Partner's deemed distribution is advance accounted for at end of partnership year.

In a formalization of existing practice, the IRS stated in Rev. Rul. 94-4 that a deemed distribution of money resulting from a decrease in a share of partnership liabilities is treated as an advance and taken into account at the end of a partnership tax year.

Sec. 752(b) provides that a decrease in a partner's share of partnership liabilities is considered a distribution of money by the partnership to a partner. The partner recognizes gain under Sec. 731 (a)(1) if the distribution of money exceeds the adjusted basis of the partner's interest in its partnership before the distribution.

The ruling notes that Rev. Rul. 92-97 treated a deemed distribution of money to a partner under Sec. 752(b) resulting from a cancellation of debt as an advance or drawing against the partner's distributive share of cancellation of indebtedness income under Regs. Sec. 1.731-1(a)(1)(ii). Regs. Sec. 1.731-1(a)(1)(ii) states that, for purposes of Sec. 731, any advance or drawing of money or property against a distributive share is treated as a current distribution made on the last day of the partnership tax year.

Thus, any Sec. 752(b) deemed distribution resulting from a decrease in a partner's liability share is treated as an advance to be netted at year-end against partnership basis.

The ruling also states that a deemed distribution of money resulting from a cancellation of debt may qualify for treatment as an advance or drawing under Rev. Ruls. 94-4 and 92-97.

This ruling is welcome confirmation of what many partnership tax practitioners thought to be the most workable rule for dealing with decreases in partnership liabilities during the tax year that might result in taxable gain.

From Dan Baucum, J.D., Bob Crnkovich, CPA, J.D ., John Schmalz, J.D., and Sam Starr, CPA, J.D., Washington, D.C.