain or loss on the property, which is distributed?
To what extent, is there a substantial economic effect?
Do the facts and circumstances support that the taxpayer participated in the activity on a “regular, continuous, and substantial basis” during the taxable year?
Is there a partnership agreement?
What does the partnership agreement say?