Exam Pro on Partnership Taxation
Authors:
Wootton, Robert R. / Lawsky, Sarah B.
Edition:
2nd
Copyright Date:
2020
20 chapters
have results for partnership taxation
Chapter 5. Inside and Outside Basis Revisited 90 results (showing 5 best matches)
- These hypotheticals could be multiplied to cover many other situations where aggregate inside basis does not equal aggregate outside basis. In each situation, the inequality leads to under-taxation or over-taxation of partnership income, relative to the norm of direct ownership. There is “no need or room” for this result in a properly functioning partnership tax system.
- This Chapter began with the observation that the equality of inside and outside basis is the fundamental principle of the partnership tax system. When inside and outside basis are unequal, partnership income will be overtaxed or undertaxed, at least temporarily, relative to the taxation of the same income earned directly by the partners without an intervening entity.
- The outside-basis adjustments of section 705 can be entirely explained by the need for equality between inside basis and outside basis. Return for a moment to the case of Stella, whom we met in Topic 5.1. When her partnership sells for $1,000 the asset she contributed with an adjusted basis of $400, the partnership realizes a $600 gain, which it passes through to her. When the partnership distributes the $1,000 cash proceeds of sale to Stella, she is threatened with a second $600 gain, because the cash distribution exceeds her initial outside basis by that amount. section 731(a)(1), discussed in Topic 9.1. The adjustment provided by section 705(a)(1)(A) forestalls this double taxation by increasing her outside basis from $400 to $1,000 as a result of the allocation to her of the $600 gain on sale by the partnership. It avoids double taxation, in other words, by equalizing inside and outside basis.
- , Inside Basis Adjustments and Hot Asset Exchanges in Partnership Distributions
- income, gains and losses realized by the partnership should produce adjustments to outside basis. This would still leave room, however, for double or no taxation, as illustrated by the following Questions.
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About This Bookvii 5 results
- Although the cover proclaims that this is a book on “partnership taxation,” its sole focus is US federal income taxation in the domestic context. It mentions other US federal taxes—estate, gift and excise—only in passing and largely ignores the state and local tax consequences of operating a business as a partnership or limited liability company. It does not cover the development of the centralized partnership audit regime, which has been a major item on the business plan of the IRS since 2015. There is also little attention paid to the application of US federal income tax principles to international partnerships. Chances are, your law school course on partnership taxation will be similarly limited in scope.
- The book begins with an extensive “reading period,” which breaks down partnership tax into 59 topics, arranged into 10 chapters. You can read it straight through if you want to, but you’ll probably jump around, either to review the material that you just covered in class or to bone up for an exam. Clear, explanatory titles and extensive cross-references should help you find your way. Unless you are already confident in your understanding of partnership accounting, we recommend that you spend some time with the material at the beginning of Chapter 2, which introduces the simple accounting concepts that underlie all of partnership tax. Mastering these concepts will enhance your understanding—enjoyment, even—of the material in your partnership tax course. It will also improve your grade.
- Students often ask where they can find a book that contains problems like the ones we do in class, with answers so they can see if they’re getting it right. It’s a good question. The problem method is used in most partnership tax courses to teach the subject and in most partnership tax exams to test students’ mastery of it. A book of problems with complete answers would seem to be not only a perfect supplement to the course material during the semester, but an ideal way for students to prepare for the final exam. So here it is. In this book, there are over 400 questions. They are mainly multiple-choice, with full explanations of the correct (and incorrect) answers.
- It is unlikely that you will cover all the topics in this book in your partnership tax course. That’s okay—just skip what you don’t need. In each chapter, the topics are arranged in order of increasing difficulty. The practice questions in each topic are similarly arranged. Every practice question has a complete answer in the back of the book.
- The “final exam” portion of the book includes 12 sample exams of 10 questions each. Most of the questions come from exams in basic or advanced partnership tax courses at Northwestern Pritzker School of Law. As with the study topics, the exams are arranged roughly in order of increasing difficulty. Complete answers are in the back.
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Chapter 9. partnership distributions 235 results (showing 5 best matches)
- Whenever you confront a partnership distribution, ask yourself three questions. What is the distributee-partner’s outside basis immediately before the distribution? Is the distribution currently taxable? And, what is the basis of the distributed property and of the distributee’s remaining partnership interest following the distribution? The question of tax basis, always a critical inquiry in partnership taxation, is particularly important here.
- In an effort to ease the taxation of current distributions, the IRS permits “advances” or “draws” against a partner’s anticipated share of the partnership’s income for the year to be treated as current distributions made on the last day of the partnership’s tax year. Treas. Reg. § 1.731–1(a)(1)(ii). Universally known as the “drawings rule,” this regulation is particularly useful for partners of service partnerships who receive monthly cash payments against the current year’s earnings. The rule allows them to increase outside basis by their share of the partnership’s income for the entire year before determining the tax treatment of the cash distributed to them during the year. In Rev. Rul. 94–4, 1994–1 C.B. 195, the IRS extended this treatment to deemed cash distributions under section 752(b).
- . The 1956 regulations cause section 751(b) to apply to current distributions of cash (or other non-section 751(b) property) in which no ordinary income is being shifted. The reason is that the 1956 regulations do not take section 704(c) into account. While this is understandable, given that the 1956 regulations were issued 28 years before Congress made section 704(c) mandatory, it is out of step with the current tax reality. Prior to making a current distribution that changes the partners’ respective interests in the partnership, partnerships quite routinely revalue their assets, which has the effect of embedding in the book capital accounts of all the partners, including those of the distributee(s), all the existing appreciation in the partnership’s assets, including its section 751(b) property. When the partnership recognizes this income or gain for tax purposes, it must allocate the taxable income and gain to follow the previously allocated book gain. Treas. Reg. § 1.704–1(b)(4)...
- There also has been no adjustment to Brody’s or Corbett’s outside basis. If and when their partnership interests are liquidated by cash distributions, they will each recognize their shares of the $4,000 deferred gain (assuming that comes before the basis step-up at death afforded by section 1014). If their partnership interests are liquidated with property distributions instead, the distributed property will take a substituted basis in their hands, preserving the deferred gain for taxation if and when they sell the distributed property (again, assuming no section 1014 step-up). As you can see, death can play a big role in partnership tax planning, because of the relative ease of deferring partner gain until that unfortunate event erases the deferred gain for good.
- In the halls of government, this was an unwelcome development. The Joint Committee on Taxation, the Treasury Department Office of Tax Policy and the IRS are, of course, aware of the tax advantages of partnership property distributions. But the availability of these advantages has always been limited by the idiosyncrasies of partnerships and their partners. Simply put, cash distributions are more common than property distributions. As long as it stays that way, the damage, from the government’s perspective, is contained. The marketable securities gambit posed a threat to this fragile truce, because it made property distributions “scalable.”
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Chapter 10. Partnership terminations, mergers and divisions 121 results (showing 5 best matches)
- If you remember nothing else, remember this: there are almost no special rules for the taxation of partnership mergers. Instead, you apply the ordinary rules of partnership taxation to the transactions that are deemed to have occurred under Treas. Reg. § 1.708–1(c), just as though they actually happened. For example, in the default assets-over form for the merger of two partnerships, the terminated partnership (“T”) transfers all of its assets and liabilities to the continuing partnership (“C”) in exchange for interests in C, which T distributes to its partners in liquidation of their T interests. The deemed asset transfer from T to C is a contribution, generally tax-free under section 721. Watch out, however, if either partnership has a lot of debt relative to tax basis. (The tip-off will be that its partners have negative tax capital.) In the merger, there will be deemed contributions and distributions under sections 752(a) and (b), respectively, as debt is shared in a larger pool...
- There are four ways to accomplish a merger. First, a merging partnership can transfer its assets to the resulting partnership in exchange for interests in the resulting partnership, which it distributes to its partners in liquidation (“assets over”). Second, a merging partnership can distribute its assets to its partners in liquidation, and they can contribute those assets to the resulting partnership (“assets up”). Third, the partners of a merging partnership can transfer their partnership interests to the resulting partnership in exchange for interests in the resulting partnership (“interests over”). The transferred partnership, now owned solely by the resulting partnership, terminates. Fourth, the partnerships can engage in a formless merger under a state merger statute.
- Two merging partnerships with no overlapping ownership.
- More than two merging partnerships with overlapping ownership.
- Three partnerships combine under the governing state merger statute. They are Partnership AB, Partnership CD and Partnership EFG. A and B each own 25% of the capital and profits interests in the resulting partnership, and C, D, E, F and G each own 10%. For tax purposes, the resulting partnership is treated as a continuation of:
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Chapter 4. Partnership Income, Gains, Losses and Deductions 93 results (showing 5 best matches)
- Suppose now that Partnership B chooses a taxable year ending January 31. In the partnership’s year beginning February 1, the income that it earns for the next 11 months (February through December) will not flow through to the partners until the following year. Compared to the baseline of daily flow-through, the taxation of the income from 11 months will be deferred for a year. Accordingly, Partnership B’s taxable year is said to offer 11 months of deferral to all partners.
- Now return to the real world where partnership income flows through at year-end. Suppose that Partnership A has a taxable year ending October 31 and all its partners have calendar taxable years. In the partnership’s year beginning November 1, the income that it earns in November and December will not flow through to the partners until October 31 of the following year, when it will be included in their income. Compared to the baseline of daily flow-through, taxation of the income from these two months will be deferred for a year. Somewhat confusingly, Partnership A’s taxable year is said to offer two months of deferral to each of the partners. What it really offers is 12 months of deferral (from the partners’ year ending 12/31/01 until the partners’ year ending 12/31/02) of two months of income (that earned by the partnership from 11/1/01 through 12/31/01).
- Section 706(b) limits the ability of a partnership to select a taxable year of its own choosing. The need for this limitation grows out of the way that a partnership’s taxable income, gains, losses and deductions flow through to its partners. Section 706(a) provides that a partner’s taxable income for a taxable year includes partnership items for any partnership taxable year ending with or within the partner’s taxable year. In everyday language, the partnership’s income or loss flows through to its partners at the end of the partnership’s year. This presents no problem if the partnership and all its partners share the same taxable year, because in that case, the partnership’s income or loss flows through to all the partners on the last day of their respective taxable years and is taken into account by them for the same year in which it was earned by the partnership.
- said—that Subchapter K is an amalgam of entity and aggregate concepts. This means that the partnership tax laws sometimes reach results consistent with treating a partnership as an entity separate from its partners and other times reach results consistent with treating the partners as the owners of undivided interests in the partnership’s assets. So, does this mean that a partnership is treated as an entity for some purposes and as an aggregate for others? No, it does not. Under Subchapter K, a partnership is always an entity. There are provisions in Subchapter K that seek to replicate aggregate treatment, of course, and we review them in this Reading Period. But these provisions disregard the existence of the partnership as an entity (although regulatory anti-abuse rules or judicial doctrines may disregard the existence of the partnership entirely). Instead, in a very selective manner, certain provisions replicate the tax results that would be achieved if the partners owned...
- A second, more feasible, approach might be to tax all partnerships as pro-rata, whether they are or not. While more feasible than the first idea, this one is no more sensible. In every case that the partnership agreement provided for special allocations, this approach would cause at least one partner to be taxed on partnership profit that, according to the partnership agreement, belonged to a different partner. Or one partner to enjoy the tax benefit of a partnership loss that was borne by someone else.
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Chapter 6. Transfers of Partnership Interests 115 results (showing 5 best matches)
- Same facts as Question 6.7.2, except that the soothsayer has returned, having spent the day at a conference on partnership taxation. She advises Aria and Bartholome that a change in their transaction is in order. Following her advice, Bartholome transfers his villa to the partnership in exchange for a one-half interest. The partnership keeps the villa and transfers $425,000 of its existing funds to Aria in redemption of one-half of her interest. How much gain does Aria recognize on this transaction?
- between the taxation of partners and the taxation of other co-owners of property. Suppose that Marion and Lillian offer home-decorating services on a joint basis. Their small business, which they do not treat as a partnership for tax purposes, has a few assets, including accounts receivable for consulting services rendered in the past for which they have not yet been paid. If Marion wished to sell her interest in the business to Adrian, she would be treated for tax purposes as selling her interest in each of the assets of the business. , 152 F.2d 570 (2d Cir. 1945). The sale of her share of the accounts receivable would produce ordinary income. If, on the other hand, the business were a partnership, the general rule of section 741 would allow Marion to recognize only capital gain on the sale.
- True or false? Where it applies, section 704(c)(1)(C) creates an inequality of inside and outside basis. It is thus inconsistent with the fundamental tenant of partnership taxation that inside and outside basis should always be equal.
- If this works so well, why is it not the general rule of section 743? Why does it take an election to reach the “right” result (the one that avoids under- or over-taxation relative to direct ownership of assets)? In 1954, the drafters evidently thought that the computations required to ascertain special basis adjustments and to allocate them among the assets of the partnership were too burdensome to impose on all partnerships. Their solution was to let partnerships decide for themselves—recognizing that the default rule of section 743(a) sacrifices accuracy for simplicity in any case that an election is not made. The computational burden has diminished significantly in the intervening 60-some years. This, in turn, has led many policy thinkers to recommend amending section 743 to require special basis adjustments in every case.
- Staff of the Joint Committee on Taxation, 109th Cong., 1st Sess., General Explanation of Tax Legislation Enacted in the 108th Congress 386
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Chapter 7. Safeguards 69 results (showing 5 best matches)
- Partnership taxation is based on an accounting system. This system tells us how to determine inside and outside basis, how to account for partnership liabilities, how to compute partnership income and loss and allocate it among the partners, how to adjust the accounts for partnership distributions, and so forth. This goes a long way toward explaining the modifications to the system that have been made over the years. A system of accounts is blind to the identity of its owners—everybody is treated alike. As it turns out, that has not always worked for partnership tax. Moreover, an accounting system tends to be driven by labels—a “contribution” has certain tax consequences, as does a “distribution.” If they both happen at the same time, are they something fundamentally different—a disguised sale, perhaps? An accounting system is not designed to answer that question.
- The most obvious observation is that in 1954 the drafters of the Internal Revenue Code built a complete and coherent system for partnership taxation. There is not, by our reckoning, a single modification or addition since 1954 that should be counted as a necessary part of the basic partnership tax system. On the other hand, there was little in the 1954 statute that went beyond the basic system, making the safeguards included at that time all the more noteworthy. There were six, for family partnerships (section 704(e)), transactions between related parties (section 707(b)) and transactions that could shift ordinary income (sections 731(a)(2), 735, 751 and 753).
- As we reviewed in Topic 4.1, section 702(b) determines the character of a partnership’s gain or loss by reference to the partnership’s relationship to the item in question. When a partnership sells an asset, for example, the resulting gain is a capital gain if the partnership held the asset as a capital asset. Whether this gain is long-term or short-term depends on the partnership’s holding period for the capital asset, rather than any partner’s holding period for her partnership interest, and this characterization generally follows the gain or loss when the partnership allocates it to its partners. Rev. Rul. 68–79, 1968–1 C.B. 310.
- We have passed the midpoint of our trip together, so it may be a good time to stop and take stock of what we have seen and what is still ahead. Most, but not all, of what we have reviewed so far is the basic structure of partnership taxation—those provisions of law that are necessary to describe the tax consequences of carrying on business in partnership. On the road ahead, we’ll see many provisions that are not integral to the basic system, but are instead safeguards that prevent the basic system from reaching tax results that Congress believes are inappropriate. Call these latter provisions anti-abuse rules if you like, but that seems an unfair characterization. The inappropriate results addressed by these safeguards often are not abusive, as that word is customarily used to describe people who apply tax provisions in unintended ways to reach unintended results. In some instances the basic system, applied exactly as intended, simply produces answers that are not consistent with...
- This is a weird rule. Ordinarily, when the tax law permits or requires nonrecognition treatment on the disposition of property, the transferor’s adjusted basis carries over to the transferee, to preserve the unrecognized gain or loss for future taxation. Here, in contrast, the transferee (buyer) of loss property takes a cost basis in the acquired property, together with a special dispensation to reduce future gain by the amount of the basis step-down. In the partnership context, this opens the door to two different problems. First, to the extent that a disallowed loss is not used to reduce the gain on a subsequent sale, it is permanently disallowed—despite the fact that the property has been sold to an unrelated person. Second, sections 707(b)(1) and 267(d) cause the tax benefit of a built-in loss to be shifted to other, possibly unrelated persons.
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Answers to Study Questions 386 results (showing 5 best matches)
- A partner has a single basis in her partnership interest, even if such partner is both a general partner and a limited partner of the same partnership. Rev. Rul. 84–53, 1984–1 C.B. 159. This is very different from the rule in corporate taxation, which allows the basis of individual shares, or lots, of stock to be separately maintained. When a partner sells less than all her partnership interest, she is entitled to recover a fraction of her unitary basis that is equal to the fraction of the fair market value of her entire interest that she has sold, adjusted for liabilities. The partnership interest is bifurcated, however, for the purpose of determining holding periods. This bifurcation is based on relative fair market values. Treas. Reg. § 1.1223–3(b)(1). Thus, if a partner contributes property with a long-term holding period in exchange for one-half of her partnership interest by value, she takes a long-term holding period in one-half of her partnership interest. Here, Will...
- Instead of being liquidated by the partnership, Sr.’s interest in this Question is acquired by his son. The special rule of Treas. Reg. § 1.736–1(a)(6) no longer applies, because the payments to Sr. are not governed by section 736. The partnership terminates under section 708(b)(1) on the date that the business is no longer “carried on by any of its partners in a partnership.” Here, continuation of business is not the problem—Jr. will carry on the partnership’s business into a bright future. The problem is the continued existence of a partnership. A partnership cannot exist without at least two partners, so Duo-Tone terminates on the date that Jr. becomes the ...partnership interest. The facts state that this occurs on the date Sr. retires, October 15 of year 1. Duo-Tone will continue to exist as a limited liability company under state law, but for tax purposes, it will be a disregarded entity unless Jr. elects to treat it as a corporation. See Treas. Reg. § 301.7701–3(b)(1)....
- The existence of a substantial risk of forfeiture holds taxation in abeyance until the risk is eliminated. Here, that occurs at the end of two years. At that time, James recognizes ordinary compensation income equal to the value of his interest at that time ($1,250,000) less the amount he paid for it ($0). The result is similar to the result in Question 3.1.4, where the partnership gave James an option to acquire a capital interest. In both cases, taxation is deferred until a later event (here, vesting; there, option exercise), at which time James recognizes ordinary income based on the current value of his interest. The numbers are not exactly the same in the two Questions, because James is required in Question 3.1.4 to pay $100,000 to exercise the option, whereas the partnership requires no monetary contribution from James here.
- Under Treas. Reg. § 1.708–1(d)(4)(i), the divided partnership must be a continuing partnership. The first step is therefore to see which of the two partnerships resulting from this division is treated as a continuation of the prior partnership. Chubb and Dumol collectively owned 60% of the prior partnership, so the resulting partnership in which they are partners is a continuing partnership. Albany and Bryce, on the other hand, owned only 40% of the prior partnership, so the resulting partnership in which they are partners is not a continuing partnership. When, as here, there is only one continuing partnership, that partnership is the divided partnership. It is Duquesne Power Blinds LLC, continued under the same name after the division. Westside Properties LLC is a new partnership formed in the division.
- The option issued by Speedee Messenger Services is a noncompensatory option, because it is issued for cash, not services provided or to be provided by Lillian. The issuance of a noncompensatory option does not result in recognized gain to either the partnership or the option holder. Rev. Rul. 58–234, 1958–1 C.B. 279 (option issuance is part of an open transaction; taxation held in abeyance until the transaction closes through the lapse or exercise of the option). Moreover, section 721(a) generally applies to the exercise of a noncompensatory option by the delivery of cash or property to the partnership. Treas. Reg. § 1.721–2(a)(1).
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Title Page 1 result
Chapter 1. Entity Status 54 results (showing 5 best matches)
- Ben and Jerry could now operate their business as a partnership at a maximum tax rate of 28%, which was substantially lower than the corporate tax rate, even before considering the cost of removing the earnings from the corporation via dividends or liquidating distributions. In the words of a favorite Chicago radio pitchman, it was the biggest no-brainer in the history of earth. Partnerships (and limited liability companies taxed as partnerships) began to spring up all over the country. Over the past 35 years, these entities and their incorporated cousins, S corporations, have emerged from the shadows to become a predominant form for doing business, accounting for about 30% of all business net income in the country.
- Since 1954, section 761(a) has permitted certain organizations to elect out of the application of Subchapter K—essentially, to declare that, while they could be partnerships for federal income tax purposes, they desire to be taxed as co-ownerships instead. While this election has its place—it can, for example, permit co-owners to dispose of their individual interests in like-kind exchanges under section 1031, which would not be permitted if they were partners—it suggests a discomfort with partnership taxation that seems a little old-fashioned. Generally speaking, the tax rules that apply to partnerships are more flexible and seldom less favorable than those that apply to co-ownerships. Indeed, in some common cases the availability of Subchapter K is all that stands between the parties and a tax nightmare.
- Suppose Ben and Jerry were looking to start a business in 1980. If they organized a partnership, its operating income would be subject to federal income tax at individual rates up to 70%. Corporate taxes were high as well in those days, topping out at 46%, but still well below the individual tax rates. If Ben and Jerry chose to use a corporation to avoid 70% individual taxation, however, they would still be faced with the problem of getting money out of the corporation to enjoy the fruits of their labor. Dividends in those days were also taxed at rates up to 70%, so that wasn’t the answer. Instead, many small businesses operated as corporations which paid their owner-employees enough salary to live on and accumulated the rest. The owner-employees eventually sold or liquidated the corporation, at which time they paid tax at capital gains rates on the accumulated value.
- It is far too simplistic to say that the choice of entity is between a partnership and a corporation. On the partnership side, there are general partnerships, limited partnerships, limited liability partnerships, limited liability companies, and more. On the corporate side, there are C corporations and S corporations, not to mention a variety of special-purpose entities such as real estate investment trusts. Each offers a different combination of limited liability, tax treatment and management options. Some have a history of usage and familiarity in particular industries. Nowadays, a small businessperson in a line of work that is not subject to special regulation is likely to be choosing among a limited liability company, an S corporation and a C corporation. All provide limited liability to all owners. An S corporation resembles a limited liability company (or a partnership) in that its income “passes through” to be taxed directly to its owners. It is dissimilar in many ways....
- Limited partnership.
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Chapter 3. Performing services for a Partnership 62 results (showing 5 best matches)
- Contributions of services and contributions of property lie on opposite sides of the Grand Canyon of partnership taxation, one being entirely taxable and the other entirely tax-free. Yet the value of almost all property embodies some enhancement from the application of personal efforts, a possible exception being undeveloped land. No particular problems arise if the efforts have been expended by persons unrelated to the partnership—the fact that the construction of an office building required the work of hundreds of construction workers does not make the completed building any less “property” in the hands of its owner, and she can contribute it to a partnership confident of having the protection of section 721. But what if the personal efforts are those of the owner herself? Does this cause the item in question not to be “property”?
- When you think about it, giving a capital interest to a brand-new service partner is a little crazy. Before she even shows up for work on day one, she owns a piece of the partnership. Worse, she owns a piece of the partnership if she does not show up for work on day one. A partnership that has any degree of bargaining power will therefore seek to restrict access to the capital of the partnership until the service provider has proven her mettle. One very common approach is to issue the service provider a profits interest. As reviewed in Topic 3.1, a profits interest has no immediate right to any of the capital of the partnership.
- Does the partnership recognize gain or loss on the deemed sale of an undivided interest in its assets?
- Adair, Blair and Claire agree to form a partnership. Adair contributes property worth $180,000 with an adjusted basis of $120,000. Blair contributes $180,000 cash. Claire will manage the business, for which she receives an equal, one-third partnership interest. Assume that the value of Claire’s interest is $120,000 and that the partnership is entitled to deduct this amount as compensation expense. Complete the opening balance sheet of this partnership, taking into account both compensation income and deduction. Values of the partnership’s assets are included for your reference.
- Sometimes, a partnership combines these two approaches, by issuing a profits interest that is subject to a vesting schedule. A service partner who gets one of these—and indeed any recipient of a partnership interest with a vesting schedule—must reach agreement with the partnership regarding the cash distributions it will make to her and her obligation, if any, to return such amounts if she ultimately forfeits her interest.
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Preface to the Second Editionv 2 results
- Since the publication of the First Edition in 2016, the changes in the law of partnership taxation have been modest when compared to the tumultuous changes in other areas wrought by the 2017 tax legislation. Nevertheless, changes have occurred. The addition of a deduction for “qualified business income” has certainly gotten the most press. Found in section 199A of the Internal Revenue Code, this deduction applies to income earned by individuals and S corporations as well as by partnerships. Because it will frequently be covered in partnership tax classes, this Second Edition includes a new Topic 1.6 on section 199A, as well as a new Topic 1.1 on the general considerations involved in choosing the type of entity in which to carry on a nonpublic business.
- The Treasury Department’s continuing assault on so-called “leveraged partnership” sales transactions, culminating (at least for now) in the issuance in October 2019 of final regulations on the allocation of partnership recourse debt, has rewritten Topic 5.5. Follow-on effects of that effort impact the treatment of deficit-restoration obligations, covered in Topic 4.3. The repeal of section 708(b)(1)(B), which formerly provided for termination of a partnership upon transfer of sufficient interests, has made Topic 10.1 shorter. Other, smaller changes in the law have been reflected as needed throughout the book. Finally, to give you an even better shot to ace your partnership tax exam, we have added a new practice exam at each of the basic, intermediate and advanced levels.
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Answers to Final Exam Questions 153 results (showing 5 best matches)
- , a contribution), in which the partnership takes George’s basis of $525,000 in the office building. On the sale, the partnership recognizes a loss of $125,000 which, under the traditional method, would be allocated entirely to George. begins by treating the transaction as a contribution of the office building, but it applies section 704(c)(1)(C) to give the partnership a basis of $300,000. George has a section 704(c)(1)(C) basis adjustment of $225,000. On the partnership’s sale of the building, each of the children recognizes book and tax gain of $30,000. George recognizes a book and tax gain of $10,000, the latter offset by his $225,000 basis adjustment, bringing his net to a tax loss of $215,000. is arguably the “best” answer to this Question from the perspective of the policy of partnership taxation. The difference between it and the answer mandated by the statute is remarkable.
- The first step in analyzing any division is to determine whether any of the partnerships resulting from the division is considered a continuation of the prior partnership. In this case, Newco LLC is a continuation of Partnership ABCD, because its partners, C and D, owned more than 50% of the interests in capital and profits of Partnership ABCD. This continuing partnership is the so-called divided partnership under Treas. Reg. § 1.708–1(d)(4)(i). The transaction in question was executed in assets-up form, but that form cannot be respected for tax purposes, because the divided partnership did not make it. How do you know it didn’t? Because the divided partnership owns the distributed assets at the end of the day, so it cannot possibly have distributed them. Treas. Reg. § 1.708–1(d)(3)(ii). Accordingly, the transaction is recharacterized in the default, assets-over form under Treas. Reg. § 1.708–1(d)(3)(i)(A). The divided partnership (here, Partnership ABCD/Newco) transfers to a new
- The first step in analyzing a partnership merger is to identify the continuing partnership, if any, and the terminated partnership(s). Under section 708(b)(2)(A), both Partnership AB and Partnership BC are continuing partnerships, because the partners of each own more than 50% of the capital and profits interests in the resulting partnership. Under Treas. Reg. § 1.708–1(c)(1), however, Partnership BC is the only continuing partnership, because it brings the higher net asset value to the resulting partnership. As to the characterization of the transaction, Treas. Reg. § 1.708–1(c)(3)(ii) allows for an assets-up transaction in which a terminated partnership distributes all its assets to its partners in liquidation, and they immediately contribute all the assets they receive in this distribution to the resulting partnership in exchange for interests therein. That is not how this transaction was structured. Partnership CD, the continuing partnership, made the liquidating distributions....
- Rasheeda’s distributive share of all these items adjusts her outside basis under section 705(a). Leaving any of them out would cause her outside basis to diverge from her share of the aggregate inside basis of the partnership’s assets, contrary to a basic goal of partnership taxation to keep these two amounts as nearly equal as possible. In the case of investment interest expense and charitable contributions, Rasheeda’s outside basis decreases, even though she may be unable to claim a deduction for these amounts on her individual tax return, due to the limitations on deductions found in section 163(d) and section 170(d). Similarly, the passive-activity loss rules of section 469 may prevent Rasheeda from claiming a current tax benefit for her share of the partnership’s loss from rental real estate. On the income side, capital gains, ordinary income and even tax-exempt income all adjust outside basis equally, although they certainly are not taxed equally.
- The partnership’s choice of section 704(c) methods allows the ceiling rule to apply to dispositions of those properties that are appreciated at the time of the revaluation (“Gain Properties”) and prohibits the ceiling rule from applying to dispositions of those properties that are depreciated at the time of the revaluation (“Loss Properties”). There are two factors that lead to the conclusion that this combination of methods is unreasonable. First, it produces a net tax benefit for the existing partners (A, B and C). The partnership’s choice of the remedial method for Loss Properties allows A, B and C to retain the full tax benefit of the losses existing at the time of the revaluation, even if the value of those properties increases in the future. The partnership’s choice of the traditional method for Gain Properties will bring the ceiling rule into play if the value of those properties decreases in the future, thereby allowing A, B and C to escape taxation on at least a portion of...
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Chapter 2. Transfers of Money or Property to a Partnership 101 results (showing 5 best matches)
- Okay, time for a pep talk. Many law students, like many other human beings, are not entirely comfortable with numbers. In much the same way that many mice are not entirely comfortable with cats. We hate to be the ones to break it to you, but partnership tax is really numbers masquerading as words. Although you probably don’t want to hear that, it’s actually a good thing. Indeed, the alternative was much, much worse. In the years before 1954, judges made partnership tax law by attempting to apply common-law principles of partnership to ascertain tax consequences. The results of their well-intentioned efforts were inconsistent, economically irrational and tended to be based on essentially meaningless distinctions. It was a mess. The folks who remade the partnership tax law in the early 1950s were—you guessed it—accountants and lawyers with training in accounting. The result of their intervention was a system of taxation that largely, if not entirely, makes sense.
- Staff of the Joint Committee on Taxation, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984
- If the relationship between the contribution and the distribution is taken into account, another model for taxation may suggest itself. If Amelia had transferred her property to a controlled corporation in exchange for stock and $400 of cash “boot,” she would have recognized $400 of gain. Under section 351(b), the transferor must recognize the entire amount of the boot, up to the amount of the gain in the transferred property. The difference between these two treatments is, of course, basis recovery. The partnership rule in section 731(a) allows partners to apply their basis first against cash or other taxable property, minimizing the gain recognized on distributions. The corporate rule in section 351(b) forces shareholders to apply their basis last, maximizing recognized gain.
- The most basic rule is that partnership liabilities are not included in the partners’ capital accounts (book or tax). Why is that? Think about the effect of a partnership liability on the balance sheet. Say, for example, a partnership borrows $1,000 and puts the money in its bank account. Assets of the partnership increase by $1,000 (the money in the bank). Liabilities also increase by $1,000 (reflecting the borrowed amount). If any portion of the liability also appeared in the capital accounts, the partnership’s balance sheet would not balance—the accounting identity would be broken, because Assets ≠ Liabilities + Capital.
- In the case that a partner assumes a $2,000 partnership liability, there is again no change in the inside basis of the partnership’s assets, but the assuming partner’s capital increases by $2,000. Section 752(b) prevents an inequality from arising between inside and outside basis by providing that, for purposes of computing the partners’ outside bases, they are collectively considered to have been distributed $2,000 cash from the partnership, in accordance with their respective shares of the partnership liability from which the partnership is relieved.
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Intermediate 58 results (showing 5 best matches)
- A and B want C to manage investment properties for them. Together, they form Partnership ABC, a general partnership. A contributes Property X, with a basis and value of $30,000, subject to a $12,000 nonrecourse mortgage, and B contributes Property Y, with a basis and value of $60,000, subject to a recourse debt of $42,000. Partnership ABC assumes this recourse debt and the lender releases B. In exchange for her agreement to perform services for Partnership ABC, C receives a one-third capital interest in Partnership ABC, the value of which is currently deductible by the partnership. The partnership agreement provides that all items of partnership income, gain, loss and deduction, and all excess nonrecourse liabilities, will be allocated equally among the partners. It adopts the traditional method under section 704(c). Assuming no disguised sale, what is the basis of each partner in her interest in Partnership ABC immediately following these formation transactions? State law imposes...
- A and B want C to manage investment properties for them. Together, they form Partnership ABC LP, a limited partnership in which A and B are limited partners and C is the general partner. A contributes Property X, with a value of $50,000 and adjusted basis of $18,000, subject to a $32,000 nonrecourse mortgage. B contributes Property Y, with a basis and value of $60,000, subject to a recourse debt of $42,000. Partnership ABC LP assumes this recourse debt and the lender releases B. In exchange for her agreement to perform services for Partnership ABC LP, C receives a one-third interest in Partnership ABC LP, the value of which is currently deductible by the partnership. The partnership agreement meets the standards of the alternate test for economic effect and provides that all items of partnership income, gain, loss and deduction, and all excess nonrecourse liabilities, will be allocated equally among the partners. It adopts the traditional method under section 704(c). Assuming no...
- Partnership ABCDE is owned in the following proportions by its partners: A, 40%; B, 25%; C, 25%; D, 5% and E, 5%. Pursuant to state law, it divides into Partnership AB, Partnership BCD and Partnership CDE, each owned by the partners who appear in their respective names. Which, if any, of the resulting partnerships is treated as a continuation of Partnership ABCDE for tax purposes?
- A, B and C contribute $10,000 each to form a limited partnership, in which A is the general partner and B and C are limited partners. The partnership borrows $70,000 on a nonrecourse basis and uses the proceeds of this loan plus the partners’ capital to purchase a small commercial building for $100,000. The partnership desires to allocate the depreciation on this building, as well as all other partnership income, gains, losses and deductions, to the partners in proportion to their capital-account balances. You are hired to draft the partnership agreement. The state law under which this partnership is organized obligates the general partner to restore a deficit capital account only to the extent necessary to pay creditors. Assume that the desired allocations satisfy the reasonable consistency requirement for allocating nonrecourse deductions. What are the least restrictive provisions that you will have to include in the partnership agreement to ensure that these allocations are given...
- Bill and Wayne form a real estate partnership. Bill contributes Blackacre, which is worth $600,000 and in which he has a tax basis of $100,000, for an 80% interest in the partnership. Wayne contributes Whiteacre, which is worth $150,000 and in which he has a tax basis of $125,000, for a 20% interest. Five years later, Blackacre is worth $750,000 and Whiteacre is worth $300,000 and there has been no change to either inside or outside basis. The partnership distributes Whiteacre to Bill and the interests of Bill and Wayne in the partnership are adjusted to 72% and 28%, respectively. The partnership has no liabilities. How much gain, if any, do Bill and Wayne recognize on this distribution?
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Chapter 8. Section 704(c) 131 results (showing 5 best matches)
- (The somewhat odd treatment of the accounts payable as liabilities on the partnership’s opening balance sheet is discussed in Question 8.1.5.) The partnership and all the partners use the cash method and a calendar tax year. The partnership has not elected a section 704(c) method. Soon after the partnership’s formation, it sells the stock, as planned, for a price that was not planned, $70,000. What book and tax amounts should the partnership allocate to Frank?
- Ava, Bella and Cora form a general partnership. The partnership agreement provides that each of these individuals has an equal, one-third interest in profits and losses. Cora contributes land, Bella cash and Ava some used equipment. The partnership uses Bella’s cash to purchase an investment asset. After this purchase, the partnership’s balance sheet is as follows:
- Okay, how does the partnership do that? Let’s take several different examples and see if we can build them into a general rule. Say, for example, that the partnership sells the land Aaliyah contributed for $140,000, its value at the time of contribution. The partnership realizes a tax gain of $30,000, all of it attributable to the built-in gain in existence at the time of contribution. The partnership should therefore allocate all $30,000 of tax gain to Aaliyah and none to Blake or Carbury.
- Let’s try another example. Say the partnership sells the land for $170,000, instead of $140,000. Its tax gain is $60,000, equal to the excess of the selling price over the partnership’s tax basis in the land. How should it allocate this gain? Your first impulse may be that it should be allocated entirely to Aaliyah, because this allocation would completely eliminate her book-tax difference. Not a bad idea, but a little over-eager. Only $30,000 of the partnership’s $60,000 tax gain is built-in gain. The remaining $30,000 of gain represents the increase in the value of the land while it has been owned by the partnership, and all the partners should get a share of that. To determine how much, it is useful to introduce a new term, “book gain.” Book gain is the gain calculated by reference not to the tax basis of the land, but instead its book value. The book gain on this sale is $30,000. It is allocated in whatever way the partnership agreement provides, as long as that allocation has...
- Clara, Dyson, Ellie and Frank organize Waves LLC, a limited liability company treated as a partnership for tax purposes, to continue and expand Clara’s business of designing and manufacturing boogie boards. Clara contributes her inventory and accounts receivable and the partnership assumes her $10,000 of accounts payable. Dyson contributes a small building near the beach where the partnership will install its workshop. Ellie contributes cash and Frank contributes appreciated stock that the partnership will use as an additional source of funds. Under the partnership agreement, each partner is allocated 25% of book income and loss. The adjusted bases and initial fair market values of the contributed assets are reflected on the partnership’s opening balance sheet, which is as follows:
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BAsic 64 results (showing 5 best matches)
- Derek is a partner in the Dunleavey Partnership, a general partnership. His tax capital is a negative $12,000. His share of the partnership’s only liability, a recourse bank debt, is $12,000. Derek receives a liquidating distribution from the partnership consisting of $9,000 in cash. The partnership has no section 751 property. How much gain or loss does Derek recognize on this distribution?
- Judah is a partner in a partnership; both are calendar-year taxpayers. The partnership has no liabilities and no section 751(b) property. At the beginning of the partnership’s tax year, Judah’s outside basis is $120,000. A month later, the partnership makes a current distribution to Judah of $130,000 cash and property worth $40,000 having an adjusted basis to the partnership of $15,000. Assume that Judah’s share of the partnership’s income is $3,000 per month both before and after this distribution. What gain, if any, does Judah recognize on the distribution?
- Naomi is a partner in a partnership; both have tax years ending December 31. Each year in January, the partnership makes a cash distribution to each of its partners equal to their respective shares of the partnership’s taxable income for the prior year. Throughout the year, however, each partner is entitled to request cash payments from the partnership not exceeding 70% of the partner’s share of the partnership’s estimated taxable income to date. By agreement with its partners, the partnership reduces a partner’s year-end distribution by the sum of these cash payments for the year. As of February 1 of year 4, Naomi’s outside basis in the partnership is $50,000. She takes a total of $120,000 in interim payments throughout the year, and her share of the partnership’s taxable income for the year is $160,000. How much gain, if any, does Naomi recognize on the interim payments?
- A is a partner in Partnership ABC. The partnership leased a building from A at an annual rent of $40,000 (its fair rental value). Partnership ABC is on the cash method of accounting, A is an accrual-method taxpayer, and A and the partnership are calendar-year taxpayers. The partnership did not make payment in year 1 but waited until April of year 2 to pay the annual rent to A. What is the result?
- Individuals A, B and C are partners in Partnership ABC, a general partnership. The partnership and all its partners are calendar-year, cash-method taxpayers. On January 1, A’s basis in her partnership interest is $8,100, including a $3,000 share of the partnership’s liabilities. This share remains constant through July 23 of that year, when A sells one-third of her partnership interest to D, an unrelated individual, for a cash payment of $2,700. The partnership uses the interim closing method under Treas. Reg. § 1.706–4. Applying this method, it will allocate $1,500 of partnership income
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Advanced 79 results (showing 5 best matches)
- Great Western Investments LP holds a diversified portfolio of high-quality bonds and, for purposes of this Question, it can be assumed to generate income and gain totaling $10,000 every month. The tax year of the partnership and all its partners is the calendar year. The partnership agreement provides that all partners share the profits and losses of the partnership in proportion to the positive balances in their capital accounts. On June 30, year 1, George contributes $40,000 to the partnership, which increases his share of the partnership’s total capital from 30% to 40%. The partners wish to recognize the timely nature of George’s capital contribution and its great value to the partnership, and on March 1, year 2, they approach you for advice as to whether it is possible to amend the partnership agreement to allocate to George more of the partnership’s income for year 1—perhaps up to $48,000, equivalent to a 40% share of the partnership’s income for the entire year. Applying all...
- Adelaide contributes unimproved land to Jersey Shore Realty LLC, a limited liability company treated as a partnership for tax purposes, on December 15, year 1. The land is worth $2.5 million and has an adjusted basis in her hands of $1 million. On March 31, year 3, the partnership distributes a different parcel of real property to Adelaide which is worth $1 million and in which the partnership has a basis of $500,000. The facts show that the partnership would not have made this distribution but for Adelaide’s contribution and that the partnership’s distribution is not dependent on the entrepreneurial risks of the partnership’s operation. Ignoring imputed interest, what is the amount of gain, if any, recognized by the Adelaide and the partnership, and in what year?
- Paul Rand is a 20% partner in Kind Rand, an Illinois general partnership. Both Paul and the partnership use the cash method and the calendar year. On January 1, year 1, Paul’s adjusted basis in his partnership interest is $50,000 (including his share of the partnership’s $60,000 recourse borrowing). On March 31, year 1, the partnership distributes $50,000 in cash to Paul, and Paul’s partnership interest is reduced immediately from 20% to 10%. Paul’s share of the partnership’s income for all of year 1
- On that day, the partnership distributes actively traded stock with a value of $106,400 and an adjusted tax basis to the partnership of $34,000 to Ron Lauren in complete liquidation of his interest. Ron’s basis in his partnership interest immediately prior to the distribution is $78,240. What is his basis in the distributed stock?
- Partnership ABC has had a taxable year ending September 30 since its formation. Its partners are A, who has a 75% interest in capital and profits and a taxable year ending September 30; B, who has a 15% interest and a taxable year ending June 30; and C, who has a 10% interest and a taxable year ending December 31. On December 31, year 1, A sells 60% of her partnership interest to D, who has a taxable year ending December 31. Following this sale, what is the required taxable year of the partnership and when is the partnership required to adopt this required taxable year?
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Table of Contents 17 results (showing 5 best matches)
- Publication Date: December 30th, 2019
- ISBN: 9781684671144
- Subject: Taxation
- Series: Exam Pro Series
- Type: Exam Prep
- Description: The Second Edition of the Exam Pro on Partnership Taxation extends the approach of the original as a partnership tax study guide with questions and answers. Completely revised and updated, it includes lectures and study questions on the deduction for qualified business income under section 199A, the new regulations on allocating partnership recourse debt, and the choice of entity for conducting business and investment activities. New sample exams at the basic, intermediate and advanced levels give you an even better shot to ace your partnership tax exam. The book is designed to help JD and LLM students from the first day of class. It begins with over 50 short lectures on topics in partnership tax ranging from basic to advanced, illustrated by over 280 study questions, each with a complete explanation of the right (and wrong) answers. Several of the lectures focus on the basic accounting concepts that are essential to understanding partnership tax, to give students with no prior accounting background the tools they need to succeed in this subject. The book includes twelve sample exams (a total of 120 more questions) that, like the lectures, increase in difficulty from basic to advanced, labeled so that students can pick the exams that are right for them and the course they are taking. Full answers to each of the exam questions are provided, with cross-references to the lectures and the study questions. Robert R. Wootton, Professor Emeritus of Practice of Law, and Sarah B. Lawsky, Professor of Law, teach partnership tax at Northwestern Pritzker School of Law.