Liquidating distribution for partnership
However, the distribution of property subject to debt out of the partnership can easily be treated as a taxable transaction despite Section 731(a).The significant issue is that upon the distribution in complete liquidation, the adjusted tax basis for the distributed property may be less (and sometimes much less) than the tax basis in the hands of the partnership.No business entity is clearly superior in all cases.While different circumstances call for different entity choices, there is at least one constant in business. Human beings have weaknesses, vulnerabilities, varying degrees of emotional management, and differing ethical codes.The IP Members argued that the Fair Market Value of their Units was the product of the enterprise gross value multiplied by their share of profits.Under this approach, the brainy folks were entitled to about 4,000 each.In other words, for each Unit, a departing Member receives the net amount that person would receive as to that Unit if the Company sold all of its assets for fair market value in liquidation.
The partnership can distribute the assets to the partners as in exchange for each partner’s interest, subject to a tenancy in common agreement.A relatively recent Delaware case highlights the perils of failing to clearly and unambiguously addressing these differences where a partner’s interest is “redeemed”. That act triggered a provision in the LLC Agreement granting the LLC the right to buy out the IP Members’ interests in the LLC (their Units).The buyout provision in the LLC Agreement stated that amount to be paid for their Units (in this case) is the Fair Market Value of their Units.And even if it were a distribution, it could be a distribution that is made differently than distributions under the LLC Agreement’s liquidating distributions provisions.Vice Chancellor Noble’s statements on distributions seem suspect to me.