If the partnership distributes property -- anything other than cash and property treated as cash -- during its liquidation, it has no immediate tax effect.Instead, gain or loss is delayed until you sell the property.When a business operates as a partnership, the partners each report a percentage -- which is usually the same as their percentage of ownership -- of annual earnings on their personal returns.As a result, the tax effects of a partnership that makes liquidating distributions only impacts the partners who receive them.Generally, a creditor of a limited partner can attempt to seize only three types of assets: - Limited partnership interest - Profits or distributions payable to the limited partner - Assets previously transferred to the limited partnership by that debtor-partner Let's examine each possibility: 1.Seizure of the Limited Partnership Interest A creditor of a limited or general partner cannot seize the limited partnership interest.
When considering the limited partnership for protection, the two central questions are: 1. To answer these questions, understand the specific rights and limitations of a partner's personal creditor when that partner's assets are protected through ownership in a limited partnership.
To be taxed as a liquidating distribution, however, a partner's interest in the partnership must terminate.
Only partners who receive a liquidating distribution of cash may have an immediate taxable gain or loss to report.
As with all other aspects of partnership taxation, the dual nature of a partnership for tax purposes — as at times an aggregation of its partners, and at times an entity — complicates the discussion, particularly because no one, including the author, has been able to articulate a comprehensive statement of when the aggregate, and when the entity, aspect should predominate.
Further complication arises because the “tax” partnership includes not only entities organized as general partnerships or limited partnerships (“LP”) under state law, but also the newer forms of limited liability partnerships (“LLP”), initially primarily for professionals, and the increasingly popular limited liability company (“LLC”). Adjustment to Partnership's Basis in Assets Under 734(b) 1.