Tax treatment loss liquidating distributions

Initially, your basis is equal to the amount of cash plus your basis -- or cost -- in any property contributed to the business.

Your basis increases and decreases over the years for required adjustments to arrive at adjusted basis -- the amount you'll use to calculate gain or loss after the liquidation.

A loss results when the liquidating distribution is less than the partner's basis in the partnership.

Partners, however, can only take a loss on their returns if it's solely the result of a liquidating distribution of cash, outstanding partnership receivables or inventory items.

Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder.[6] The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.

Only partners who receive a liquidating distribution of cash may have an immediate taxable gain or loss to report.

Liquidation is a taxable event for both the shareholder and the corporation. Like the “Redemptions Not Equivalent to Dividends” test of I.

A corporation may liquidate by (a) paying off creditors and distributing the remaining assets in kind to the shareholders or (b) selling assets, paying off creditors, and distributing the remaining cash to the shareholders.

Provided the liquidation terminates your entire interest in the partnership, your tax basis in the distributed property is equal to your adjusted basis in the partnership interest minus the cash distributed to you.

Regardless of the amount of cash you receive, your basis in the distributed property is never less than zero.

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If the partnership distributes property -- anything other than cash and property treated as cash -- during its liquidation, it has no immediate tax effect.

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