Question

Javier is retiring from the JKL Partnership. In January of the current​ year, he has a​ $100,000 basis in his partnership interest when he receives a​ $10,000 cash distribution. The partnership plans to distribute​ $10,000 each month this​ year, and Javier will cease to be a partner after the December payment. Is the January payment to Javier a current distribution or a liquidating​ distribution?

Answer 1

Answer: Liquidating distribution

Step-by-step explanation:

A Liquidating distribution refers to when a company completely terminates the partnership of one of its partners by issuing a distribution that covers the basis of the Partners Capital. In other words, the entire amount of the Shareholders equity is distributed.

Javier was paid the liquidating Distribution knowing that he would leave the company after the last payment.

It is worthy of note that if the Distribution exceeds the amount of the partner's basis which in this case is $100,000, that constitutes a gain on their part. Javier therefore is making a gain.

Answer 2

The payments are all part of a LIQUIDATING DISTRIBUTION

Explanation:

The payments are all part of a LIQUIDATING DISTRIBUTION and not current distribution because a liquidation distribution can said to be a single distribution or one of a planned series of distributions that terminates a partner's entire interest in the partnership while Current distributions can be said to be all other distributions thay include those that reduce or decrease a partner's interest in the partnership.

Therefore in accordance with the liquidation, distribution laws Javier would have to recognize a gain or profit of $20,000 at the end of the year so to the fact that he only had $100,000 basis but is receiving $120,000 (12*10000).

Thus the partnership will not have to recognize a gain or a loss according to the information provided.