When are partnership liquidating distributions required

Only partners who receive a liquidating distribution of cash may have an immediate taxable gain or loss to report.The value of marketable securities, such as stock investments that are traded on a public stock exchange, and decreases to your share of the partnership's debt are both treated as cash distributions.

As stated in Taxation of Limited Liability Companies and Partnerships, limited liability companies are taxed as partnerships by default.

Before you can figure out the tax effects of the liquidation, you'll need to know your adjusted tax basis in the partnership.

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

The partner’s basis in his partnership interest in increased by: These basis adjustments depend in large part on the allocation of partnership income, gains, losses, deductions, and credit among the partners.

The partnership agreement determines the allocation of these items.[14] If the partnership agreement is silent, these items are allocated in accordance with the partnership interests.[15] If the partnership agreement allocates partnership items among the partners, the allocation is respected as long as one of the following is true: If an allocation does not meet one of these requirements, the allocation of income, gain, loss, deduction, or credit is reallocated in accordance with the partner’s interest in the partnership.[20] Special rules apply to allocations of property with built-in gain and loss.[21] Important Note: The rules governing substantial economic effect are complex and must be given special consideration if the partnership agreement or operating agreement provides for allocations other than in accordance with each partner’s interest in the partnership.

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