Treatment of liquidating
If the Cash Liquidation Distributions exceed the cost basis, the portion of the Cash Liquidation Distributions that exceeds basis is considered a capital gain and taxed accordingly.Whether you report the gain as a long-term or short-term capital gain depends on how long you have held the stock.If the partnership’s inventory is appreciated, that partner will have ordinary income on a sale but not upon liquidation.(In the case of “substantially appreciated” partnership inventory, the departing partner will have ordinary income regardless of whether the transaction is a sale or liquidation.) Furthermore, whereas the remaining partners will receive a cost basis for the departing partner’s share of the inventory if the transaction is a liquidation, the remaining partners in the case of a transaction structured as a sale will be able to increase their basis only if a Section 754 election is in effect.Q: How do I calculate the cost basis of the investment?A: Use the calculator below, or take the following steps to make the calculation: According to IRS pronouncements, including IRS Publication 550 (excerpts of which are reproduced below), the calculations should generally be computed separately for each block of shares owned by a taxpayer (i.e., shares acquired in multiple transactions at different times), although use of an average cost across multiple blocks of stock is permitted in certain cases.
In a sale, by contrast, any payment received upon a purchase of a partnership interest that is attributable to partnership goodwill is generally treated as capital gain and is not deductible by the remaining partners.
Q: What are the tax implications for Box 8, Cash Liquidation Distributions for Taxable Accounts (such as individual or joint tenant type accounts)?
A: A Cash Liquidation Distribution is a non-taxable distribution until such time that the total Cash Liquidation Distributions received exceed the cost basis of the investment.
The termination of a partnership not only creates administrative hassles, but will also give rise to certain constructive transactions that may have undesirable tax results.
By contrast, a liquidation of a partner’s interest in the partnership will not cause such a termination, even if the partner has a 50-percent or greater interest in the partnership.