The US Internal Revenue Service (IRS) has released updated practice units addressing specific issues related to partnerships.
As part of the Large Business and International (LB&I) Division’s knowledge management efforts, practice units are developed through internal collaboration and serve as both job aids and training materials on tax issues. For example, practice units provide IRS staff with explanations of general tax concepts as well as information about a specific type of transaction. Practice units will continue to evolve as the compliance environment changes and new insights and experiences are contributed.
The new practice units include:
Liquidating Distributions of a Partner’s Interest in a Partnership
All partnership distributions are either current or liquidating. A liquidating distribution terminates a partner’s entire interest in the partnership. A current distribution reduces a partner’s capital accounts and basis in his interest in the partnership (“outside basis”) but does not terminate the interest.
This outlines the tax implications for partners receiving these distributions, covering the recognition of gains or losses, the allocation of basis to received assets, and the characterisation of recognised gains.
For liquidating distributions, gain is recognised to the extent money (or deemed money) distributed exceeds the partner’s outside basis; loss is recognised to the extent the partner’s outside basis exceeds money distributed and the basis of any hot assets distributed. A partner will not recognise a loss on a liquidating distribution if he receives any property other than money, unrealised receivables, or inventory.
A partnership is called a “flow-through entity” or a “pass-through entity.” Partnerships pay no tax. Instead, each partner includes his share of the partnership’s income, gain, loss, deduction, or credits on his personal tax return. Therefore, for purposes of reporting tax items and calculating tax liabilities, the partnership is treated as an aggregate of its partners. As previously stated, outside basis is a partner’s basis in his partnership interest. Inside basis is the partnership’s basis in its assets.
This explains the process of calculating a partner’s outside basis in a partnership through various methods.
Recourse vs. Nonrecourse Liabilities
This explores the tax implications of recourse and nonrecourse liabilities in partnerships and their effect on a partner’s outside basis.
This practice unit addresses the definition of liabilities for federal income tax purposes in the context of partnerships. Both recourse and nonrecourse liabilities are discussed in this Unit. Rules for allocating partnership liabilities among the partners are covered in a separate Concept Unit, Determining Liability Allocation.
Understanding partnership liabilities is critical to understanding a partner’s outside basis. Outside basis is a partner’s basis in his partnership interest. A partner’s outside basis is the sum of his capital account plus his share of the partnership’s liabilities. A separate practice unit, Partner’s Outside Basis, provides an overview of how to calculate a partner’s outside basis in a partnership interest.
