In previous articles liability relief from a partnership has been discussed. Generally, liability relief from a partnership is deemed a distribution to the partner who has been relieved of the liability. But, what happens when a partner is relieved of liability at the liquidation of the partnership? Can liability relief be deemed a liquidating distribution to a partner in a partnership? The article below has been prepared by a tax attorney in Denver, Colorado from The McGuire Law Firm to provide additional information regarding this issue. Please remember to consult your tax attorney or business attorney directly regarding any related issues.
In regards to the question asked above, the answer is yes. Just as with normal partnership distributions, liquidating distributions include not only money, but any relief from partnership liabilities. Under Internal Revenue Code Section 752, a deemed distribution of cash or money is attributable to recourse liability relief when the deemed distributee (partner being relieved of liability) would no longer bear the economic risk of loss for the recourse liability of the partnership as a tax partner. Often the question arises, when is a withdrawing partner relieved of a liability? The general rule may be that a partner has immediate liability relief for any of the partnership liabilities that the continuing partnership maintains. Under Private Letter Ruling 9622014, a selling partner will include guaranteed partnership liability in their amount realized when the purchasing partner indemnified the partners, even though the lender actually refused to release the withdrawing partner from the liability. Thus, there was a deemed distribution even though technically the withdrawing partner would have still been liable to the bank under the terms of the bank loan.
What happens when the partner or partners receive a series of liquidating distributions? When a partnership liquidates and the distributions are made through a series of liquidating distributions, recourse and non-recourse liability relief may not occur until the final distribution is received. The reasoning behind this matter is that a withdrawing partner remains a tax partner of the partnership until the final distribution is received from the partnership.
If you are considering withdrawing from a partnership or liquidating a partnership, it is important to under the tax implications of the distributions from the partnership you will receive and how debt relief can be treated. You can speak with a Denver tax attorney by contacting The McGuire Law Firm. The McGuire Law Firm provides a free consultation with a Denver Tax Attorney to all potential clients.
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