Discussion:Property Distributions out of S-Corp

Does anyone use CS Ultra Tax?

I understand that there will certainly be a realized gain, but how do I report the gain AND the property distribution on the schedule K?

Note that if FMV has gone done, no loss is recognized

Therefore the K-1 will carry out the 'profit' and the shareholders have a new basis in the real estate. If this was depreciable real estate you've got some fun on your hands.

For the deemed sale, lets say property is investment land with basis of $20,000 and is worth $50,000. On the books, you would credit asset for $20,000 and credit gain for $30,000. What's the debit? I think the debit is to draw/distribution account. I think of it like the shareholder gave this phantom cash of $50,000 for deemed purchase of property to the corporation and the corporation turns around and distributes it back.

The shareholders basis would increase due to flow throuch of $30,000 gain and decrease for the $50,000 distribution - net effect is their basis is lowered by the adjusted basis of the property.

Does this make sense or am I off in left field?

Kevin, it looks like the loss could have been recognized as the property was distributed pro rata to the shareholders.

336(d) Limitations on recognition of loss

     (1) No loss recognized in certain distributions to related
         persons
       (A) In general
         No loss shall be recognized to a liquidating corporation on
       the distribution of any property to a related person (within
       the meaning of section 267) if -
           (i) such distribution is not pro rata,

Thanks again!

What if the property was received in a like-kind exchange?

credit land 100 credit gain on sale/transfer 50 debit distribution 150

You better believe it! Totally different, like, the Code sections that apply to partnerships don't even start with the same digit as the ones that deal with corporate distributions.

2.) What if the property was [had been?] received in a like-kind exchange?

If that's the case, I would strongly suggest that the property had better be held for use in a trade or business or for investment. Are you thinking there would be different rules for the taxation of a distribution from a partnership depending on whether the distributed property had been acquired, earlier, by the partnership in an exchange that satisfied the Section 1031 requirements?

Yes, the property had been acquired in an LKE a couple of years ago.

The IRS pub I read describes how you would treat distributions or property originally contributed by the partners, but I don't know if that technically applies in this situation since the property was acquired in an LKE.

Since it was acquired in an LKE, you suggest they keep it in the business or as an investment. Is this per the code? Or your personal advice? I'm not questioning you, I just like substantiation for things that come out of the code.

Can you refer me to the section that describes in super duper detail partnership distributions?

Thanks so much!

737 applies if the receiving partner has contributed other appreciated property to the partnership within the past 7-years.

If the 2 preceding sections do not apply, gain is limited by Sec. 731.

I've been reading and re-reading 704 and 737, and, like I mentioned before, it refers to the distributions as "contributed property".

Or, is the fact that the property was acquired in an LKE irrelevant; is it treated as if it were contributed by the partner(s) (based on his/her % of ownership)?

Bleh, so confusing.

Subpart B - Distributions by a Partnership

Sec. 731. Extent of recognition of gain or loss on distribution

Sec. 732. Basis of distributed property other than money

Sec. 733. Basis of distributee partner's interest

Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction

Sec. 735. Character of gain or loss on disposition of distributed property

Sec. 736. Payments to a retiring partner or a deceased partner's successor in interest

Sec. 737. Recognition of precontribution gain in case of certain distributions to contributing partner

When I wrote that the exchanged property had better "be held for use in a trade or business or for investment" I was just being cute. That's a *necessary* condition for the like-kind exchange rule of Section 1031 to have applied to the exchange.

The first issue is whether the receiving partner has contributed other property to the partnership within the last 7 years. If so, there may be a Sec. 737 gain to report on the distribution of the property acquired in the 1031 exchange.

The second issue is that, under 1031, the partnership must hold the property for business or investment purposes before it distributes the property to any of its partners. If the partnership has held the property for at least 2 years, I would say that this requirement has been satisfied.

Issue number 2: Yes, the property has been held for at least two years, so that answers that question.

Thanks Riley.