Liquidating and Nonliquidating Distributions

DQ #1 Liquidating and Nonliquidating Distributions

Due Day 2 Wednesday

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Question:

What is a liquidating distribution? What is a nonliquidating distribution? Provide an example of each.

Distributions from a partnership fall into two categories: liquidating distributions and

nonliquidating (or current) distributions. A liquidating distribution is a single distribution,

or one of a planned series of distributions, that terminates a partner’s entire interest in the

partnership. All other distributions, including those that substantially reduce a partner’s

interest in the partnership, are governed by the nonliquidating (current) distribution rules.

There are two types of distributions from partnerships and S corps: liquidating and non-liquidating (current) distributions.

A liquidating distribution can either be a single distributing or one of many distributions that terminates the partner’s interest in the going concern. For example, if a partner wishes to terminate their interest and they have $10K invested and $10K in undistributed earnings owed to them, a liquidating distribution would pay the partner $20K. The partner would no longer have any interest.

A non-liquidating (current) distribution is any distribution other than a liquidating distribution. In this type of distribution, the partnership can distribute either cash or noncash property to the partner as a draw against their basis, while not totally depleting their interest. A partner’s basis in a going concern is the total of their investment and undistributed earnings that have already been taxed. As such, the partner receives either or both their undistributed earnings and investment while still maintaining an interest in the partnership.

For example, if a partner wishes to receive a non-liquidating distribution and they have $10K invested and $10K in undistributed earnings owed to them, a...