C’s actual share of the distribution is 3.3% (,000 divided by
C’s actual share of the distribution is 3.3% ($50,000 divided by $1.5 million).As a result, C will never be entitled to receive 10% of the Hurdle Amount.||
C’s actual share of the distribution is 3.3% ($50,000 divided by $1.5 million)..5 million).
The inside basis is the partnership's tax basis in the individual assets.
The outside basis is the tax basis of each individual partner's interest in the partnership.
In order to satisfy this requirement, it is imperative that the capital accounts of the existing partners/members (excluding the partner/member receiving a profits interest) be “grossed-up” to reflect the net fair market value of the assets of the partnership/LLC (the so-called “Hurdle Amount”) and that any distributions from the partnership/LLC first be made to such existing partners/members in an amount equal to the Hurdle Amount before any distributions are made to the holder of the profits interest.
Thus, for example, if an LLC owned by two members (A and B) grants a 10% profits interest to a service-provider (C) at a time when the LLC’s Hurdle Amount is $1 million, if the LLC later wishes to distribute cash of $1.5 million, the first $1 million (Hurdle Amount) must be distributed to A and B before C is entitled to received its 10% share of the remaining $500,000 (i.e., $50,000).
This was more of a “cash follows tax” approach, in which the operating agreement provided a calculation for the allocation of taxable income/loss and distributions were then made based on the balance of the each partner’s capital account.
The Regulation provides a safe harbor for economic effect if:1.
Other times, partnerships go bankrupt and are forced to liquidate in order to pay off their creditors.
Either way, the partnership liquidation process is similar.
Whether earnings are retained in a partnership or distributed to partners has no affect on the taxation of those earnings, since the partners have to pay tax on the earnings whether they are distributed or not.
Earnings are distributed to each partner's capital account from which distributions are charged against.
If you sold your partnership interest for ,000, you would recognize a gain of ,000, whereas your partner, if she sold at the same price, would recognize no gain.