Partnership liquidating distribution marketable securities

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Janet recognizes a gain of 5,000 (0,000 cash less ,000 adjusted basis of one-fourth interest in land J).The partnership takes a basis of 5,000 in land J (0,000 from the purchase and ,000 from the contribution 723).Part of this transaction is a disguised sale, when the contribution of the land and the receipt of the cash payment are viewed together.

Under this general rule, Chuck would recognize ,000 of gain on this liquidating distribution, the amount by which the "money" distributed--,000 (the FMV of the marketable securities)--exceeds his basis in his Royal Monarch interest. Under certain circumstances, the rule may not apply if the distributed security had been contributed to the partnership by the distributee partner or if the security was not a "marketable security" when acquired by the partnership.

As a consequence, the exceptions listed above would not be available to Chuck and Royal Monarch. 731(c) also contains a "gain limitation," under which a distributee does not recognize gain attributable to his share of the partnership's net appreciation for securities of the same class and issuer as those distributed. 731(c)(3) reduces the amount of securities treated as money by the excess of (1) the partner's distributive share of any net gain that would result from the sale of all securities of same class and issuer held by the partnership immediately prior to the distribution for their FMV at the time of the distribution over (2) the partner's distributive share of any net gain that would result from the sale of all such securities held by the partnership immediately after the distribution for the same FMV. Of this, one third--,000--would be allocated to Chuck.

Royal Monarch would hold no such stock after the distribution.

This could include marketable securities not marketable when acquired by Royal Monarch or perhaps stock purchased through a private placement, but which might go public in the near future.

Conclusion If Chuck wishes to avoid recognizing gain on the liquidation of his partnership interest in Royal Monarch Company, the tax adviser should counsel against distributing all 300 shares of the partnership's IBN-TELco stock to Chuck.

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