Gain recognized is limited to the difference between the FMV of the property received over the LLC basis at the time of distribution. 704(c) gain is then gone when the contributing partner leaves.
The partner who contributed the property has then paid tax on the pre-contribution gain from the original property. 737(c)(2) provides the partnership with a step-up in basis equal to the gain recognized by the departing partner.
Once the process is complete, the business is dissolved.
This is not the same as its debts being discharged, as happens when an individual files for Chapter 7.
The company’s operations are brought to an end, and its assets are divvied up among creditors and shareholders, according to the priority of their claims. Not all bankruptcies involve liquidation; Chapter 11, for example, involves rehabilitating the bankrupt entity and restructuring its debts.
Although theoretically logical, the calculation and allocation of this income can be challenging, especially when there are other factors (such as loans, special allocations and multiple member withdrawals) to consider. The income is treated as ordinary to the liquidated partner, but the related accrued expense is not. Example: LLC, T, has 0 of cash-basis accounts receivable (AR.), of cash-basis accounts payable and net equity of . The member's share of AR was , and it is reduced to zero. This will be reported on the Schedule K-1 of the liquidated partner as ordinary income. 737, distributions made within seven years to a member that contributed property with Sec.
The most senior claims belong to secured creditors, who have collateral on loans to the business.
These lenders will seize the collateral and sell it—often at a significant discount, due to the short time frames involved.
In fact, no gain is recognized in a distribution of property and cash to a partner, even in a liquidation of interest, unless the cash distributed exceeds the partnership basis.
Loss is never recognized by a partner in liquidation unless the property distributed consists entirely of cash, unrealized receivables, inventory or a combination of the three.