Partnership Taxation: Partnership Distributions under Code Section 731

Summary

This practice note discusses the taxation of a partnership's or a limited liability company's (LLC) distributions to its partners or members. Under Code Section 731, distributions are generally tax-free—an important tax characteristic of pass-through entities. But partnerships and LLCs distribute both cash and property in many different situations and for many different reasons. The result is that many exceptions apply to make certain types of distributions taxable.