Black Letter Outline on Partnership Taxation
Authors:
Schwarz, Stephen / Lathrope, Daniel J. / Hellwig, Brant J.
Edition:
9th
Copyright Date:
2019
25 chapters
have results for partnership taxation
Perspective 25 6 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.
- So much additional reading is available on the taxation of partnerships and S corporations that students will need to protect themselves against “information overload.” Among the leading professional treatises in the area are
- 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.
- Partnership tax is regarded as among the most challenging subjects in the law school curriculum. This reputation is well deserved. Quite apart from the intricacies of the Internal Revenue Code, the underlying transactions are complex and the concepts are often unfamiliar even to students with some business or accounting background. The goal of this outline is to make the rules more accessible to students by presenting them in a structured and intelligible format that includes definitions, examples, cross references and practice questions. Although the outline is generally organized to follow the life cycle of a partnership from formation to termination (the so-called “cradle to grave” approach), it should be easily adapted to whatever organization your instructor uses. We reiterate what your instructor no doubt has already preached at the first class—a study aid is no substitute for a careful reading of the primary materials assigned in your course. This outline is intended to...
- 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
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Chapter VIII Compensating the Service Partner 129 68 results (showing 5 best matches)
- In the rare situation where a service partner is taxable on receipt of a profits interest, the partnership logically should be allowed a § 83(h). In addition, the partnership may be considered as having transferred a portion of its future profits in exchange for the services performed by the partner. The disposition will be taxable to the partnership and the profits share then should be treated as if it were transferred back to the partnership, resulting in a tax cost outside basis for the service partner and a fair market value inside basis in the profits share for the partnership. The partnership’s basis in the profits share should be amortized over some period of time to offset the future partnership profits it represents. The benefit of those deductions should be allocated to the service partner to prevent double taxation of the same profits. See V.A.2., at page 82,
- to taxing a transfer of a partnership interest in connection with the performance of services. IRS Notice 2005–43, 2005–1 C.B. 1221; Prop. Reg. § 1.83–1( § 83 to include a partnership interest and provide a safe harbor election for valuation of a transferred partnership interest (whether capital or profits) and nonrecognition for the partnership. Reg. § 1.83–1(e). Under this safe harbor election, the fair market value of a partnership interest transferred in connection with the performance of services is its liquidation value—i.e., the cash the partner would receive if immediately after the transfer the partnership sold all of its assets for cash and liquidated. The liquidation value for a profits interest at the time it is received normally will be zero because the partner would not receive any cash on an immediate liquidation of the partnership. ...to a number of conditions and applies only to a “safe harbor partnership interest,” which essentially is an interest that could have...
- 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. § 61 upon receipt of the payment, assuming A is a cash method taxpayer. Assuming the partnership uses the cash method and 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...
- Partnership wishes to acquire an office building to use in its business. Attorney will do the legal work on the acquisition for the partnership and normally charges $15,000 for such services. Attorney contributes cash for a 10% interest in the partnership and receives both a 10% distributive share of net income for the life of the partnership and an allocation of the first $15,000 of the partnership’s gross income in its first year of operation. The partnership expects to have sufficient cash in its first year to distribute $15,000 to Attorney.
- Partner A in the AB partnership is to receive $30,000 for deductible services, plus 50% of any partnership income or loss. After deducting the $30,000 payment to A the partnership has a $20,000 loss. A will report $30,000 of ordinary income plus her $10,000 distributive share of partnership loss. If the partnership also had a $6,000 long-term capital gain, that item would be separately stated and A also would include a $3,000 distributive share of the gain.
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Title Page 1 result
Capsule Summary 1 129 results (showing 5 best matches)
- Aggregate and Entity Theories of Partnership Taxation
- § 704(c)(1)(A) gain that would have been allocated to that partner if the partnership had sold the property for its fair market value. To prevent double taxation, appropriate adjustments are made to the contributing partner’s outside basis and the partnership’s inside basis in the distributed property.
- A partner’s amount realized on the disposition of a partnership interest includes the cash and the fair market value of any property received for the interest, and any decrease in the selling partner’s share of partnership liabilities. The partner’s adjusted basis includes his distributive share of partnership items for the taxable year of the sale. The partnership’s taxable year only closes with respect to a partner who sells or exchanges his entire partnership interest.
- Partnerships, including general and limited partnerships, limited liability partnerships, and joint ventures. A small number of unincorporated businesses, known as publicly traded partnerships, have ownership interests that may be traded on an established securities market.
- If either the partnership agreement is silent or the partnership allocations lack substantial economic effect, a partner’s distributive share of partnership items is determined in accordance with the partner’s interest in the partnership.
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Chapter I Introduction 29 38 results (showing 5 best matches)
- The taxation of partnerships is covered in Chapters III–XIV.
- The nonrecognition concept has always played an important role in the taxation of corporations and partnerships. In general, all realized gains or losses must be § 1001(c). Transactions typically qualify for “nonrecognition” treatment if they are mere changes in form which result in a continuity of investment. To ensure that realized gain or loss is only deferred, a nonrecognition provision is coupled with transferred and exchanged basis rules that preserve the gain or loss for recognition at a later time. Many corporate and partnership transactions, ranging from simple formations to complex liquidation and acquisitions, will qualify for nonrecognition treatment.
- §§ 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:
- The taxation of C corporations is covered in Schwarz & Lathrope, Black Letter on Corporate Taxation (West 2019).
- In a general partnership, the partners have unlimited liability and generally are bound by the acts of the other partners. General partners ordinarily are personally liable for partnership debts.
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Chapter IV Partnership Operations: General Rules 61 64 results (showing 5 best matches)
- Aggregate and Entity Theories of Partnership Taxation
- Aggregate and Entity Theories of Partnership Taxation
- A partnership has its own taxable year. § 706(b)(1)(A). In computing taxable income, a partner includes in income his distributive share of partnership items in the taxable year in which the partnership taxable year ends. § 706, a partnership generally determines its taxable year according to mechanical rules. First, a partnership is required to use the taxable year of its partners having more than a 50% interest in partnership profits and capital. (4)(A). If partners owning more than a 50% interest do not have the same taxable year, the partnership must use the taxable year of all the principal partners (i.e., partners with a 5% or more interest in profits or capital) of the partnership. (3). If neither of these rules applies, the regulations require the partnership to use the taxable year that results in the least aggregate deferral of income to the partners.
- § 702, a partner is taxed directly on his distributive share of the partnership’s separately stated items and nonseparately computed income or loss. Section 705 adjusts the partner’s outside basis to reflect these results. In general, a partner must increase his outside basis by his distributive share of partnership taxable income and tax-exempt income and decrease it (but not below zero) by partnership distributions, as provided in § 733, and his distributive share of partnership losses and expenditures by the partnership which are neither deductible nor chargeable to a capital account.
- Except for qualified nonrecourse financing, a partner is not considered at risk for nonrecourse borrowings of the partnership. As a result, nonrecourse debt of the partnership may produce outside basis for a partner sufficient to avoid the § 704(d) limitation, but the partner still may be denied a deduction for partnership losses and deductions because he is not sufficiently at risk in the venture. In that situation the partner’s outside basis is nonetheless reduced by the distributive share of partnership loss passed through from the partnership.
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Appendix C Glossary 261 52 results (showing 5 best matches)
- This glossary is intended to provide the reader with brief definitions of some of the terms frequently encountered in a course covering the taxation of partnerships and S corporations. More comprehensive definitions of many of these terms are included in the body of the outline.
- An accounting method used to apportion partnership items when a partnership’s taxable year closes or interests in the partnership change during the year. Under this method, the portions of partnership items attributable to different periods in the partnership’s taxable year are determined under the partnership’s accounting method rather than simply prorated on a daily basis throughout the year.
- An accounting method used to apportion partnership items when a partnership’s taxable year closes or interests in the partnership change during the year. Under this method, the portions of most partnership items attributable to different periods in the partnership’s taxable year are prorated on a daily basis throughout the year.
- Tiered Partnership:
- A term used in the regulations governing allocations with respect to nonrecourse liabilities of a partnership. Partnership “minimum gain” with respect to a nonrecourse liability is the amount of gain which would be realized by the partnership if it disposed of the partnership property subject to the liability in full satisfaction of the liability and for no other consideration.
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Chapter VII Partnership Liabilities 117 36 results (showing 5 best matches)
- If a partnership (the “upper-tier partnership”) is a partner in another partnership (the “subsidiary partnership”), the upper-tier partnership’s share of the subsidiary partnership’s liabilities (other than liabilities owed to the upper-tier partnership) are treated as liabilities of the upper-tier partnership for purposes of applying § 752 to the partners of the upper-tier partnership. Reg. § 1.752–4(a); see
- The effect of partnership liabilities on outside basis was introduced in Chapter 2, when formation of a partnership was discussed. This chapter provides greater detail on allocation of partnership liabilities among partners. First, recall the basics. Under § 752(a), an increase in a partner’s share of partnership liabilities is considered a contribution of money which increases the partner’s outside basis under § 722. A decrease in a partner’s share of partnership liabilities is considered under 733. If a decrease in a partner’s share of partnership liabilities exceeds the partner’s outside basis, the partner must recognize the excess as capital gain from the sale or exchange of the partnership interest. §§
- Equal partners in a general partnership ordinarily will share the economic risk of loss for any partnership recourse liability equally because they share the economic burden of that debt equally. Similarly, limited partners ordinarily do not bear the economic risk of loss for any partnership liability because they generally have no obligation to contribute additional capital to the partnership.
- A and B form a general partnership with each contributing $20,000 cash. A and B agree to share all partnership profits equally but partnership net taxable loss will be allocated 90% to A and 10% to B. A and B also agree to comply with The Big Three. The partnership purchases depreciable personal property for $40,000 in cash and a recourse purchase money note of $60,000. Under the doomsday liquidation analysis employed by the § 752 regulations, all partnership assets are deemed worthless and all partnership liabilities are deemed due and payable. If the partnership immediately liquidated after incurring the purchase money obligation, it would recognize a $100,000 tax loss on the disposition of its depreciable personal property for no consideration. Under the partnership agreement, A would be allocated $90,000 of the loss and B $10,000. Their capital accounts would be adjusted as follows:
- A partner’s share of partnership nonrecourse liabilities is equal to the sum of: (1) the partner’s share of “partnership minimum gain” and (2) the amount of any taxable gain that would be allocated to the partner under § 704(c) if the partnership disposed of its property subject to nonrecourse liabilities for relief of such liabilities and no other consideration. (2). Any remaining partnership nonrecourse liabilities are shared by the partners in accordance with their shares in partnership profits. Reg. § 1.752–3(a)(3). The partners’ interests in partnership profits are determined by taking into account all facts and circumstances relating to the economic arrangements of the partners. The regulations also permit the partners to specify their interests in partnership profits for purposes of determining their shares of nonrecourse liabilities as long as the interests are reasonably consistent with allocations of some significant items of partnership income or gain among the partners.
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Chapter XII Liquidating Distributions and Terminations 189 58 results (showing 5 best matches)
- A merger or combination of partnerships can take three forms: (1) the terminated partnership can contribute its assets and liabilities to the resulting partnership in exchange for a partnership interest and then distribute interests in the resulting partnership to its partners in liquidation (assets-over form), (2) the terminating partnership can distribute all of its assets to its partners in liquidation of the partners’ interests and then the partners could immediately contribute the distributed assets to the resulting partnership in exchange for partnership interests (assets-up form), or (3) the partners in the terminating partnership can transfer their partnership interests to the resulting partnership in exchange for partnership interests and then the resulting partnership can liquidate the terminating partnership (interests-over form). The tax results of a merger of partnerships may vary depending on the form selected for the transaction. For example, the adjusted basis of the...
- 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
- If two or more partnerships merge or consolidate, the resulting partnership is considered the continuation of any merged or consolidated partnership whose members own more than 50% in the capital and profits of the resulting partnership. § 708(b)(2)(A). If the resulting partnership can be considered a continuation of more than one of the merged or consolidated partnerships under that test, it is considered a continuation of solely the partnership that contributed assets with the greatest fair market value (net of liabilities) to the resulting partnership. Reg. § 1.708–1(c)(1). Any other merged or consolidated partnership is considered terminated. If the members of none of the merged or consolidated partnerships have an interest of more than 50% in capital and profits of the resulting partnership, then all of the merged or consolidated partnerships are terminated and a new partnership results.
- If a partnership divides into two or more partnerships, the resulting partnerships are considered a continuation of the prior partnership if members of the resulting partnership had an interest of more than 50% in the capital and profits of the prior partnership. § 708(b)(2)(B). Any other resulting partnership is considered a new partnership. Reg. § 1.708–1(d)(1). Partnership divisions can be accomplished through an assets-over or assets-up form. The regulations respect whichever of those two forms is selected. If no form is selected or if the assets-up form is not selected, the division is treated as taking the assets-over form.
- 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. § 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, In the case of a general partnership interest in a partnership in which capital is not a material income-producing factor, payments for the partner’s share of unrealized receivables and goodwill, except to the extent the partnership agreement provides for a specific payment with respect to goodwill, are excluded from § 736(b) (i.e., (1) payments for unrealized receivables and “unstated goodwill” for a general partnership interest in a services partnership, and (2) “premium” payments paid to the partner in excess of her share...
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Chapter XV S Corporations 215 15 results (showing 5 best matches)
- In 1958, Congress created a method for corporations to avoid the double tax by enacting Subchapter S, which allows the shareholders of a “small business corporation” to elect to be taxed directly on corporate-level profits. The S corporation taxing scheme was substantially improved by the Subchapter S Revision Act of 1982, which adopted a simplified pass-through approach. As a result, the taxation of S corporations and their shareholders became similar, but not identical, to the taxation of partnerships and their partners, and S corporations became a more attractive legal form for operating a business enterprise. Subsequent legislation has liberalized the eligibility requirements and made S corporations more accessible vehicles for operating a closely held business.
- Unlike partners, who generally may include their share of the partnership’s indebtedness in the basis of their partnership interest, S corporation shareholders may not include debts incurred by the corporation in their stock or debt basis.
- Taxation of the S Corporation
- Taxation of the S Corporation
- § 1366(a). Even though aggregate principles are employed for the taxation of an S corporation’s income or loss, entity principles generally are used for its computation.
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Chapter IX Property Transactions Between Partnerships and Partners 147 20 results (showing 5 best matches)
- § 707(a)(2) regulations dealing with the distribution of loan proceeds. So-called “debt-financed distributions” begin with a potential seller and buyer of property forming a partnership. The seller contributes the desired asset and the partnership incurs a loan approximately equal to the “purchase price” for the asset. The partnership then distributes the loan proceeds to the seller tax free under Reg. § 1.707–5(b)(1), which generally provides that if a partner transfers property to a partnership and the partnership incurs a liability the proceeds of which are distributed with 90 days of the liability being incurred, the transfer of money to the contributing partner is only taken into account under ...)(2)(B) to the extent the money received exceeds the contributing partner’s share of the liability. A key to the transaction is the selling partner obtaining outside basis credit for a share of the liability. Taxation of the “sale” then is deferred until the debt is satisfied and a...
- § 707(a)(1), a sale of property between a partner and a partnership generally is treated in the same manner as a sale between the partnership and a nonpartner. Several other provisions are designed to prevent tax avoidance through transactions between related parties. Section 707(b)(1) disallows losses on sales or exchanges of property between a partnership and a partner who owns, directly or indirectly, more than 50% of the capital or profits interests of the partnership. Losses are also disallowed on sales or exchanges between two partnerships in which the same persons own, directly or indirectly, more than 50% of the capital and profits interests. Under § 1239, gain on the sale or exchange of property between a partner and a controlled (i.e., more than 50% owned) partnership or between two controlled partnerships is characterized as ordinary income if the property: (1) is not a capital asset in the hands of the transferee or (2) is depreciable in the hands of the transferee. For...
- 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?
- 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 § 721 contributions of property and partnership distributions are not within the jurisdiction of
- Partner A plans to lease equipment to the ABC partnership for five years at an annual $10,000 rental fee. If the partnership pays A the full $50,000 five-year rental fee in the first year, A will have $50,000 of income and the partnership will have to capitalize the $50,000 expenditure and deduct it at the rate of $10,000 per year. Alternatively, if the partnership could give a $50,000 special allocation of gross income in the first year, that allocation would have the same effect as an immediate $50,000 deduction in that it would reduce the distributive shares of the other partners.
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Chapter VI Partnership Allocations: Income-Shifting Safeguards 101 70 results (showing 5 best matches)
- The potential exists for these rules to be avoided by using tiers of partnerships. For example, a business could be operated in a partnership (the “lower-tier” partnership) which has other partnerships (“upper-tier” partnerships) as its partners. Changes in ownership of upper-tier partnerships would not alter ownership of the lower-tier partnerships and would not be subject to § 706(d), if there is a change in any partner’s interest in an upper-tier partnership then the distributive shares of the partners in the upper-tier partnership attributable to a lower-tier partnership must be determined on a per-day, per-partner basis.
- Mother owns $500,000 of securities which she contributes to a partnership in which she is an equal partner with Daughter, who provides no capital for her one-half interest in the partnership. The income from the partnership is $75,000. Assume that under Daughter will be recognized as a partner in the partnership because Mother and Daughter had a bona fide intent to join together in the present conduct of an enterprise. Daughter’s distributive share must be determined so as to reasonably compensate Mother for all services she has rendered to the partnership. § 704(e)(1). If, for example, Mother provides investment management services to the partnership with a reasonable value of $15,000, an allocation of partnership profits which did not compensate her for those services (e.g., $37,500 of profits to both Mother and Daughter) would not be respected. An allocation which did not compensate Mother for her partnership capital at the same rate as Daughter also would not be respected. The...
- The taxable year of a partnership generally does not close as a result of shifts during the year in the partners’ interests in the partnership. For example, if a new partner enters the partnership, or a partner disposes of part of her partnership interest through a gift or sale, the partnership’s taxable year closes at its normal time and the partners include their distributive share of partnership items at that time. (2)(B). If, however, there are changes during the year in any partner’s interest in the partnership (by entry of a new partner, partial liquidation of the partner’s interest, gift or otherwise), § 706(d)(1) requires that each partner’s distributive share of partnership items be determined by taking into account the partners’ varying interests in the partnership during the year. The varying interest rule in ...If the capital interests of the partners do not shift during the year, the partners generally are free at year end to amend the partnership agreement and...
- Assume Nupartner joins a partnership as a one-fourth partner on July 1 of the current year. Under § 706(d)(1) all of the partners’ distributive shares must be determined by taking into account their varying interests during the year. Under the default interim closing of the books method, Nupartner would be allocated one-fourth of the partnership items properly allocated to the July 1 to December 31 period under the partnership’s method of accounting. If the partnership properly elected the proration method, Nupartner would be allocated one-half of his hypothetical one-fourth share of partnership items for the full year.
- 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 III Formation of a Partnership 51 41 results (showing 5 best matches)
- If a taxpayer contributes property to a partnership in exchange for an interest in the partnership, the transaction arguably should be taxable to both the new partner and the partnership. The new partner might be required to recognize gain or loss equal to the difference between the fair market value of the partnership interest and the adjusted basis of the contributed property. Likewise, the partnership might have to recognize gain or loss on its receipt of the contributed property. Section 721 eliminates these theoretical concerns by providing that gain or loss is not recognized by either a partnership or its partners on a contribution of property to the partnership in exchange for a partnership interest. The policy is that the contribution of property to a partnership is a mere change in the form of the taxpayer’s investment and not an appropriate taxable event. Consistent with its nonrecognition policy, ...unrecognized gain or loss in the new partner’s basis in the partnership...
- 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.
- A noncompensatory option is an option that is not issued in connection with performance of services for the partnership. Reg. § 1.721–2(f). A noncompensatory option includes a call option, or warrant to acquire a partnership interest, the conversion feature in a partnership debt instrument, and the conversion feature in a preferred equity interest in a partnership.
- If a creditor of a partnership contributes the partnership’s indebtedness in exchange for a capital or profits interest in the partnership, Reg. § 1.721–1(d)(2). In determining whether there is discharge of indebtedness income, the partnership is treated as satisfying the debt with an amount of money equal to the fair market value of the partnership interest. Reg. § 1.108–8(a). “Fair market value” for this purpose generally is deemed to be the liquidation value of the partnership interest.
- On a contribution of property in exchange for a partnership interest, a partner’s outside basis under § 722 is equal to the sum of the money and the adjusted bases of property contributed to the partnership. Under § 723, the partnership’s inside basis is equal to the basis the contributing partner had in the property. Both the contributing partner and the partnership obtain a basis increase if gain is recognized under the investment partnership rule in
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Chapter V Partnership Allocations: § 704(b) 81 75 results (showing 5 best matches)
- Partnership minimum gain with respect to a particular nonrecourse liability is defined as the amount of gain, if any, that would be realized if the partnership disposed of the partnership property subject to the liability in full satisfaction of such liability and no other consideration. Reg. § 1.704–2(d)(3), partnership minimum gain is determined with reference to the book value of partnership property if book value differs from the property’s adjusted tax basis. Partnership minimum gain is the aggregate of the separately computed gains. The increase or decrease in partnership minimum gain is determined by comparing the partnership minimum gain on the last day of the preceding taxable year with the partnership minimum gain on the last day of the current taxable year.
- Because the business or financial relationship among partners, as memorialized in the partnership agreement, may not directly correspond to the tax results you have studied in Subchapter K, principles of financial accounting are used to “keep score” of partnership activities. A partnership must maintain records of its assets, liabilities, and each partner’s share of partnership capital. Typically, these matters are reflected in the partnership’s balance sheet, with assets on the left side and partnership capital and liabilities on the right side. The main rule of thumb for financial accounting is that an enterprise’s assets equal its ...plus the owner’s equity or capital. A simple example illustrates these principles. Assume A and B agree to form the AB general partnership with A contributing $20,000 of cash and B contributing an asset in which she has a $12,000 adjusted basis and which the partners agree has a $20,000 fair market value. A and B agree to be equal partners and share...
- The financial books of the partnership and the partners’ capital accounts will be kept in accordance with the partnership agreement and reflect the business arrangement agreed to by the partners. Thus, on the ultimate liquidation of the AB partnership, A and B will have equal capital accounts reflecting the fact that they agreed to share partnership assets equally.
- A and B form a general partnership with each contributing $30,000 cash. The partnership uses the $60,000 to purchase depreciable property. The partnership agreement provides that A and B will share partnership taxable income and loss (other than cost recovery deductions) and cash flow equally, but all cost recovery deductions will be allocated to A. A and B agree to properly maintain capital accounts and on liquidation of the partnership (or any partner’s interest) partnership assets will be distributed in accordance with capital account balances, but no partner has an obligation to restore a deficit balance in her capital account. The partnership agreement also contains a qualified income offset. Assume that in its first year AB breaks even (income equals expenses) except that it has a $15,000 cost recovery deduction which under the terms of the partnership agreement is all to be allocated to A. Assuming future distributions are not reasonably expected to create a deficit in A’s...
- Assume C and D form a partnership and agree that partnership income, gain, loss and deduction will be allocated 60% to C and 40% to D. The CD partnership agreement fails to require the maintenance of capital accounts, but under a state law right of contribution C and D are ultimately liable for 60% and 40%, respectively, of partnership debts. The partnership allocation will have economic effect under the economic effect equivalence test. See
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Chapter XI Operating Distributions 169 76 results (showing 5 best matches)
- § 734(a), the partnership’s asset still has $3,000 of gain potential even though A recognized $1,000 of gain on the distribution. Thus, if the partnership sold the capital asset, B and C would each recognize $1,500 of gain which would increase their outside bases to $11,500. B and C would each have $500 of potential loss built into their partnership interests which would be recognized only if they dispose of their partnership interests or if the partnership liquidates.
- A partner generally does not recognize gain or loss on the receipt of a cash distribution from a partnership. § 731(a). If, however, the money distributed exceeds the partner’s outside basis, the excess is recognized as gain from the sale or exchange of the partner’s partnership interest. § 731(a)(1). A partner’s outside basis is reduced (but not below zero) by the amount of any money distributed by the partnership. §§
- These rules apply only to distributions by a partnership. So, for example, if a partnership loans money to a partner, there is no distribution but a later cancellation of the partner’s repayment obligation is considered a distribution. Reg. § 1.731–1(c)(2). Advances or draws of money or property by a partner against his distributive share of income are considered distributions on the last day of the partnership’s taxable year because they are contingent on the profitability of the partnership and must be repaid to the extent the partnership does not have sufficient profits. Advances and draws thus are similar to loans. § 752(b), which occur as a result of a decrease in a partner’s share of partnership liabilities. A deemed distribution of money under § 752(b) is treated as an advance or draw and is taken into account at the end of the partnership taxable year.
- A’s outside basis is $10,000. If the partnership distributes $8,000 cash to A in a pro rata distribution to all partners, he will not recognize any gain or loss and his outside basis will be reduced to $2,000. If, instead, the partnership distributed $13,000 cash to A, he would recognize $3,000 of gain from the sale or exchange of his partnership interest and his outside basis would be reduced to zero. The results would be the same if under § 752(b) the $13,000 distribution resulted from a $13,000 decrease in A’s share of partnership liabilities.
- § 731(c) do not apply to: (1) distributions of marketable securities from an “investment partnership”; (2) a distribution of a security to a partner who contributed that security to the partnership; and (3) in several other very specialized situations. § 731(c)(3). For purposes of the first exception, an “investment partnership” is a partnership that never has engaged in a trade or business and substantially all of the assets of which consists of stocks, bonds, cash, currencies, and other investment-type assets.
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Chapter X Sales and Exchanges of Partnership Interests 153 74 results (showing 5 best matches)
- The selling partner’s adjusted basis for her partnership interest is her outside basis determined under ), adjusted to reflect her share of partnership income or loss for that part of the partnership’s taxable year up to the sale. Although the taxable year of a partnership generally does not close as a result of partner-level events ( § 706(c)(1)), it does close with respect to a partner who sells or exchanges her entire interest in the partnership ( § 706(c)(2)(A)(i)). In that situation, the selling partner includes in income her distributive share of partnership items for the short taxable year, and they are reflected in her outside basis. The portion of the partnership’s income attributable to the selling partner’s short taxable year is determined by taking into account the partners’ varying interests in the partnership.
- An exchange of partnership interests does not qualify for nonrecognition as a like-kind exchange. § 1031(a)(2)(D). This rule applies regardless of whether the interests exchanged are general or limited partnership interests, or interests in the same partnership or different partnerships.
- At the partnership level, § 743(a) provides that the transfer of a partnership interest generally has no impact on the basis of partnership property. This rule may produce distortions in the timing and character of the buying partner’s income or loss. To help remedy these potential distortions a partnership may elect under
- A, B, and C are equal partners in the ABC partnership, which has not made a § 754 election. The partnership has two assets: Asset X, with a built-in gain of $1 million, and Asset Y, with a build-in loss of $900,000. Pursuant to the partnership agreement, any gain on the sale of Asset X is specially allocated to A. The partners otherwise share equally in all other partnership items, including the built-in loss in Asset Y. C sells his one-third partnership interest to D for $33,333. The partnership does not have a substantial built-in loss as defined by § 743(d)(1)(A) because the adjusted basis of its assets does not exceed their fair market value by more than $250,000. But if the partnership were to sell all its assets for cash at their fair market value immediately after C’s transfer to D, D would be allocated a $300,000 loss (one-third of the $900,000 built-in loss in Asset Y). As a result, there is a substantial built-in loss under the test in ...)(B), requiring the partnership to...
- An “electing investment partnership” may take advantage of a special rule that allows it to avoid the administrative inconvenience of inside basis adjustments when it has a substantial built-in loss immediately after the transfer of a partnership interest. See § 743(e)(6) for the definition of an electing investment partnership. Under § 743(e)(2), a loss limitation rule is imposed on a transferee partner in lieu of an inside basis adjustment for the partnership. Under the limit, a transferee partner’s share of losses (without regard to gains) from the sale or exchange of partnership property is not allowed except to the extent it is established that such losses exceed any loss recognized by the transferor on the transfer of the partnership interest. §§ (2). An even more exotic investment vehicle, a “securitization partnership,” is permitted to avoid both an inside basis adjustment and the
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Chapter XIV Partnership Anti-Abuse Rule 209 25 results (showing 5 best matches)
- 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.
- 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. Reg. § 1.701–2(a)–(c). The second rule permits the IRS to disregard the partnership entity and treat a partnership as an aggregate of its partners (in whole or in part) as appropriate to carry out the purposes of the Code or regulations.
- One or more partners either have nominal partnership interests or are substantially protected from any risk of loss from partnership activity or have little or no participation in partnership profits except for a preferred return that is a payment for use of capital;
- The partnership must be bona fide and each partnership transaction must be entered into for a substantial business purpose;
- The tax consequences under Subchapter K to each partner of partnership operations and transactions between the partner and the partnership must accurately reflect the partners’ economic agreement and clearly reflect the partner’s income.
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Appendix A Answers to Review Questions 245 48 results (showing 5 best matches)
- § 707(c) guaranteed payment, A will have $10,000 of income and the partnership will receive a $10,000 § 162 deduction, assuming A’s services are not a capital expenditure. The timing of the guaranteed payment is determined by the year in which the partnership accrues the guaranteed payment. Thus, even if it is not paid, A is taxed when the partnership accrues the guaranteed payment. Assuming the guaranteed payment is deductible to the partnership under § 162, the partnership ends up with $70,000 of ordinary income and $20,000 of long-term capital gain.
- The types of partnership property are: 1) “premium” amounts paid in addition to the partner’s share of partnership property which are in the nature of mutual insurance; and 2) unrealized receivables as defined in § 751(c) (excluding depreciation recapture), and goodwill, unless the partnership agreement expressly provides for payment of goodwill, when the payments are for a general partnership interest in a partnership where capital is not a material income-producing factor.
- Under the partnership anti-abuse regulation, the Service can disregard the purported partnership; treat a purported partner as a nonpartner; adjust the partnership’s accounting method; reallocate items of partnership income, gain, loss, deduction or credit; or otherwise adjust or modify the claimed tax treatment.
- False. Elections affecting the determination of partnership taxable income generally are made by the partnership.
- partnership will have $72,000 of ordinary income and $18,000 of long-term the partners in the taxable year in which the partnership’s taxable year ends.
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Chapter II Classification 39 37 results (showing 5 best matches)
- “Publicly traded partnerships” are generally classified as corporations. § 7704(a). A “publicly traded partnership” is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). Section 7704(c) provides an exception for publicly traded partnerships in which 90% or more of the gross income consists of various types of passive investment income.
- 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. §§ 6031. The timing and character of the income realized by the owners also may be affected if a business activity is classified as a partnership.
- The operation of many Internal Revenue Code sections also varies depending on whether the taxpayer is an individual, a partnership, a corporation or some other type of entity. For example, under § 179 property” each year. In the case of a partnership, the dollar limit is applied at both the partnership and partner levels. § 179(d)(8). Thus, if two individuals enter into a business relationship which is not classified as a partnership, each taxpayer will be eligible to expense up to the § 179 cost limit, but if the activity is classified as a partnership the benefits of § 179 will be restricted to one limit for the partnership.
- Beginning in the 1960s, investors in tax shelters sought partnership rather than corporate status. Limited partnerships became the preferred vehicle for tax shelters because they permitted losses to pass through to investors and provided protection for the limited partners against personal liability for debts of the enterprise. The Service argued that limited partnerships should be classified as associations despite its regulations, which then had a bias in favor of partnership status. These efforts to recharacterize limited partnerships as associations were unsuccessful. See . The restrictions on deducting losses from tax shelter investments that were enacted in the Tax Reform Act of 1986 reduced but did not eliminate the importance of the association versus limited partnership classification issue.
- A business entity with two or more members that is not automatically classified as a corporation is classified as a partnership for federal tax purposes, unless an election is made for the entity to be classified as a corporation. –3(b)(1)(i). Consequently, an unincorporated entity, such as a limited liability company or limited partnership, with two or more members will automatically be classified as a partnership unless such an election is made.
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Chapter XIII Death of a Partner 203 21 results (showing 5 best matches)
- § 443(a)(2). In general, the partnership’s taxable year does not close when a partner dies. § 706(c)(1). The taxable year of the partnership, however, does close with respect to a partner whose interest in the partnership terminates, whether by reason of death, liquidation, or otherwise. § 706(c)(2). Thus, a deceased partner’s final tax return includes a distributive share of partnership income or loss for the portion of the partnership’s taxable year prior to death.
- If the partnership has made a § 754 election, a transfer of a deceased partner’s partnership interest will result in a § 743 adjustment to the basis of the partnership’s assets. In addition, an adjustment to the basis of the partnership’s assets when a deceased partner’s interest is transferred if the partnership has a substantial built-in loss immediately after the transfer. The partnership has a substantial built-in loss if the adjusted basis of its property exceeds the fair market value of such property by more than $250,000.
- If A’s entire partnership interest in Example (1) were sold as of the date of her death pursuant to a preexisting buy-sell agreement, the partnership’s taxable year would close with respect to A and she would include her $2,000 share of partnership income and that item would not be IRD. § 706(c)(2)(A). A’s share of the partnership’s accounts receivable is still IRD and the basis of A’s partnership interest for purposes of the sale would be $23,000 ($26,000 less $3,000 of IRD). If the partnership had a § 754 election in effect, A’s partnership interest would obtain a $8,000 inside basis adjustment
- 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.
- § 736(a) payments (payments for a general partnership interest in a services partnership for unrealized receivables and unstated goodwill as well as premium payments made to any liquidated partner) made by a partnership to an estate or other successor in interest of a deceased partner also are IRD. If a partnership interest held by an estate or successor in interest is liquidated by the partnership, any § 736(b) property (e.g., cash method accounts receivable of a partnership in which capital
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Appendix B Practice Examination 257 11 results (showing 5 best matches)
- Partner X has decided to leave the partnership at the end of 2019 and is considering various transactions to achieve that result. On December 31, 2019, X will have a $85 basis in her partnership interest. The XYZ Partnership has made a
- 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.
- Since the partnership has a § 743(b) upward inside basis adjustment equal to $55, which is the difference between Buyer’s outside basis ($140) and his $85 share of the adjusted basis to the partnership of its property. Buyer’s interest in the partnership’s previously taxed capital is $65 ($120, the amount of cash Buyer would receive if the partnership liquidated after a hypothetical sale of its assets, minus $55 of the gain in the accounts receivable, inventory, and land from the hypothetical sale). Buyer’s share of the adjusted basis to the partnership of its property is $85 ($65 share of previously taxed capital, plus $20 share of the partnership’s liabilities).
- X, Y and Z are equal general partners in the XYZ Services Partnership. On December 31, 2019, the XYZ Partnership will have the following balance sheet:
- § 751(d) inventory items. In a hypothetical sale of all of the partnership’s property, X would be allocated $35 of income from the accounts receivable and inventory. Thus, $35 of X’s gain is ordinary and the remaining $20 of gain is capital gain under § 741. X’s capital gain is long-term or short-term depending on the holding period for her partnership § 741 gain is attributable to partnership collectibles or unrecaptured
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Summary of Contents 17 results (showing 5 best matches)
Index 281 48 results (showing 5 best matches)
Table of Contents 43 results (showing 5 best matches)
- 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.