Tax on a liquidating distribution

Also, the income or loss that is allocated in a partnership agreement is Sec.

704(b) book income or loss—not taxable income or loss.

Most partnership agreements, however, require that taxable income or loss be allocated in the same manner as Sec. For purposes of this article, unless indicated otherwise, the terms “partnership allocation” or “partnership allocations” mean allocations of partnership Sec.

704(b) book income or loss, but with the assumption that the partnership agreement requires that partnership taxable income or loss be allocated in the same manner as partnership Sec. Starting in the early 1990s, however, a new method of wedding the partnership’s tax and economic consequences arose (so-called targeted, or forced, allocations 5).

tax on a liquidating distribution-74tax on a liquidating distribution-70tax on a liquidating distribution-68tax on a liquidating distribution-61

For partnerships liquidating in accordance with the partners’ capital accounts, partnership allocations were, and still are, drafted to attempt to cause the partners’ ending capital accounts to achieve the desired economic deal (so-called safe-harbor, or layer cake, allocations 4).

If a Solo 401(k) Plan participant is eligible to take a distribution and elects to take a distribution prior to 591/2, the Plan Administrator of the Solo 401(k) Plan is require to withhold 20% of the distribution amount.

Note – in order for the Solo 401K Plan participant to take a distribution there must be a plan trigger event or the distribution funds must be from a rollover.

In next month’s issue, part II discusses some issues targeted allocations raise and recommends guidance the IRS should issue.

As stated above, when drafting safe-harbor allocations, the goal is to draft a set of allocations that will cause the partners’ ending capital account balances to achieve a given economic deal and then to liquidate the partnership in accordance with those balances.

This two-part article first discusses the rules governing safe-harbor allocations.

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