Family Limited Partnership Distributions / Liquidating Dist

Technical topics regarding tax preparation.
#1
kjwcpa  
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24-Mar-2022 11:21am
Location:
Pasadena, CA
Hi Everyone,

I have two questions relating to liquidating events / distributions from a FLP that is classified as an investment partnership (solely holds actively traded securities and cash).

1) I am familiar with how distributions of marketable securities are treated as distributions of money and the three exceptions under IRC 731(c)(3)(A), but would like to know if the exception for the return of assets to the original contributing partner or the exception for an investment partnership still apply if the partner in question is being liquidated. I believe the answer is yes given Reg. 1.731-1(a)(1)(i) and Reg 1.731-2.

As an example, the LP in questions contributes 100 shares of XYZ co in year 1 with a basis and FMV of $100 in total ($1/share). Four other LP's contribute $100 in cash. In year three, their interest is redeemed/liquidated by distributing the 100 shares of XYZ co which have now appreciated to $200 ($2/share).

From my perspective, the exceptions should still apply and there should be no taxable event given the stock contributing LP is in the same economic place they were to begin with, the only caveat being the FLP held title to the securities for a period of time.

2) Essentially the same scenario as item number one, except for the contributing LP was a trust (IDGT) whose grantor/beneficiary has since passed away. If a distribution were made now, returning the original contribution of stock to the trust (now with successor beneficiaries), there should still be no gain or loss on distribution - correct?
 

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