Black Letter Outline on Partnership Taxation
Authors:
Schwarz, Stephen / Lathrope, Daniel J. / Hellwig, Brant J.
Edition:
9th
Copyright Date:
2019
23 chapters
have results for Tax
Chapter V Partnership Allocations: § 704(b) 81 23 results (showing 5 best matches)
- A and B are equal partners in the AB partnership. Over the next several years, A expects to be taxed at the highest federal tax rate and B expects to be taxed at the lowest. There is also a strong likelihood that over the next several years AB will realize approximately equal amounts of taxable interest and tax-exempt interest. The AB partnership agreement complies with The Big Three. Assume the partners allocate a disproportionate amount of the tax-exempt interest to A and a disproportionate amount of the taxable interest to B so as to take advantage of their respective tax rates and increase their total after-tax returns from the partnership. Such allocations would have economic effect but the economic effect will not be substantial. At the time the allocation became part of the partnership agreement, the after-tax economic consequences of A are expected to be enhanced and there is a strong likelihood that the after-tax economic consequences of neither A nor B will be... ...tax...
- Under the regulations, the general rule is that the economic effect of an allocation is not substantial if, at the time the allocation becomes part of the partnership agreement: (1) the after-tax economic consequences of at least one partner may, in present value terms, be enhanced compared to such consequences if the allocation were not contained in the partnership agreement, and (2) there is a strong likelihood that the after-tax economic consequences of no partner will, in present value terms, be substantially diminished compared to such consequences if the allocation were not contained in the partnership agreement. In determining the after-tax economic benefit or detriment to a partner, the interaction of the allocation with the partner’s nonpartnership tax attributes is considered. Id economic effect, it must have the potential to actually impact the economic relationship among the partners, apart from the tax results.
- C and D are equal partners in the CD partnership. In the partnership agreement, C and D agree to comply with The Big Three. C expects to be taxed at the highest federal tax rate during the current year and D expects to be taxed at the lowest. During the current taxable year, C and D agree to share the first $10,000 of the partnership’s tax-exempt income on a 90/10 basis (90% to C, 10% to D), and the first $10,000 of the partnership’s dividend income on a 10/90 basis (10% to C, 90% to D). The allocations will have economic effect. If there is a strong likelihood that the partnership will earn more than $10,000 of both tax-exempt income and dividends, the economic effect of the allocations will not be substantial because the net increases and decreases in C’s and D’s capital accounts will be the same as they would have been if the allocations had not been made and the partner’s total tax liability is reduced. Assuming the partnership realizes at least $10,000 of both tax-exempt income...
- E and F are equal partners in the EF partnership. In the partnership agreement E and F agree to comply with The Big Three. For the next three years the partnership will invest in equal amounts of tax-exempt bonds and corporate stock and over that period of time E expects to be in a higher tax bracket than F. Assume that during the three-year period the partners agree to allocate the tax-exempt interest 90% to E and 10% to F, and the dividends 10% to E and 90% to F. If there is a strong likelihood that the amount of tax-exempt interest and dividends realized will not differ substantially over the three-year period, the economic effect of the allocations will not be substantial because at the end of that period the net increases and decreases to the partners’ capital accounts will be the same as they would have been without the allocations and the tax paid by the partners will be reduced. If the tax-exempt interest and dividends are the same over the three-year period, they will be...
- A and B form the AB partnership with each contributing $50,000. A and B agree to comply with The Big Three. AB purchases $50,000 of stock and $50,000 of tax-exempt bonds and there is a strong likelihood the stock and bonds will produce approximately equal amounts of dividend income and tax-exempt interest. In Year 1, A expects to be in a higher marginal tax bracket than B. A and B agree that in Year 1 the tax-exempt interest will be allocated 90% to A, 10% to B and the dividend income will be allocated 10% to A and 90% to B.
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Chapter XV S Corporations 215 83 results (showing 5 best matches)
- The principal benefit of a corporation making an S election is relief from paying all corporate-level taxes. Thus, an S corporation is not subject to the § 11 tax on corporate taxable income, and various penalty taxes such as the § 531 accumulated earnings tax and the § 541 personal holding company tax. S corporations with a prior C corporation history, however, are subject to taxation in certain limited circumstances.
- Profits distributed as dividends by a C corporation to its shareholders generally are subject to tax at both the corporate and shareholder levels. A C corporation is subject to the tax under § 11 on its taxable income at a flat rate of 21%. When the after-tax profits are distributed, noncorporate shareholders are taxed on most dividends as net capital gain at a maximum rate of 20% (23.8% for high-income taxpayers subject to the additional tax on net investment income). §§ § 701. The partners are taxed directly on the income from the enterprise, and partnership distributions generally do not produce additional taxable income. §§
- Wages received by employees are subject to federal employment (Social Security and Medicare) taxes, which are paid equally by the employer and employee at a combined rate of 15.3% on wages up to an indexed threshold ($132,900 in 2019) and at 2.9% (the Medicare portion) on all wages above the threshold. Self-employed taxpayers (including general partners and member-managers of LLCs) are subject to self-employment tax, using the same rates and thresholds. An additional 0.9% Medicare tax is imposed on wages and self-employment earnings of high-income taxpayers. S corporations and their owner-employees must pay Social Security and Medicare taxes on wages paid for services rendered ...partners and LLC members who are active in the business, their pro rata shares of the entity’s net business income, whether or not distributed, are not subject to self-employment tax. The pro rata shares of trade or business income of S corporation owners who are active in the business also are not subject...
- An S corporation is required to calculate its gross income and taxable income in order to determine the tax items that pass through to the shareholders. §§ 1363(b). An S corporation also must file its own tax return (Form 1120S) and is subject to audit and examination by the Internal Revenue Service.
- § 1374 continues to apply to the payments received after the recognition period. The gain in later years will be taxed to the extent it would have been taxed under
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Chapter I Introduction 29 37 results (showing 5 best matches)
- For most of our early tax history, the maximum individual tax rate on ordinary income was much higher than the top corporate rate. Despite the double tax, this rate differential motivated taxpayers to operate profitable businesses as C corporations. The typical strategy was to distribute profits to owner-employees in the form of tax-deductible compensation or interest and accumulate what was left in the corporation. Accumulated profits would compound at a lower rate of tax and often were later withdrawn at highly preferential capital gains rates when the business was sold, or tax-free after an owner died. Congress enacted several anti-avoidance provisions, such as the accumulated earnings and personal holding company taxes, to curtail these strategies.
- Our system of taxing business organizations has been influenced by at least four broad tax policy decisions. The relationship of these policies impacts taxpayer behavior, both as to the choice of form in which to conduct a business and the tax saving opportunities within each form. Tax legislation enacted over the past several decades has radically altered some of these policies and contributed to instability in the system. As a result, some cases and Code sections that traditionally were studied in business enterprise tax courses (and are still included in some casebooks) are obsolete or less significant, but they could become important again with future changes in the law. The following discussion is a greatly simplified overview of the most influential policies and their past and present impact on taxation of business organizations.
- Under the entity concept, a business organization is viewed as an entity that is separate and distinct from its owners. As such, the entity is subject to tax on its taxable income, and transactions between the owners and the entity are taxable events unless a specific provision of the Internal Revenue Code provides for nonrecognition of gain or loss. This is often referred to as “a double tax regime.”
- Partnerships and S corporations are taxed under a hybrid model that treats an organization as a separate entity for some purposes (e.g., determination of income, filing of tax returns) and as an aggregate for other purposes (e.g., by passing through
- §§ 701–761), partnerships and limited liability companies are not treated as separate taxpaying entities. Partnership income and deductions pass through to the individual partners and are taxed at the partner level. A partnership, however, is treated as an accounting entity for purposes of determining its income, and it must file an informational tax return showing how all the partnership’s tax items have been allocated among the partners. A partnership and its partners also are taxed under an entity or modified-entity approach in several substantive contexts, such as formation and termination, transactions between partners and partnerships, and sales of partnership interests. The rules in Subchapter K fall into four principal categories:
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Chapter IV Partnership Operations: General Rules 61 36 results (showing 5 best matches)
- The characterization of tax items is determined at the partnership level. (holding period for long-term capital gain is based on the partnership’s holding period for the asset). The partnership must separately state certain items to preserve their unique character as they pass through to the partners. This enables the partners to combine the passed through items with their nonpartnership tax items when computing tax liability. The tax items required to be separately stated are listed in § 1231 gains and losses, charitable contributions, dividends taxed as net capital gain or eligible for the dividends received deduction, and foreign taxes. § 702(a) (1)–(6). This list is expanded by the regulations to include any other tax item (e.g., § 1202 capital gain on qualified small business stock or capital gain on a collectible taxed at a 28% rate) which if separately taken into account by any partner could affect the tax liability of that partner or any other person. ...). Tax items...
- A recurring issue throughout Subchapter K is whether a partnership is treated for tax purposes as an aggregate of its individual partners or an entity separate and apart from its partners. The Code does not exclusively use either approach. Partnerships are treated as entities for some tax purposes and aggregates for others. For example, partnership income is taxed directly to its partners under an aggregate theory. § 701. At other times, the Code blends the two theories and adopts a modified aggregate or entity approach to determine the tax results to the partners. As you study partnership operations, it is important to focus upon the particular approach that the Code employs.
- Even though a partnership is not a taxable entity, it must calculate its gross income and taxable income to determine the tax results to its partners. §§ 703(a). A partnership also must file its own informational tax return by the 15th day of the third month following the end of its taxable year and is subject to audit and examination by the Internal Revenue Service. §§
- § 706(b) mechanical rules, provided the year selected results in no more than three months of tax deferral. As a cost for this relief, the partnership must make “required payments” under § 7519 which are designed to offset the financial benefits of the tax deferral provided by
- § 1231 gain, and the capital gains and losses are separately stated items because their separate treatment could affect the tax liability of a particular partner depending on the partner’s personal tax results during the year. For example, the § 1245 gain is ordinary income, its tax treatment cannot vary among the partners and thus it is not a separately stated item. Each partner in ABC must include his or her distributive share of the § 1231 gain, LTCG, STCG and nonseparately computed income in the taxable year in which ABC’s October 31 taxable year ends. Calendar year partners would report their distributive shares of these items on their tax return for the following year.
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Chapter VI Partnership Allocations: Income-Shifting Safeguards 101 33 results (showing 5 best matches)
- Under the traditional method, tax depreciation is allocated first to the noncontributing partner in an amount equal to his share of book depreciation and the balance of tax depreciation is allocated to the contributing partner. Reg. § 1.704–3(b)(1). Book and tax depreciation must be computed using the same depreciation method and useful life. )(3). The ceiling rule, however, limits the tax depreciation allocated to the noncontributing partner to the partnership’s total tax depreciation with respect to the contributed property.
- § 704(c) allocations using the remedial method and that the straight-line method will be used to recover any excess book basis. Assume that the equipment, which has a $4,000 tax basis, has 10 years remaining on its 20-year recovery period when it is contributed to LM. Tax depreciation is thus $400 per year for 10 years. Under the remedial method, LM’s book depreciation for each of its first 10 years is $400 ($4,000 tax basis divided by remaining 10 years in recovery period) plus $300 ($6,000 excess of book value over tax basis divided by a new 20-year recovery period), or $700. To simplify the example, book depreciation is determined without regard to any first-year depreciation convention. L and M are each allocated $350 of book depreciation (50% of $700), M is allocated $350 of tax depreciation and L is allocated the remaining $50 of tax depreciation. No remedial allocations are yet necessary because the ceiling rule does not cause a book allocation of depreciation to the... ...tax...
- Assume CD in Example (3) sells the asset contributed by C for $22,000. CD’s tax loss is $2,000 ($22,000 less $24,000 adjusted basis) and it has a $2,000 book gain ($22,000 amount realized less $20,000 book value). Ideally, one would like to allocate $4,000 of tax loss (the amount of the precontribution loss) to C and $1,000 of gain (one-half of the total book gain) to both C and D. The traditional method, however, contains a “ceiling” rule under which § 704(c) allocations are limited to the recognized tax gain or loss of the partnership. Thus, all of the $2,000 tax loss is allocated to C. This has the effect of not requiring D to include the $1,000 of book gain, and the disparity between the partnership’s tax and capital accounts is not totally eliminated.
- A and B form the AB equal partnership with A contributing Oldacre (value $30,000, basis $22,000) and B contributing $30,000 cash. Oldacre is a capital asset. At the end of its first year, AB sells Oldacre for $25,000. Under the traditional method, AB’s $3,000 tax gain ($25,000 amount realized less $22,000 tax basis) is all allocated to A, while the $5,000 book loss ($30,000 book value less $25,000 amount realized) is allocated $2,500 each to A and B. The ceiling rule causes a $2,500 disparity between the partners’ book and tax accounts, requiring $2,500 more tax gain to be allocated to A and $2,500 of tax loss to be allocated to B to cure the disparity. If the partnership had other capital gains and losses, an allocation of $2,500 of capital gain to A and $2,500 of capital loss to B would be reasonable curative allocations because they would offset the disparity caused by the ceiling rule.
- Curative allocations are allocations of tax items actually realized by the partnership. Remedial allocations are tax allocations of income, gain, loss, or deduction created by the partnership that are offset by other tax allocations of income, gain, loss, or deduction created by the partnership. Reg. § 1.704–3(d)(1). Under the remedial method, if the ceiling rule results in a book allocation to a noncontributing partner that differs from the corresponding tax allocation, the partnership makes a remedial allocation to the noncontributing partner equal to the full amount of the disparity and a simultaneous offsetting remedial allocation to the contributing partner. Id. A remedial allocation must have the same effect on each partner’s tax Reg. § 1.704–3(d)(3). Remedial allocations are solely for tax purposes and have no effect on the partnership’s book capital accounts.
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Chapter VIII Compensating the Service Partner 129 35 results (showing 5 best matches)
- Carried interests have received considerable media, academic, and political attention. Critics of the current tax treatment have noted that billions of dollars of what is essentially compensation have been paid to fund managers through carried interests, converting what should be taxed as ordinary income into tax-deferred and preferentially taxed capital gains.
- The profits allocation has become known as a “carried interest.” The tax treatment of carried interests benefits from many of the rules outlined in this chapter. Because it is a profits interest outside the exceptions in , a carried interest may be received tax-free. And because it is received for managing the venture in the service provider’s capacity as a partner, is not fixed in amount, and is usually subject to significant entrepreneurial risk, the carried interest is treated for tax purposes as a distributive share. The profits of many investment partnerships, such as private equity and venture capital funds, largely consist of qualified dividends and long-term capital gains, both taxed at preferential rates. Thus, a significant portion of the fund manager’s income will be tax deferred (receipt of the partnership interest was not taxed) and taxed as profits are realized at preferential capital gains rates.
- For many years, legislation was introduced in Congress to change the tax treatment of carried interests but, despite some bipartisan support, these proposals failed to gain traction. Basically, the proposals would have taxed a fund manager’s share of partnership income as ordinary compensation income, which also would be subject to self-employment tax. The details, however, were extremely complex, and concerns were expressed as to whether the legislation would (or should) extend to other industries, such as real estate development, where service partners active in the business often receive a larger profit share than the limited partner investors. Congress finally addressed these issues in the Tax Cuts and Jobs Act by enacting
- Section 707(a)(1) generally adopts an entity theory for determining the tax consequences of these transactions by providing that if a partner engages in a transaction with a partnership “other than in his capacity as a member of such partnership,” the transaction is to be taxed as if it occurred between the partnership and a nonpartner unless
- The ABC partnership has $150,000 of bottom line income and $50,000 of long-term capital gain for the year. If A receives $50,000 for performing services for the partnership, plus one-third of any remaining partnership income, the classification of A’s services will affect the tax results to A and the remaining partners. If the $50,000 is an allocation of partnership income, A will be taxed on $100,000 of partnership income ($50,000 plus one-third of the remaining $150,000 of partnership income), consisting of $75,000 of ordinary income and $25,000 of long-term capital gain, in the year in which the partnership’s taxable year ends. ...the payment for A’s services is currently deductible, A, B, and C would be taxed on their one-third distributive shares of the partnership’s remaining $100,000 of net income ($150,000 less the $50,000 deduction for A’s services) and $50,000 of long-term capital gain. Thus, each would include $33,333 of ordinary income and $16,666 of long-term... ...taxed...
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Chapter II Classification 39 32 results (showing 5 best matches)
- The classification of a business relationship may have profound tax consequences. Entities classified as “corporations” are subject to the double tax regime of Subchapter C while income realized by a “partnership,” which for tax purposes includes limited liability companies, is taxed directly to the partners under the pass-through taxing scheme of Subchapter K. If a business arrangement is classified as a “partnership,” a partnership tax return (Form 1065) must be filed and tax elections generally must be made at the partnership level. §§
- The choice among a limited partnership, LLC or S corporation may be influenced by state and local tax considerations, including whether the entity’s resident state provides pass-through tax treatment. Other considerations are whether the state imposes an entity-level tax; the tax treatment of nonresident owners; and overall complexity, such as the need for investors to file nonresident returns in many different states.
- The principal disadvantage of a C corporation is the double tax on earnings distributed to shareholders as dividends and, if the corporation holds highly appreciated assets (e.g., real estate), the additional tax cost when the business is sold and liquidated. Historically, however, C corporations were often used by: (1) closely held businesses able to take advantage of the then lower graduated corporate income tax rates by limiting their taxable income to $75,000 or less; and (2) companies intending to reinvest their earnings for the reasonable needs of the business rather than paying dividends. A C corporation was attractive in those situations because of: (1) the ability to minimize any corporate-level tax or defer the shareholder-level tax for a considerable time; or (2) completely avoid the shareholder-level tax upon a shareholder’s death. Beginning in 2018, with the reduction of the corporate income tax rate to 21%, some closely held businesses may find it more advantageous to...
- Tax classification issues generally arise in two settings. In the first, the issue is whether an unincorporated business relationship is an entity separate from its owners, or rather is some other form of arrangement, such as co-ownership of property, employer-employee, principal-agent, debtor-creditor, etc. On this end of the spectrum, the question is whether the business relationship among the parties is such that a separate entity is recognized for tax purposes. If a separate entity is recognized, it generally will be classified as a partnership for federal tax purposes.
- Properties LLC is a series LLC, with two series each of which owns rental real estate. Series 1 has two owners, and Series 2 has one owner. Under the default check-the-box rules, Series 1 is taxed as a partnership and Series 2 is a disregarded entity, but either series could elect to be taxed as a corporation.
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Chapter XI Operating Distributions 169 11 results (showing 5 best matches)
- Because partners are taxed directly on partnership income under an aggregate theory, Subchapter K has rules which generally permit partners to receive distributions of that income without being taxed again. Those rules, however, are subject to a number of provisions designed to prevent easy avoidance of tax.
- Finally, the tax results of the remainder of the distribution (i.e., the distributed property which is not part of the
- 751(b) amount” recognizes ordinary income to that extent. While a reasonable approach can include the hypothetical sale approach of the existing regulations, it also can include a “deemed gain” approach by which only the affected partner incurs immediate tax consequences. That is, the affected partner recognizes ordinary income equal to the “section 751(b) amount,” while the partnership and the affected partner make appropriate basis adjustments before analyzing the distribution under general principles. Once a partnership selects a reasonable approach for determining the tax consequences of
- Determine the tax consequences of the constructive distribution by the partnership to B to set the stage for the
- Determine the tax consequences of the
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Capsule Summary 1 79 results (showing 5 best matches)
- Under the business purpose doctrine, a transaction may be denied certain tax benefits, such as nonrecognition of gain, if it is not motivated by a corporate business purpose apart from tax avoidance. The doctrine has been extended through regulations to patrol against abusive partnership transactions and corporate tax shelters.
- partners from the partnership, independent of tax consequences. An allocation is not substantial if, at the time the allocation becomes part of the partnership agreement, (1) the after-tax consequences of at least one partner may be enhanced compared to the after-tax consequences if the allocation were not contained in the partnership agreement, and (2) there is a strong likelihood that the after-tax consequences of no partner will be substantially diminished compared to the after-tax consequences if the allocation were not contained in the partnership agreement. Specific rules apply to determine the substantiality of shifting and transitory allocations.
- A Subchapter S election allows a “small business corporation” to avoid almost all corporate-level taxes. The shareholders of an S corporation are taxed directly on corporate-level profits, thereby avoiding the corporate double tax.
- The taxation of business organizations has been shaped by four broad tax policy decisions that influence taxpayer behavior. The relationship of these policies has changed as a result of tax legislation enacted periodically over many years.
- The double tax regime of Subchapter C increases the cost of operating a business as a C corporation, especially if earnings are distributed as dividends or when the business is sold. The double tax often influences taxpayers to choose partnerships, limited liability companies, or S corporations for business and investment activities.
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Appendix A Answers to Review Questions 245 22 results (showing 5 best matches)
- § 1374 tax on built-in gains generally is relevant to an S corporation which was once a C corporation. Section 1374 imposes a corporate level tax, now at a 21% rate, on the appreciation in a corporation’s assets which arose while it was a C corporation, but which is recognized within five years of its S election. The tax is designed to reduce the incentive for C corporations to elect S status to avoid corporate-level tax on pre-election gains. The tax does not apply to a corporation which has always been an S corporation except to the extent the corporation acquires assets from a C corporation with a transferred basis.
- Book depreciation is allocated equally between A and B, $5,000 each. The $4,000 of tax depreciation is allocated entirely to B, the noncontributing partner, under the traditional method. Even though B is entitled to receive $5,000 of depreciation deductions (an amount equal to his share of book depreciation), the ceiling rule limits the allocation to $4,000 (the actual amount of tax depreciation).
- allocation was considered, there was a strong likelihood that tax-exempt interest the allocation as without the allocation, while the total taxes of A and B would
- If AB sells the parcel of land for $70,000, the tax gain is $50,000 ($70,000 amount tax gain and the book gain is allocated to A under the traditional method.
- If AB sells the parcel of land for $40,000, the tax gain is limited by the ceiling rule to $20,000 ($40,000 amount realized less $20,000 adjusted basis), and the book loss is $10,000 ($40,000 amount realized less $50,000 book value). The $20,000 tax gain is allocated to A. The $10,000 of book loss is allocated equally between A and B. The book loss only results in a book adjustment to capital accounts. See
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Appendix C Glossary 261 24 results (showing 5 best matches)
Appendix B Practice Examination 257 4 results
- Instead of a sale, the partnership is willing to transfer $140 cash to X in liquidation of her partnership interest. Y and Z will continue to operate the partnership. X has requested that you evaluate all of the tax consequences to the proposed liquidation. X also would appreciate any advice you may have on how to improve her personal tax results.
- Tax Consequences to Buyer:
- X is considering selling her interest to Buyer for $120 cash. X has requested that you evaluate all of the tax consequences to the proposed sale.
- Tax Consequences to X:
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Chapter X Sales and Exchanges of Partnership Interests 153 16 results (showing 5 best matches)
- § 704(c), the regulations provide a detailed formula for determining the transferee partner’s share of the partnership’s inside basis. Under the formula, a transferee partner’s share of inside basis is equal to the sum of (1) the transferee’s interest as a partner in the partnerships “previously taxed capital,” plus (2) the transferee’s share of partnership liabilities. The transferee partner’s interest in the partnership’s previously taxed capital is generally determined by considering a hypothetical, fully taxable, disposition of all the partnership’s assets for cash equal to their fair market value. The transferee’s interest in the partnership’s previously taxed capital is equal to the cash the partner would receive on a liquidation following the hypothetical sale, increased by the amount of tax loss and decreased by the amount of tax gain that would be allocated to the transferee partner in the hypothetical sale.
- $50,000 share of the partnership’s inside basis. Under the regulations, Nupartner’s share of the partnership’s inside basis would equal her interest in the partnership’s previously taxed capital. If there were a hypothetical cash disposition of all the partnership’s assets, Nupartner would receive $80,000 of cash on the liquidation of the partnership. That amount is reduced by the $30,000 of tax gain ($10,000 in the accounts receivable, $5,000 in the capital asset, and $15,000 in the depreciable business property) that would be allocated to Nupartner in the hypothetical sale and liquidation. Thus, Nupartner’s interest in the partnership’s previously taxed capital and her share of the partnership’s inside basis is $50,000. Note that under the formula in the regulations, Nupartner’s share of the partnership’s inside basis is simply her one-third proportionate share of the $150,000 total inside basis. That is because there are no special or
- § 743(b) total upward inside basis adjustment will now be $50,000, the difference between her $80,000 outside basis and her $30,000 share of the partnership’s inside basis. Under the regulations, Nupartner’s share of the partnership’s inside basis would equal her interest in the partnership’s previously taxed capital. Again, in a hypothetical sale of assets followed by a liquidation of the partnership, Nupartner would receive $80,000 cash. That amount is reduced by the $50,000 of tax gain ($30,000 in the accounts receivable, $5,000 in the capital asset, and $15,000 in the depreciable business property) that would be allocated to Nupartner in the hypothetical sale and liquidation. Nupartner, as a transferee of A steps into A’s shoes with respect to the Reg. 1.704–3(a)(7). Thus, Nupartner’s interest in the partnership’s previously taxed capital and her share of the partnership’s inside basis in $30,000.
- § 743(b), Nupartner’s total upward inside basis adjustment will be $5,000 ($25,000 outside basis less $20,000 share of the partnership’s inside basis). Nupartner’s share of the partnership’s inside basis would be equal to his $10,000 interest in the partnership’s previously taxed capital ($15,000 cash Nupartner would receive on a sale and liquidation of the partnership, plus $10,000 share of tax loss in capital asset, minus $15,000 share of tax gain in the accounts receivable) plus his $10,000 share of partnership liabilities. The regulations permit Nupartner to make a $15,000 upward basis adjustment to the accounts receivable and a $10,000 downward basis adjustment to the capital asset so the net adjustment equals the $5,000 total
- Tax Consequences to the Selling Partner
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Chapter XIV Partnership Anti-Abuse Rule 209 18 results (showing 5 best matches)
- The flexible rules for taxing partnership activities provide taxpayers with considerable tax saving opportunities. That flexibility may lead to abuse if the statutory rules are applied literally. To combat improper reduction of income taxes, the Treasury promulgated Reg. § 1.701–2, which gives it the power to recast transactions that attempt to use partnerships in an abusive manner that is inconsistent with the intent of Subchapter K or the Code and regulations. The partnership anti-abuse regulation contains two main provisions. The first allows the IRS to recast a transaction as appropriate to achieve tax results that are consistent with the intent of Subchapter K.
- The regulation also provides that if a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of the partners’ aggregate federal tax liability in a manner inconsistent with the intent of Subchapter K, the IRS can recast the transaction to achieve appropriate tax results.
- All facts and circumstances, including a comparison of the purported business purpose for a transaction and the claimed tax benefits resulting from the transaction, are examined to determine whether a partnership is formed or availed of to reduce tax liability in a manner inconsistent with Subchapter K. The regulation provides a nonexclusive list of factors which may indicate, but do not establish, that a partnership was used in such a manner. The presence or absence of any of the listed factors also does not create a presumption that a partnership was or was not used in an impermissible manner.
- B, an individual, and A Corp., form a limited partnership with A Corp. having a 1% general partnership interest and B having a 99% limited partnership interest. The arrangement is properly classified as a partnership for federal tax purposes. A limited partnership was selected so that B could have limited liability without being subject to an entity-level tax.
- Reg. § 1.701–2(e)(1). This rule is designed to prevent the use of a partnership to avoid other Code provisions and does not depend on a showing of the taxpayer’s intent. An exception is made when (1) a Code section or regulation prescribes the treatment of a partnership as an entity, and (2) that tax treatment and the ultimate tax results are clearly contemplated by that provision.
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Perspective 25 7 results (showing 5 best matches)
- This outline has been written for students enrolled in Partnership Tax or combined courses on Taxation of Pass-Through Entities (partnerships, limited liability companies, and S corporations) or Business Enterprise Taxation. It also may be useful for some of the topics covered in more advanced business tax courses.
- The study of partnership tax revolves, to a large degree, around allocation of tax items among the partners and transactions between the entity and its owners. Particularly challenging topics are the treatment of partnership liabilities, the ability of partners to make special allocations of income and deductions in their partnership agreement, the appropriate tax treatment of partners who provide services to the partnership, and numerous anti-abuse provisions primarily designed to prevent assignment of income among the partners and conversion of ordinary income into capital gain. Your study will be enhanced by an understanding of “the big picture”—the basic models for taxing a business enterprise and how those models influence taxpayer behavior. For some additional perspective, we recommend a careful reading of Chapter I of this outline.
- If your instructor uses the problem method, it is likely that the exam will ask you to analyze the tax consequences of hypothetical fact situations. Other instructors may spend more time on cases, tax policy, and less quantifiable issues, and their essay questions may reflect this approach. Many of these instructors, however, still require students to analyze discrete fact patterns on the exam—in both short answer and essay questions—if only because it is easier to grade a more “objective” exam. In short, it is a safe bet that virtually all partnership tax exams will be rather specific and require a mastery of many statutory details along with the broad concepts and tax policy issues.
- Students quickly will become aware that the partnership tax course devotes very little time to the determination of the entity’s taxable income. Those concepts should have been mastered in the basic income tax class. For students who may have suffered some memory loss, we recommend generally reviewing the concepts of gross income, deductions, timing and characterization, focusing particularly on the issues raised by the
- As in any law school course, preparing for an examination requires a student to connect with the instructor’s wave length. Some tax teachers emphasize statutory construction and problem solving. Their exams are likely to parallel the coverage during the semester but may require you to understand the relationships of concepts covered at different points in the course.
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Chapter III Formation of a Partnership 51 8 results (showing 5 best matches)
- A more detailed study of the tax treatment of nonrecourse liabilities requires an examination of the Code provisions for determining the partners’ shares of partnership income and profits in more complex situations. The tax treatment of liabilities, both recourse and nonrecourse, will be revisited after those topics are covered. See VII., at page 117, The remainder of this chapter introduces the concept of economic risk of loss and the tax treatment of contributions of property encumbered by a liability.
- § 351, its corporate tax counterpart, for the tax treatment of a partner receiving a partnership interest in exchange for services.
- § 721(b), transfers of property to a partnership which would be an investment company if incorporated do not qualify for nonrecognition. This rule prevents taxpayers from diversifying their investment portfolios tax free. See
- Partners may contribute capital directly to a partnership for a partnership interest. Alternatively, a partnership may acquire its necessary capital in more complex financing arrangements, including options or contingent rights to acquire a partnership interest. The regulations set forth the tax consequences of “noncompensatory” options to acquire a partnership interest.
- . Syndication expenses include brokerage fees, registration fees, legal fees for securities advice and tax disclosure, accounting fees for representations in offering materials, printing costs, and other selling and promotional material. . The Service has ruled that fees paid for the tax opinion in a partnership prospectus is a syndication expense.
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Chapter XIII Death of a Partner 203 10 results (showing 5 best matches)
- A deceased partner’s distributive share of income for the partnership’s taxable year ending before the deceased partner’s death is not IRD because it must be included in the deceased partner’s final tax return. See § 706(c)(2)(A). The distributive share of partnership income attributable to the deceased partner’s interest for the remaining portion of the partnership’s taxable year will be taxed to the party succeeding to the deceased partner’s interest.
- Estate Tax, Income in Respect of a Decedent, and Basis Consequences
- Federal Estate Tax
- When a partner dies, his partnership interest may be disposed of in one of three ways: (1) it may pass to the partner’s designated successor in interest who continues as a partner; (2) it may be sold at the partner’s death pursuant to a preexisting buy-sell agreement; or (3) it may be liquidated pursuant to a preexisting agreement among the partners. Each of these possibilities has different tax consequences to the deceased partner and the partnership.
- Estate Tax, Income in Respect of a Decedent, and Basis Consequences
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Chapter VII Partnership Liabilities 117 6 results (showing 5 best matches)
- § 704(c) allocations, it would make a remedial allocation of $250,000 of loss to B to eliminate the $250,000 disparity between B’s book and tax allocations. BC would also be required to make an offsetting remedial allocation of tax gain to C of $250,000. Thus, C would be allocated a total of $430,000 of tax gain ($180,000 of actual gain to C plus $250,000 allocation of remedial gain) from the hypothetical sale. Therefore, if BC adopts the remedial allocation method, C would be allocated $430,000 of nonrecourse liabilities immediately after the contribution. If BC uses the traditional method with curative allocations to reduce or eliminate the difference between B’s book and tax allocations, the IRS takes the position that curative allocations to C are not taken into account in allocating nonrecourse liabilities because such allocations
- First, partnership minimum gain is computed using the apartment building’s book value rather than its tax basis.
- § 704(c) if the partnership, in a taxable transaction, disposed of the contributed property in full satisfaction of the nonrecourse liability and for no other consideration. If BC sold the apartment building in full satisfaction of the liability and for no other consideration it would recognize a $180,000 taxable gain ($700,000 amount of the nonrecourse liability over $520,000 adjusted basis). The hypothetical sale would also result in a $500,000 book loss to BC (excess of $1,200,000 book value over $700,000 amount of nonrecourse liability). Under the partnership agreement, the book loss would be allocated equally between B and C. Because B receives a $250,000 book loss and no corresponding tax loss, the hypothetical sale would result in a $250,000 disparity between B’s book and tax allocations.
- The basis of a partnership interest has important tax consequences for the partner owning that interest. Under
- ...provides that each partner will be allocated 50% of all partnership items. Assuming that those allocations have substantial economic effect, BC could choose to allocate the additional nonrecourse liabilities 50% to each partner. Alternatively, if the partners agreed to allocate the additional nonrecourse liabilities in the manner in which it is reasonably expected that the deductions attributable to those liabilities will be allocated, all the remaining liabilities would be allocated to B. As 50 percent partners, B and C would each be allocated $600,000 of book depreciation over the life of the apartment building. However, because the apartment building only has a $520,000 adjusted basis, the entire $520,000 of tax depreciation over the life of the property must be allocated to B. Therefore, BC must allocate all of the excess liabilities to B if it chooses to allocate the excess nonrecourse liabilities in accordance with the manner that the deductions attributable to the excess...
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Chapter XII Liquidating Distributions and Terminations 189 17 results (showing 5 best matches)
- Section 736 is the starting point for determining the tax consequences of payments in liquidation of a partner’s interest in a partnership. It applies only to payments made to retiring partners or to a deceased partner’s successor in interest. Section 736 classifies such payments into two broad categories, and the tax treatment of the payments is then determined under other provisions of Subchapter K. Under § 736(b), payments for a partner’s interest in partnership property generally are treated as distributions by the partnership and taxed under the rules applicable to nonliquidating distributions. See generally Chapter XI,
- Conversions of (1) a general partnership to a limited partnership, (2) a domestic partnership to a limited liability company taxed as a partnership, and (3) a general partnership to a limited liability partnership, are not terminations of the first partnership unless that partnership’s business is not continued after the conversion. Rev. Rul. 84–52, 1984–1 C.B. 157; Rev. Rul. 95–37, 1995–1 C.B. 130; Rev. Rul. 95–55, 1995–2 C.B. 313. The tax consequences of the conversion are determined under
- Tax Consequences of § 736(b) Payments to the Partner
- Tax Consequences of § 736(b) Payments to the Partnership
- Tax Treatment of § 736(a) Payments
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Summary of Contents 7 results (showing 5 best matches)
Index 281 14 results (showing 5 best matches)
Table of Contents 36 results (showing 5 best matches)
Chapter IX Property Transactions Between Partnerships and Partners 147 8 results (showing 5 best matches)
- Section 707(a)(1) generally adopts an entity theory for determining the tax consequences of transactions between a partner and a partnership. See VIII.A.1., at page 130, . It provides that if a partner engages in a transaction with a partnership “other than in his capacity as a member of such partnership,” the transaction is to be taxed as if it occurred between the partnership and a nonpartner unless
- Tax Planning Agenda
- A, a cash method taxpayer, contributes $25,000 to the ABCD partnership for a one-quarter partnership interest. A also contributes the use of office space for five years in a building owned by A to the partnership in exchange for a special allocation of the first $30,000 of partnership gross income. How will the $30,000 allocation most likely be treated for tax purposes?
- § 721. Partners may still make a tax-free contribution of property to a partnership in exchange for a share of profits.
- the AB partnership has $50,000 of net income from its operations during the year. What are the tax consequences in the following alternative transactions?
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- Publication Date: June 28th, 2019
- ISBN: 9781642428926
- Subject: Taxation
- Series: Black Letter Outlines
- Type: Outlines
- Description: This comprehensive and clearly written text is designed to help students recognize and understand the basic principles and issues covered in law school courses in partnership or pass-through entity taxation at both the J.D. and LL.M. levels. It explains all the fundamental concepts and transactions affecting partnerships, limited liability companies, and S corporations and includes numerous illustrative examples, self-test questions with answers, and sample exam questions. The Ninth Edition incorporates all relevant provisions of the 2017 legislation known as the Tax Cuts and Jobs Act.