Federal Income Taxation of Partners and Partnerships in a Nutshell
Author:
Burke, Karen C.
Edition:
5th
Copyright Date:
2017
21 chapters
have results for Federal Income Taxation of Partners and Partnerships in a Nutshell
Chapter 1. Introduction to Partnership Taxation 106 results (showing 5 best matches)
- The statutory framework for the federal income taxation of partners and partnerships is set forth in §§ 701–761 of the Code (Subchapter K). One of the recurrent themes of Subchapter K is the blending of aggregate and entity concepts. A pure aggregate approach would look through the partnership, treating each partner as if he owned an undivided interest in the partnership assets and conducted a proportionate share of the partnership business. A pure entity approach, by contrast, would treat the partnership as a separate entity for tax purposes, with each partner owning an interest in the partnership rather than in the underlying assets.
- A partner’s capital account is adjusted (under rules similar to § 705(a) ) to reflect partnership operations. Since a partner’s distributive share of income and any additional contributions increase his investment in the partnership, they trigger corresponding increases in his capital account. Similarly, a partner’s distributive share of losses and any distributions reduce his net investment in the partnership and trigger corresponding reductions in his capital account. A partner’s capital account (but not his outside basis) may be reduced below zero by his distributive share of losses or by distributions. A deficit in a partner’s book capital account normally represents the amount of cash that he would be obligated to contribute to the partnership upon liquidation. The value of partnership property, together with any partners’ negative capital account balances, will equal the amount necessary to satisfy partnership liabilities and any other partners’ positive capital account...
- Corporations and certain publicly-traded firms are ineligible to be taxed as partnerships. §§ 7701(a)(3) , 7704(a) . An unincorporated firm that qualifies as a “separate entity” has a range of tax choices—it may elect to be taxed as a partnership under Subchapter K, as a corporation under Subchapter C, or as an S corporation (subject to a modified form of passthrough taxation) if it meets certain eligibility requirements under Subchapter S. See § 10. Both partnerships and S corporations offer the advantage of a single-level tax and passthrough of losses. The choice of entity may be heavily influenced by the relationship between the individual and corporate tax rates. When corporate tax rates are roughly equal to the highest individual tax rates as under current law, passthrough taxation may be particularly attractive. In effect, income passed through a partnership to its partners is taxed at a substantially lower effective rate than corporate distributions which are taxed once at the...
- During Year 2, ABC has taxable income of $3,000, computed by taking into account $9,000 depreciation, $3,000 of operating expenses and $15,000 of operating income; in addition, ABC repays $15,000 of the loan principal, reducing the outstanding liability to $75,000. The loan repayment does not affect the partners’ capital accounts, but reduces each partner’s outside basis by $5,000 ( of $15,000 decrease in liabilities). The depreciation reduces the basis and book value of the building from $81,000 to $72,000. The partnership generates a negative cash flow of $3,000 ($15,000 operating income less $18,000 operating expenses and loan repayment), reducing partnership cash from $30,000 to $27,000. Each partner’s tax and book capital account (and outside basis) is increased by her $1,000 distributive share of the partnership’s taxable income. At the end of Year 2, the partnership’s balance sheet is as follows:
- Although a partnership as such is not subject to income tax, it is treated as a separate entity for accounting purposes. §§ 701–703 ; see Chapter 3. Items of income, gain, loss and deduction from partnership operations for each taxable year of the partnership are initially determined at the entity level; under conduit principles, these items are allocated among the partners and are passed through to them as distributive shares. The term “distributive share” refers not to actual distributions, but rather to each partner’s allocable share of partnership items that must be reported. Both the amount and character of items included in a partner’s distributive share are determined at the partnership level but are taxed to the partner on his individual return. Thus, the partnership serves as a conduit both quantitatively and qualitatively. See § 702
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Chapter 4. Partnership Allocations 123 results (showing 5 best matches)
- regulations illustrate a transitory allocation in the case of an equal two-person partnership in which one partner has a net operating loss due to expire in the current year. The partnership agreement allocates the partnership’s income for the current year to the partner with the net operating loss and allocates partnership income in subsequent years to the other partner until the original allocation is offset. The partnership expects to produce sufficient income within the next five years to offset the original allocation. Apart from the net operating loss, both partners expect to be in the same tax bracket for the next several years. There is a strong likelihood that the original and offsetting allocations, when viewed together, will reduce the partners’ total tax liability without substantially affecting their respective capital accounts. The original allocation reduces the loss partner’s total taxes by accelerating income that can be sheltered by his expiring net operating loss...
- An allocation can satisfy the primary (or alternate) economic effect test only if the partnership maintains capital accounts in accordance with the detailed rules of the § 704(b) regulations, a partner’s capital account must be increased by (i) the amount of money contributed by the partner to the partnership, (ii) the fair market value of property contributed by the partner to the partnership (net of any liabilities secured by such property which the partnership is considered to assume or take subject to under § 752 ) and (iii) the partner’s distributive share of “book” income and gain (including tax-exempt income and gain). Reg. § 1.704–1(b)(2)(iv)(b) . A partner’s capital account must be decreased by (i) the amount of money distributed to the partner by the partnership, (ii) the fair market value of property distributed to the partner by the partnership (net of liabilities secured by such property which the partner is considered to assume or take subject to under § 752
- Section 704(a) provides that a partner’s distributive share of partnership income, gain, loss or deduction is generally determined by the partnership agreement. If the partnership agreement fails to allocate an item among the partners or provides an allocation which lacks substantial economic effect, however, § 704(b) requires that a partner’s distributive share be determined “in accordance with the partner’s interest in the partnership,” taking into account all facts and circumstances. Section 704(b) applies to “bottom-line” allocations of partnership net income or loss as well as to special allocations of specific items. Reg. § 1.704–1(b)(1)(vii) . For example, if the partnership agreement specially allocates all depreciation to one partner and the remainder of the partnership’s income is divided equally, both the special and residual allocations must be tested under § 704(b)
- Since partnership liabilities are not reflected in the partners’ capital accounts, each partner has an initial balance of $100 equal to her cash contribution. Each partner’s capital account is increased by her $90 share of the partnership’s operating income and decreased by her $35 share of the partnership’s operating expenses. In addition, A’s capital account is reduced by $100 of depreciation.
- A special allocation of cancellation-of-indebtedness (COD) income to an insolvent partner, coupled with a corresponding allocation of book loss from revaluation of partnership property, lacks substantial economic effect. . Under the facts of , a two-person partnership borrowed $8,000 nonrecourse to purchase depreciable property worth $10,000. The property subsequently declined in value to $6,000, and the creditor agreed to forgive $2,000 of the nonrecourse loan. The partnership agreement was amended to allocate the entire $2,000 of COD income specially to the insolvent partner, rather than equally between the two partners as under the original agreement. The partnership simultaneously revalued its assets, and allocated the $4,000 book loss attributable to the decline in the property’s value disproportionately ($3,000 to the insolvent partner and $1,000 to the other partner). The paired allocation of COD income ($2,000) and offsetting book loss ($2,000) had no net effect on the...
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Chapter 7. Partner-Partnership Transactions 66 results (showing 5 best matches)
- Payments to a partner in his capacity as a partner constitute “guaranteed payments” under § 707(c) to the extent they are made for services or the use of capital and are determined without regard to partnership income. For purposes of §§ 61 (inclusion in partner’s gross income) and 162 (deduction to the partnership, subject to capital-expenditure rules of § 263 ), guaranteed payments are treated as amounts paid to a nonpartner, but timing and other tax consequences are determined as if such payments were a distributive share of partnership income. Payments falling outside §§ 707(a) and 707(c) are treated as distributions relating to a partner’s
- Prior to enactment of Subchapter K, courts generally considered that a partner could not act as an employee of his own partnership, and concluded that “salary” payments made by a partnership to a partner were taxable as distributions attributable to his distributive share of partnership income. In enacting § 707(a) , Congress recognized that a partner could deal with a partnership in a nonpartner capacity. See (brokerage commissions paid to partnership included in payor partner’s distributive share). Section 707(c) was intended to eliminate complex computations when fixed payments (e.g., salary or interest) to a partner in his capacity as a partner exceed partnership taxable income. Such fixed payments were considered difficult to reconcile with the concept of a distributive share which is contingent on partnership income. Although § 707(c)
- A guaranteed payment may take the form of a formula amount payable to a partner whose distributive share of partnership income falls below a stated level (a “guaranteed minimum”). For example, assume that the partners of the ABC partnership share profits and losses equally, and that only A (in his capacity as a partner) performs services for the partnership; the partnership agreement provides that A is to receive an amount equal to the greater of (i) one fourth of the partnership’s income (determined before taking into account any guaranteed payments) or (ii) $10,000. If the partnership has income of $60,000, A’s distributive share (without regard to any guaranteed payment) would be $15,000. As long as A’s distributive share equals or exceeds the guaranteed minimum, the entire amount received by A is treated as a distributive share. See Reg. § 1.707–1(c), Ex. 2
- Before the 1984 amendments, § 707(a) offered a potential timing advantage when the partnership and the partner used different methods of accounting. For example, an accrual-method partnership could deduct a § 707(a) payment in the year of accrual, while a cash-method partner would not have to include the payment in gross income until the year of receipt. In 1984, however, Congress extended the matching rules of § 267(a)(2) to § 707(a) . Thus, the partnership’s deduction is deferred until such payments are includible in the recipient’s income.
- A partner may receive compensation for services in the form of a special allocation of partnership income under § 704(b) . If respected, the special allocation is taxable to the service partner as a distributive share under §§ 702(a) and 704(b) , and a corresponding distribution of cash equal to the amount of his special allocation is generally tax free under § 731 . The allocation and distribution offset each other, with no net effect on the partner’s outside basis or capital account. An allocation of gross income will have the same character (e.g., ordinary income or capital gain) as the items comprising the partnership’s income. In some situations, it may be difficult to distinguish a special allocation from a § 707(a)
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Chapter 3. Partnership Tax Accounting 87 results (showing 5 best matches)
- The rules for determining a partner’s share of taxable income or loss from partnership operations represent a blend of entity and aggregate principles. Although a partnership is not taxed as a separate entity, partnership taxable income is computed in a manner similar to that of an individual. §§ 701 , 703(a) , each partner is taxed separately on his distributive share of partnership income, gain, loss, deduction and credit. The character of items included in a partner’s distributive share is determined at the partnership level. § 702(b)
- provides that each partner must make separately the elections under § 108(b)(5) and (c)(3) relating to discharge of indebtedness. Income from discharge of partnership indebtedness is not excludible at the partnership level even if the partnership is insolvent. § 108(d)(6) . Instead, the discharge income passes through to the partners as an item of partnership income and each partner then applies the rules of § 108 based on his particular circumstances. Each partner’s outside basis is increased by his distributive share of the discharge income, and decreased by the deemed § 752 cash distribution resulting from the reduction in his share of partnership liabilities. §§ 705(a)(1)–(2) . These upward and downward basis adjustments will exactly offset each other only if the discharge income is allocated among the partners in the same ratio as the partners share the discharged debt under § 752
- A partner’s basis in his partnership interest is initially determined by reference to his investment in the partnership and subsequently adjusted to reflect his distributive share of partnership income or loss and distributions from the partnership. § 705(a) . Since outside basis cannot fall below zero, any excess losses allocated to a partner are suspended until the partner’s outside basis rises above zero. § 704(d) . In addition, a partner’s ability to deduct his distributive share of partnership losses may be subject to further restrictions under the at-risk and passive loss rules. §§ 465
- A partner’s outside basis is subject to upward and downward adjustments which reflect partnership operations. Outside basis is increased by additional capital contributions from a partner and by his distributive share of partnership taxable income and tax-exempt income; it is decreased (but not below zero) by distributions to the partner and by his distributive share of partnership losses and partnership expenditures that are neither deductible in computing partnership taxable income nor properly chargeable to capital account (“nondeductible noncapital expenditures”). §§ 705(a) and 733 . Nondeductible noncapital expenditures include illegal bribes and kickbacks, expenses relating to tax-exempt income, and disallowed losses between related parties. In addition, the partnership’s charitable contributions and § 212
- Any item of partnership income, loss, deduction or credit included in a partner’s distributive share has the same character “as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.” § 702(b) . While somewhat opaque, this provision has been interpreted to require that the character of partnership items be determined at the partnership level, without regard to the partners’ individual characteristics. See Reg. § 1.702–1(b) . For example, if a partnership sells property which is a non-capital asset in the hands of the partnership but would be a capital asset in the hands of a partner, any gain which is ordinary in character at the partnership level will retain its character when passed through to the partner. See, e.g., Podell (1970); see also
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Chapter 10. Death or Retirement of a Partner 64 results (showing 5 best matches)
- was originally intended to enhance flexibility and reduce uncertainty in the tax treatment of liquidating payments. Before 1993, § 736(a) allowed a partnership to deduct liquidating payments for a withdrawing partner’s share of unrealized receivables and goodwill, at the cost of ordinary income treatment to the recipient. The 1993 Act eliminated such flexibility except for payments to general partners of partnerships in which “capital is not a material income-producing factor” (“service” partnerships). After the 1993 amendments, § 736(b) is the general rule for liquidating distributions to limited partners and to all partners in partnerships in which capital is a material income-producing factor (“capital-intensive” partnerships); in such cases, § 736(a)
- Unless a deceased partner’s partnership interest is sold at death, his estate (or other successor in interest) is generally substituted as a partner. The partnership’s taxable year automatically closes on the date of death with respect to the deceased partner’s interest, although it remains open with respect to the other partners’ interests. § 706(c)(2)(A) . This treatment allows better matching of income and deductions on the decedent’s final return (or a joint return filed by the decedent’s surviving spouse). Since most partnerships and individual partners report on a calendar-year basis, the problem of income-bunching is unlikely to arise.
- If a § 736(a) payment depends on the partnership’s income, it is classified under § 736(a)(1) as a distributive share and reduces the income reportable by the continuing partners. Section 736(a)(1) payments retain the same character in the withdrawing partner’s hands as the items included in the distributive share (e.g., tax-exempt income, ordinary income or capital gain). If the amount of the § 736(a) payment is determined without regard to the partnership’s income, it is classified under § 736(a)(2) as a guaranteed payment (as described in § 707(c) ). Such payments are deductible by the partnership under § 162(a) and taxed as ordinary income to the withdrawing partner under the normal timing rules for § 707(c)
- A recognizes $20 of ordinary income under § 751(a) (determined as if the partnership sold all of its § 751 assets for their fair market value) and $20 of capital gain under § 741 (overall gain of $40 less $20 ordinary income). See Chapter 8. If the partnership has a § 754 election in effect, B and C receive an upward § 743(b) adjustment of $40 ($115 cost less A’s $75 pre-distribution share of the partnership’s common basis) allocated equally between capital assets and ordinary income assets ($10 to each appreciated asset). See § 755 . If the partnership immediately sells all of its assets, B and C will recognize their former two-thirds share of the partnership’s ordinary income ($40) and capital gain ($40). Both the withdrawing partner and the continuing partners should be indifferent whether the transaction is structured as a sale or liquidation.
- The economic consequences of liquidating a partnership interest may be indistinguishable from those of selling the interest to the continuing partners in proportion to their respective interests. The transactions may have different tax consequences, however, since sales are governed by and 751(a) and 751(b) . If a non-service partnership has a § 754 election in effect, the consequences of sale or liquidation treatment may be quite similar. One minor difference is that, under § 751(a) , a sale of a partnership interest triggers ordinary income to the seller whether or not inventory is substantially appreciated; by contrast, § 751(b) applies only if the inventory is substantially appreciated. In addition, the look-through approach of § 741 extends to categories of capital gain property taxed at a 25% or 28% rate. See Chapter 8. In general, the continuing partners will prefer to treat the transaction as a liquidation rather than a sale if § 736(a)
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Preface to the Fifth Edition 3 results
- Federal income taxation of partners and partnerships is a dynamic and fascinating field. The mechanical rules have become increasingly complex in recent years, partly as a result of Congress’ tinkering with the statute, but mostly in response to the sophisticated implementing regulations promulgated by the Treasury Department. This complexity, while sometimes daunting, should not be allowed to obscure the internal logic and consistency of the underlying concepts.
- This book is organized along the same lines as many courses and teaching materials. Chapter 1 introduces partnership capital accounts and important concepts such as inside and outside basis; it also discusses elective entity classification and anti-abuse rules. Chapter 2 focuses on partnership formation, including contributions of encumbered property and admission of service partners. Chapter 3 deals with the passthrough of income or loss. Chapters 4 through 6 provide a systematic introduction to the detailed regulations under §§ 704 and 752 governing partnership allocations, the treatment of contributed property, and sharing of recourse and nonrecourse liabilities. Chapters 7 through 10 discuss other discrete topics, including partner-partnership transactions, sales and exchanges of partnership interests, distributions, and death of a partner.
- This book is intended to introduce lawyers and students to the basic structure of partnership taxation. It is designed for use as a supplement to traditional courses and teaching materials, and its goal is to provide sufficient background and explanatory discussion to enable the reader to grasp the principles of partnership taxation in a problem-oriented course. Numerous concrete examples illustrate the treatment of specific transactions, emphasizing the economic arrangement and its consequences. In the author’s experience, this approach proves helpful not only for students in a regular law school course but also for students in graduate tax or accounting programs. Frequent references to the statute and regulations highlight the importance of having those sources available and reading them along with this book. Students interested in pursuing matters further will find more exhaustive discussions in the leading treatises on partnership taxation. The condensed presentation in this...
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Chapter 8. Transfers of Partnership Interests 113 results (showing 5 best matches)
- If any partner’s interest in the partnership changes during the taxable year, the partners’ distributive shares of partnership income, gain, loss or deduction are determined by taking into account “the varying interests of the partners in the partnership during such taxable year.” § 706(d)(1) . The varying interest rule literally applies to any change in the partners’ interests, including partial sales, gifts and reductions of a partner’s interest.
- Under § 706(c)(2)(A) , the partnership’s taxable year closes with respect to a partner who sells or exchanges his entire partnership interest. Thus, the selling partner must report his distributive share of partnership items of income, gain, loss and deduction through the date of sale, triggering corresponding adjustments to his outside basis. Reg. § 1.705–1(a) . These interim adjustments prevent the selling partner from converting his distributive share of ordinary income or loss into capital gain or loss. For example, assume that a partner sells his entire partnership interest for $20,000 on June 30, when his outside basis is $5,000, before adjustment for his $15,000 distributive share of partnership ordinary income for the first six months. The selling partner recognizes $15,000 of ordinary income as his distributive share, and his outside basis is accordingly increased by $15,000, with the result that he recognizes no gain or loss on the sale. Reg. § 1.706–1(c)(2)(ii)
- The partnership’s taxable year closes prematurely (i) with respect to all partners if there is a termination of the partnership under § 708 , or (ii) with respect to any partner “whose entire interest in the partnership terminates (whether by reason of death, liquidation, or otherwise).” § 706(c)(1) , (2)(A) . A closing of the partnership’s taxable year may give rise to “bunching” of income if the partnership and affected partners have different taxable years. A partnership’s taxable year generally does not close with respect to a partner who sells less than his entire interest or “whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift or otherwise).” § 706(c)(2)(B)
- In the case of a merger or consolidation of two or more partnerships, § 708(b)(2)(A) provides that the resulting partnership is a continuation of any merging or consolidating partnership whose members own a more than 50% interest in the capital and profits of the resulting partnership. Similarly, in the case of a division of a partnership into two or more partnerships, § 708(b)(2)(B) provides that any resulting partnership whose members had a more than 50% interest in the prior partnership is considered a continuation of the prior partnership. A resulting partnership must have at least two partners who were partners of the prior partnership. Reg. § 1.708–1(d)(iv)
- in effect puts a cash-basis partnership on the accrual method for purposes of determining the partners’ distributive shares of certain items. The partnership must assign a portion of such items to each day of the period to which it is attributable and then allocate each daily portion among the partners in proportion to their interests in the partnership at the close of the day. § 706(c)(2)(A) . Allocable cash basis items include interest, taxes, payments for services or for the use of property and any other items (to be specified in regulations) necessary to prevent “significant misstatements” of the partners’ income. § 706(d)(2)(B) . In addition, depreciation deductions are deemed to occur ratably over the year. Since most partnerships are now required to use the accrual method, § 706(d)(2) is of limited practical significance.
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Chapter 6. Partnership Liabilities 75 results (showing 5 best matches)
- During its first year, the AB general partnership in the preceding example has operating income of $150,000, operating expenses of $110,000 and depreciation deductions of $20,000. The partnership uses its net cash flow of $40,000 to repay a portion of the $90,000 debt, reducing the principal amount to $50,000. Upon a constructive liquidation at the end of the year, the partnership would recognize a loss of $80,000 (i.e., the adjusted basis of the building). The partnership’s total losses of $60,000 ($20,000 net taxable income decreased by $80,000 constructive loss) would produce a deficit of $25,000 in each partner’s capital account ($5,000 contribution less $30,000 loss). Accordingly, each partner would have an obligation to contribute $25,000 to the partnership to pay the recourse liability. In the example, the partners’ liability-sharing ratio remains 50/50 with respect to the outstanding debt, since the partners share all items of income, gain, loss and deduction equally. If...
- X, an LLC owned entirely by A, is classified as a disregarded entity under the § 7701 regulations. In 2017, X becomes the sole general partner of a limited partnership which borrows $75,000 to purchase land; the $75,000 debt is secured by the land and is also a general obligation of the partnership. The partnership agreement provides that only X is required to restore any deficit in its capital account. At the end of 2017, when the partners’ shares of partnership liabilities are determined, X has no assets other than its partnership interest. Because X is a disregarded entity, X’s owner A is treated as the general partner for federal tax purposes. For purposes of the constructive liquidation, A is treated as bearing the economic risk of loss for the partnership’s $75,000
- The regulations trace the economic risk of loss by reference to a hypothetical liquidation in which the following events are deemed to occur: (i) the partnership’s assets (including cash) become worthless, (ii) the partnership’s liabilities become due and payable in full, (iii) the partnership disposes of its assets in a fully taxable exchange for no consideration (other than relief from limited liabilities), and (iv) the partnership allocates its items of income, gain, loss, deduction and credit among the partners and liquidates. Reg. § 1.752–2(b)(1)
- During Year 1, the partnership’s operating income equals its operating expenses; the partnership also has $200,000 of depreciation deductions. At the end of Year 1, each partner has a $50,000 share of the partnership minimum gain of $100,000 (i.e., the excess of the $900,000 liability over the $800,000 basis of the building). Accordingly, A and B continue to share the nonrecourse liability equally; each partner is allocated $50,000 of the nonrecourse liability to match her share of partnership minimum gain, and the $800,000 residual nonrecourse liability is allocated $400,000 each to A and B. Each partner has an outside basis of $400,000 at the end of Year 1 ($50,000 contribution plus $450,000 share of liabilities less $100,000 share of loss).
- A and B each contribute $5,000 to the AB general partnership in exchange for equal partnership interests. The partnership maintains capital accounts in accordance with the § 704(b) regulations, and each partner is obligated to restore any deficit in his capital account. The partnership purchases a building (worth $100,000) for $10,000 cash and a $90,000 recourse purchase-money note. Upon a constructive liquidation, the partnership would realize a loss of $100,000 (i.e., the amount realized would not include the $90,000 recourse liability because that liability is not discharged as a result of the transfer). The loss would be allocated $50,000 to A and $50,000 to B as equal partners, and each partner would have a capital account deficit of $45,000 ($5,000 contribution less $50,000 loss). Accordingly, each partner would have an obligation to contribute $45,000 to the partnership to pay the recourse liability.
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Chapter 2. Organization of a Partnership 86 results (showing 5 best matches)
- would tax a partner’s share of income attributable to an “investment services partnership interest” (“ISPI”) as ordinary income, regardless of the character of the partnership’s income. Partners would also pay self-employment tax on such income and would recognize ordinary income on the sale of an ISPI (and on certain distributions). In general, an ISPI is a partnership interest held by a person who provides services to an investment services partnership (“ISP”). A partnership is an ISP only if more than 50% of its assets are investment-type assets (e.g., securities and real estate) and over half of its contributed capital comes from passive investors.
- In response to , the Service reconsidered its position and issued . This guidance ensures that most transfers of profits interests will escape immediate taxation. Accordingly, the Service will treat as a nontaxable event (for both the recipient and the partnership) receipt of a profits interest “for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of being a partner.” . This general rule does not apply if (i) the interest relates to a “substantially certain and predictable” income stream, (ii) the recipient disposes of the interest within two years of receipt, or (iii) the interest is a limited partnership interest in a publicly-traded partnership (within the meaning of § 7704(b)
- For example, assume that the AB partnership owes $1,000 to C (who has a $1,000 basis in the debt); the partnership used the loan proceeds to purchase a single asset worth $1,000 which has declined in value to $700. A and B each have an outside basis of $500. If C agrees to cancel the debt for an interest in the AB partnership worth $700, the amount C would receive if the partnership sold all of its assets for their fair market value and liquidated, the partnership must recognize discharge of indebtedness income of $300 (allocated $150 to each of A and B). C’s loss of $300 is deferred but is preserved in the basis of C’s partnership interest ($1,000). Following the debt-for-equity exchange, A and B each have an outside basis of $150 ($500 less $500 relief of liabilities plus $150 income from debt discharge). The partners’ aggregate outside basis ($1,300) exceeds the partnership’s inside basis ($1,000) by $300 (the amount of C’s deferred loss). If C writes down the debt to $700 prior...
- proposed regulations apply equally to partnership capital interests and partnership profits interests. Both types of interests are treated as property under state law and for purposes of § 83 . If a partner receives an interest in partnership capital (a capital interest) as compensation for services, the fair market value of the interest constitutes ordinary income to the partner under § 61 . By contrast, receipt of an interest in partnership profits (a profits interest) for services rendered “in a partner capacity or in anticipation of being a partner” is generally nontaxable, subject to certain exceptions.
- When a partner contributes encumbered property to a partnership, the § 752 adjustments for liabilities affect both the contributor’s outside basis and the amount of any gain recognized. Section 752(b) treats any decrease in a partner’s individual liabilities by reason of the partnership’s assumption of such liabilities as a deemed distribution of cash from the partnership to the partner. Conversely, § 752(a) treats any increase in a partner’s share of partnership liabilities as a deemed contribution of cash by the partner to the partnership. Finally, § 752(c)
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Chapter 9. Partnership Distributions 146 results (showing 5 best matches)
- As a result of the distribution, A recognizes gain of $100 ($200 cash distribution less $100 outside basis), equal to his one-third share of the unrealized appreciation in the land. If the partnership’s basis in the land is not adjusted and the land is sold for $400, the partnership will realize $300 of gain which will all flow through to the continuing partners (B and C). In effect, A’s one-third share of the unrealized appreciation ($100) will be taxed twice, once to A on liquidation and again to the continuing partners (B and C) on sale of the land. The overstatement of gain should be only temporary, however, since the continuing partners will increase their outside bases to reflect the full amount of gain from sale of the land. If the § 754 election is in effect, § 734(b)(1)(A)
- Assume that the partnership property is revalued immediately before the distribution, and that the partnership does not have a § 754 election in effect. If the partnership’s substantially appreciated inventory were sold prior to the distribution, each partner would recognize $20 of hot asset gain (one third of the unrealized appreciation in the inventory). The distribution triggers § 751(b), since A’s share of hot asset gain is reduced to zero following the distribution. Under the deemed gain approach, A recognizes $20 of ordinary income; A’s outside basis is increased from $45 to $65, and the partnership’s basis in the retained inventory is increased from $15 to $35. Thus, A’s share of ordinary income is fully recognized, and B and C would each be taxed on $20 of ordinary income on a subsequent sale of the inventory ($75 fair market value less $35 basis).
- While the elective feature of § 754 can be defended on grounds of administrative convenience, Congress clearly recognized that the absence of mandatory basis adjustments might give rise to distortions between the partnership’s inside basis and the partners’ outside bases. The § 701 anti-abuse regulations apply a facts-and-circumstances test to determine whether the tax consequences flowing from the failure to make a § 754 election run afoul of the “proper-reflection-of-income” test. In one example, a withdrawing partner receives a distribution of assets with a higher basis in the partner’s hands than in the partnership’s hands; by failing to make a § 754 election, the partnership retains an artificially high basis in its remaining assets. Reg. § 1.701–2(d), Ex. 9
- The rules governing current and liquidating distributions are intended generally to defer recognition of as much gain or loss as possible, both to the partnership and to the distributee partner. Section 731(b) provides that the partnership recognizes no gain or loss on a distribution of property (including cash) to a partner. The distributee, in turn, recognizes gain only to the extent that he receives a distribution of cash in excess of his basis in his partnership interest, and recognizes loss only on certain liquidating distributions. Any recognized gain or loss is treated as arising from the sale or exchange of the distributee’s partnership interest. § 731(a) . Finally, certain distributed property retains its ordinary income character in the distributee’s hands. § 735
- Distributions reduce the distributee partner’s book capital account by the amount of money and the fair market value of property (net of liabilities which the distributee assumes or takes subject to). Reg. . Prior to the distribution, the partners’ book capital accounts must first be adjusted to reflect the manner in which any unrealized income, gain, loss or deduction inherent in the property (and not previously reflected in the capital accounts) would be shared by the partners if the partnership sold the property for its fair market value on the date of the distribution (the “deemed sale adjustment”). Reg. § 1.704–1(b)(2)(iv)(e)(1) . Although an in-kind distribution of property is generally nontaxable to the partnership, the capital account adjustments are necessary to balance the partnership’s books and prevent economic distortions. The effect of a distribution on the partnership’s balance sheet is to reduce both the left-hand side (showing assets) and the right-hand side (showing...
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Chapter 5. Contributed Property: Section 704(c) 82 results (showing 5 best matches)
- Use of the traditional method with curative allocations may also be unreasonable. The regulations illustrate this point with an example quite similar to the one above, except that the tax brackets of the contributing and noncontributing partners are reversed. Reg. § 1.704–3(c)(4), Ex. 3 . The partnership again depreciates the tax and book basis of the contributed property over its one-year remaining recovery period, allocating the tax and book depreciation equally among the partners. At the end of the first year, the partnership sells other property which generates $80,000 of ordinary income. Although the ordinary income is allocated equally to A and B for book purposes, the partnership elects to make a curative allocation of $40,000 of ordinary income to A. The curative allocation eliminates the book/tax disparity attributable to A’s property, and simultaneously shifts $40,000 of ordinary income away from B. The example concludes that the curative allocation is unreasonable because...
- In the case of depreciable § 704(c) property, the partnership does not have to wait until sale of the property to cure ceiling-rule limitations on depreciation. Instead, the partnership may choose to make offsetting curative allocations as ceiling-rule distortions arise. For example, the partnership may allocate additional tax depreciation from other property to the noncontributing partner (and away from the contributing partner). Alternatively, the partnership may shift additional taxable ordinary income to the contributing partner (or shift additional taxable ordinary deductions to the noncontributing partner).
- In the case of an optional revaluation, the capital account adjustments must be based on the fair market value of the partnership’s property (taking § 7701(g) into account) and must reflect the manner in which any unrealized income, gain, loss or deduction inherent in the property (and not previously reflected in the partners’ capital accounts) would be allocated among the partners on a taxable disposition. Once partnership property has been revalued, capital accounts must subsequently be adjusted for the partners’ distributive shares of book items with respect to the revalued property, and § 704(c) principles must be applied in determining the partners’ distributive shares of tax items with respect to such property to take account of book/tax disparities arising from the revaluation. Reg. § 1.704–1(b)(2)(iv)(f)(1)–(4) , –3(a)(6) . In the case of built-in loss property, § 704(c)(1)(C)
- principles also apply to unrealized income and deductions when a cash-method partner contributes accounts receivable, accounts payable or other accrued but unpaid items. § 704(c) (3); Reg. § 1.704–3(a)(4) . When the partnership collects zero-basis accounts receivable, the pre-contribution unrealized income must be allocated to the contributor. Similarly, when a partnership pays accounts payable or other accrued but unpaid items (e.g., unpaid interest expenses) contributed by a partner, the resulting partnership deductions must be allocated to the contributor or capitalized if he is no longer a partner.
- Apart from in-kind contributions of property, book/tax disparities may arise whenever partnership property is revalued under the § 704(b) regulations. A revaluation is permitted or required in certain situations, including (i) in connection with a contribution of money or other property to the partnership by a new or existing partner in exchange for a partnership interest; (ii) in connection with a liquidation of the partnership or a distribution of money or other property to a retiring or continuing partner in exchange for all or a portion of his partnership interest; (iii) in connection with a grant of a partnership interest as consideration for services by a new or existing partner; and (iv) in accordance with generally accepted industry practices if substantially all of the partnership’s assets consist of stock, securities or similar instruments that are readily tradeable on an established securities market. Reg. § 1.704–1(b)(2)(iv)(f)(5)
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Copyright Page 6 results (showing 5 best matches)
- Nutshell Series, In a Nutshell
- The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
- West, West Academic Publishing, and West Academic are trademarks of West Publishing Corporation, used under license.
- Printed in the United States of America
- © West, a Thomson business, 1999, 2005
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Index 111 results (showing 5 best matches)
- See Liquidation of a Partner’s Interest; Transfers of Partnership Interests
- See also Distributions of Partnership Property; Liquidation of a Partner’s Interest
- Partner’s interest in partnership, 122–123, 153–156
- See Partner-Partnership Transactions
- See also Partner-Partnership Transactions
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Outline 173 results (showing 5 best matches)
Table of Cases 5 results
WEST ACADEMIC PUBLISHING’S LAW SCHOOL ADVISORY BOARD 11 results (showing 5 best matches)
- Professor of Law, Chancellor and Dean Emeritus, University of California, Hastings College of the Law
- Professor of Law and Dean Emeritus, University of California, Berkeley
- Robert A. Sullivan Professor of Law Emeritus, University of Michigan
- Distinguished University Professor, Frank R. Strong Chair in Law Michael E. Moritz College of Law, The Ohio State University
- Professor of Law Emeritus, University of San Diego Professor of Law Emeritus, University of Michigan
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Table of Internal Revenue Code Sections 89 results (showing 5 best matches)
- Publication Date: December 23rd, 2016
- ISBN: 9781634607124
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: This book provides a concise overview of federal partnership taxation. It covers partnership formation, including contributions of property and admission of service partners, allocation of income and loss, tax accounting, and sharing of recourse and nonrecourse liabilities. Building on this foundation, the book also addresses advanced topics, including transactions between partners and partnerships, sales of partnership interests, distributions of property, optional and mandatory basis adjustments, and planning for retirement or death of a partner. Numerous concrete examples illustrate the tax treatment of specific transactions, allowing students to grasp the principles of partnership taxation in a problem-oriented course. The revised fifth edition reflects developments through September 2016, including proposed rules relating to compensatory profits interests and fee waivers, contributed built-in loss property, sharing of partnership liabilities and disguised sales, basis adjustments under §§ 734(b), 743(b) and 755, and § 751(b) distributions.
