Partnership Assets: Sale or Distribution

[equinecpa]

I am doing a partnership return where the partnership liquidated most (but not all) of their assets (horses). The partnership has four partners (two couples).

One couple bought several of the horses from the partnership at FMV. These horses were a combination of capital assets and inventory to the partnership. Would the transfer of these horses be considered sales or distributions? The purchasing couple paid the other partners for their share of the horses.

I'm thinking these transactions were sales since the partners didn't receive any preferential treatment and the transaction was made at FMV.

[erchess]

Ok

My knowledge of partnerships is um Limited (to coin a phrase) but why do you not have both a sale (of the other partner's shares of the horses) and a distribution (to the buyers of their own shares of the same horses)? Furthermore, do not the buyers of the horses have taxable income equal to their share of the horses and are not the other shareholders unhappy that some have income and others do not?

And by the way why did not the partnership sell the horses to the interested partners at FULL FMV and then have that much more cash to distribute to everyone upon liquidation of the partnership?

[JON]

Buy out of partner.

Terminates the partnership, unless (h) and (w)s made up 4 partners. The taxable portion is to the ones giving up the partnership interest- the remaining elect 754 step up, if still in partnership or assign value seperately for acquring second half of the assets-
Schedule C/or where you will be reporting it.

[erchess]

What am I misssing?

Is the partnership dissolving or merely selling most of its assets to partners?

By the way the people who taught me all I know about Partnerships taught me this Golden Rule. Partnerships should never sell to partners. If there is an asset which in all honesty the partnership needs to get rid of, it should be sold at arm's length to a non partner even if one of the partners needs for some reason to buy exactly that item for purposes not related to the partnership. The logic is that the rules regarding sales to partners are so full of penalties put in place to stop tax cheating that everyone comes out ahead if this rule is followed.

[equinecpa]

This is not a liquidation -they sold most of the assets but not all, so not a liquidation. I should also clarify that there were many horses sold to parties outside the partnership, and just a few were sold to one set of partners.

I'm wondering if there would be any harm in treating the partner sales as arms length transactions. The inventory horses I would imagine it would be quite fair to record as a sale since they were sold much above partnership adjusted cost basis (zero). and would probably be considered substantially appreciated inventory. The capital asset horses are probably the problem. They were sold at FMV but that FMV was less than the partnership ACB in the horses (the performance horse market was not good in 2007).

[les grans]

From your own description, the "purchasing" partners paid the "non-purchasing" partners for "their shares" in the horses: "The purchasing couple paid the other partners for their share of the horses."
If that's the transaction, it seems pretty clear that you have, first, a distribution of prorata interest in the horses to all the partners, and then a purchase of fractional interests in the horses by the "purchasing" partners from the "non-purchasing" partners on your hands.
You did say that the "non-purchasing" partners were paid directly by the "purchasing" partners for their pro rata interests in the horses didn't you? That implies that their interests in the horses were distributed from the partnership to all four partners, and then the "purchasing" partners paid the "non-purchasing" partners [i.e., the "selling partners"] for their pro rata interests in the horses, "outside" the partnership.
You've got really only two transactions: a distribution to all four partners, followed by a sale from two of the partners to the other two. The distribution has certain rules that apply to it, and the sale has other rules. I think, intuitively, that the purchasing partners will end up with bifurcated [I don't know what else to call it] tax basis in the horses they acquired; part by distribution and part by purchase. And then, you point out that there are two types of horse ["capital" and "inventory" I think you called them. Are the horses with no tax basis really "inventory" - held for sale, and yielding ordinary income when sold?]
Yes, partnership transactions are difficult to account for, but I think in this case you have a finite number of transactions, like this: distribution of horse with tax basis, distribution of horse without tax basis, sale of interest in horse with tax basis, and sale of interest in horse without tax basis.

Or did the purchasing partners pay 100% of the market value of the distributed horses to the partnership?

[equinecpa]

...

Or did the purchasing partners pay 100% of the market value of the distributed horses to the partnership?

This latter is almost the case.

The one set of partners purchased the horses for FMV. They cut a check for 1/2 the FMV directly to the other set of partners only because they didn't do the paperwork quite right (or wanted to skip writing an extra check, who knows). The partnership actually sold the horses to the purchasing partners (that's what the sales invoice says). For all the unrelated party horse sales, a partner distribution was made immediately after the sale to each partner for their interest in the proceeds.

Horses with no basis are definitely inventory -they are young stock not put into any productive use.

So basically how do you treat a sale of a depreciated asset at less than ACB (but at FMV) to two 25% partners - I see the rules for more than 50% but can't see any special provisions for 50%.

Carolyn