Partnership's Unrealized Receivables

Technical topics regarding tax preparation.
#1
CP Hay  
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Partnership is liquidating. The distributive share of receivables is in excess of some of the partners' basis. How does a partner receive unrealized A/R? Is that just to calculate any gain/loss to the partners? Also, what happens in the event that the receivables are collected after the dissolution of the partnership?
 

#2
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The distributive share of receivables is in excess of some of the partners' basis. How does a partner receive unrealized A/R?

Is the partnership on the cash method? How about 1.732-1(c)(1)(i)
Except as provided in paragraph (c)(1)(iii) of this section, the basis to be allocated to properties distributed to a partner under section 732(a)(2) or (b) is allocated first to any unrealized receivables (as defined in section 751(c)) and inventory items (as defined in section 751(d)(2)) in an amount equal to the adjusted basis of each such property to the partnership immediately before the distribution.

If the unrealized receivables have no tax basis to the partnership, then I believe they would be distributed out with zero tax basis as well. Income would be recognized when cash is received for the receivables. Income would retain its ordinary character.
 

#3
CP Hay  
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Partnership is using the accrual method
 

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How does a partner receive unrealized A/R?

Partnership is using the accrual method

So these aren't unrealized receivables?
The distributive share of receivables is in excess of some of the partners' basis.

This is tricky, but I'll take a wack at it. I think you'd decrease the basis of the receivables upon distribution under 1.732-1(c)(2)(i) so that no gain or loss is recognized on liquidation (assuming no other property is transferred). When cash is received on the receivables later, and here's where I speculate a bit, the gain is capital (not ordinary).
 

#5
Doug M  
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Look at §751(c) where it states

For purposes of this subchapter, the term “unrealized receivables” includes, to the extent not previously includible in income under the method of accounting used by the partnership....,

Since the receivables have already been recognized as income, you have no unrealized receivables (other assets maybe, but not A/R)

https://www.law.cornell.edu/uscode/text/26/751
 

#6
CP Hay  
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What though if the partnership dissolves and then next year determines that those receivable won't be collected after all. Seems like a pain to have to go back and amend. If a partnership has a lot of A/R it's almost inevitable that some go uncollectible. I'm curious to know if anyone has experienced this.
 

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CP Hay wrote:What though if the partnership dissolves and then next year determines that those receivable won't be collected after all. Seems like a pain to have to go back and amend. If a partnership has a lot of A/R it's almost inevitable that some go uncollectible. I'm curious to know if anyone has experienced this.


Why would you have to go back and amend anything? If the accounts receivable were distributed to the partners upon liquidation, the partners now own the AR. Everything would now be handled at the partner level.
 

#8
CP Hay  
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What happens though if, after the A/R is distributed, the partners are unable to collect?
 

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CP Hay wrote:What happens though if, after the A/R is distributed, the partners are unable to collect?


The partners would have a loss to the extent of their basis in the receivable.
 

#10
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What happens though if, after the A/R is distributed, the partners are unable to collect?

This is what I speculated about in previous post 4. Because the receivables aren't unrealized receivables, I believe the sale of those assets are capital in nature. 1.735-1(a)(1) states
Any gain realized or loss sustained by a partner on a sale or exchange or other disposition of unrealized receivables (as defined in paragraph (c)(1) of § 1.751-1) received by him in a distribution from a partnership shall be considered gain or loss from the sale or exchange of property other than a capital asset.

I think you'd also need to apply the holding period rules of 1.735-1(b), possibly making the gain/loss on disposition of the receives short-term. Maybe set up an installment sale for the receivables if the collection takes place over multiple tax years. Depending on the basis of the receivables and the amount collected, you could wind up with ST/LT cap gain/loss.
 

#11
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Permanently-Diff wrote:This is what I speculated about in previous post 4. Because the receivables aren't unrealized receivables, I believe the sale of those assets are capital in nature.


But there is no sale of an asset here, only the collection of a distributed A/R. Also, this A/R in the hands of the partner is not a capital asset since the original sale at the partnership level constituted ordinary income. If the A/R is not collectible, then the partners have an ordinary loss to the extent of their basis in the receivable.
 

#12
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But there is no sale of an asset here, only the collection of a distributed A/R.

If you sold land in exchange for a note, and collected the money over x years, isn't that still a sale albeit an installment sale?
Also, this A/R in the hands of the partner is not a capital asset since the original sale at the partnership level constituted ordinary income.

You're correct. The receivables would be considered inventory under 1.735-1(a)(2). The receivables are considered inventory under 751(d)(2) as they are not capital assets to the partnership under 1221(a)(4). So that would mean you couldn't installment sale them, which brings us back to the original question, how to report the collection of the AR. What if the collection spans multiple tax years?
 

#13
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If you sold land in exchange for a note, and collected the money over x years, isn't that still a sale albeit an installment sale?


Of course. But I'm not getting the correlation here.

So that would mean you couldn't installment sale them, which brings us back to the original question, how to report the collection of the AR. What if the collection spans multiple tax years?


Why would you report the collection of an A/R? It was already reported as a sale at the partnership level; you're just collecting the money. No entity on the accrual basis reports the collection of an A/R.

Now, back to the poster's question: What to do if the A/R can't be collected? Then, you have the reporting of an ordinary loss to the extent of the basis in the A/R.
 

#14
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Why would you report the collection of an A/R?

What if you don't collect all of it? What if you collect some in one tax year and some more in another tax year? What if you collect the AR but the basis of the AR doesn't equal the cash collected? You'd need to report it on the partner's tax return somehow, right?
Of course. But I'm not getting the correlation here.

It's a deferred payment for an asset. One is land, the other is inventory items from a liquidated partnership.
 

#15
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What if you don't collect all of it? What if you collect some in one tax year and some more in another tax year? What if you collect the AR but the basis of the AR doesn't equal the cash collected? You'd need to report it on the partner's tax return somehow, right?


Correct. If the partner fails to collect the entire amount of the receivable then an ordinary loss can be claimed for the unpaid amount on the partner's return.
 


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