Partnership Income Taxation
Authors:
Repetti, James R. / Lyons, William H. / Luke, Charlene D.
Edition:
7th
Copyright Date:
2023
28 chapters
have results for partnership of income taxation by james repetti
Preface 6 results (showing 5 best matches)
- We thank our previous coauthor, Alan Gunn, for all of his contributions to this book. We greatly benefitted from Alan’s invaluable insights about partnership taxation and his good humor. He is a masterful teacher to whom we owe much. We also thank James E. Tierney and Larry D. Ward for helpful comments on previous editions. In addition, we thank Reid Diaz, Boston College Law School Class of 2022, for helpful research assistance. Lastly, James Repetti gratefully acknowledges support provided by the Paulus Endowment for Tax.
- James R. Repetti
- This book attempts the simplest possible introduction to an intricate body of law. Any “simplified” description of the rules of partnership taxation would be so misleading as to be useless. We have therefore tried to make the subject accessible not by paraphrasing the rules, but by including numerous illustrations that are as straightforward as possible. The text focuses on simple partnerships (including where appropriate limited liability companies (LLCs) taxed as partnerships) holding few assets and engaging in routine transactions. It places the rules in context by pointing out the purposes of the statute and regulations and presenting background information about practical matters such as how partnerships maintain capital accounts and how nonrecourse financing works. Using many examples, it then shows the operation of the rules in everyday cases encountered by practitioners.
- This is not a reference book: many interesting and difficult issues have been ignored. Some matters, such as the application of § 736 to noncash distributions and the taxation of tiered partnerships, are not discussed at all. Most of the points that are addressed, however, are discussed at considerable length. Our goal has been to give students background material and illustrations so that they can begin to understand and work with a statute that was drafted for (and by) experienced practitioners and so that they can be prepared to make sense of any future changes.
- Most chapters end with a section comparing the tax treatment of partners with that of the shareholders of S corporations. Many students encountering partnership taxation for the first time have already studied subchapter S. We expect that an examination of some of the basic differences between subchapters S and K should help those students understand both subjects. The book is current through December 31, 2022.
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Chapter Three. An Introduction to Partnership Basis and Limits on Losses 81 results (showing 5 best matches)
- James acquires a one-third interest in the HIJ partnership by contributing $100,000. During the partnership’s first taxable year, James’s distributive share of ordinary income net of deductions (bottom-line income) is $4,000; his share of tax-exempt interest is $1,000; and he receives a distribution of $3,000. James’s outside basis, as adjusted to reflect these transactions, is $102,000, computed as follows: original outside basis of $100,000 (§ 722 ), plus $5,000 for his share of taxable and tax-exempt income, less $3,000 for the distribution. The distribution is not taxable because it does not exceed James’s outside basis.
- seems to embody a familiar principle of income taxation. An individual taxpayer’s deductions cannot normally exceed the amount of the taxpayer’s cash plus the basis of the taxpayer’s property. one asset with a basis of $10,000. Ordinarily, that asset can generate only $10,000 in tax deductions. Georgia should not be allowed larger deductions by contributing the asset to a partnership and claiming a share of the partnership’s deductions greater than she could have gotten by holding the asset as a sole proprietor.
- The CDE partnership (Example 3-1) earns $150,000; Ellen’s distributive share of this income is $50,000. Under § 705(a)(1)(A), Ellen’s outside basis increases by $50,000 to $90,000. Were it not for this increase, a sale by Ellen of her partnership interest for $100,000 (its value taking into account the partnership’s receipt of $150,000, of which Ellen’s share is $50,000) would cause her to recognize a gain of $60,000. In substance, she would be taxed twice on her $50,000 increase in wealth: once when she reports her distributive share of the partnership’s income and again when she sells her partnership interest.
- Suppose that the FG equal partnership has $40,000 in income and $100,000 in deductions this year. Partner Fred’s basis for his interest in the partnership (“outside basis”) is $100,000; partner Georgia’s outside basis is only $10,000. Although each partner’s equal share of the partnership’s $60,000 loss is $30,000, only Fred can potentially deduct the full $30,000. lets a partner deduct a partnership loss “only to the extent of the adjusted basis of such partner’s interest in the partnership at the end of the partnership year in which such loss occurred.” Therefore, Georgia can deduct a maximum of $10,000 of her share of the loss. The other $20,000 becomes a carryover to future years, so she will gain access to the suspended loss whenever her outside basis increases. (For example, if she contributes $20,000 to the partnership, or if her share of partnership debt increases by $20,000, or if her share of future partnership income is $20,000, her outside basis will increase and the...
- Partners must report their distributive shares of partnership income of whether the partnership actually distributes any of that income to the partners. See Chapter 2 § B.
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Chapter Six. Partnership Allocations: Assignment-of-Income Problems 65 results (showing 5 best matches)
- Section 704(e) ensures that these outcomes do not change when the parent performs her work as a partner or if the income-producing property in question is partnership property. A service provider’s attempt to divert some of the income from her services to the donee of part of her partnership interest should have no more effect on taxation than a similar attempt without the utilization of a partnership. As a result, § 704(e)(1) requires that the donor-service partner be allocated income that represents reasonable compensation for her services. Similarly, § 704(e)(1) requires that income from partnership capital be allocated among the donor partner and her donee in a way that reflects the ownership that each partner has in the partnership’s underlying assets. Ownership of the underlying assets is determined by asking what assets would the donee be entitled to receive upon liquidation of the partnership.
- The anti-abuse regulations’ only example of an allocation that meets the requirements of the § 704(b) regulations but is “abusive” involves a technique known in tax jargon as a “stripping” transaction, in which income from property is allocated to a foreign partner not subject to U.S. taxation, while deductions attributable to the property are taken by U.S. partners. The partnership in the example buys equipment and leases it for a substantial period. The partnership then sells its right to receive rentals under the lease and allocates nearly all the income from that sale to the foreign partner, whose interest is then liquidated. The partnership then buys other property subject to debt; this transaction increases the outside bases of the U.S. partners. Finally, the partnership sells the leased equipment (for a low price, since most of the equipment’s income stream has already been sold), recognizing a loss that is allocated to the U.S. partners. The example concludes that the
- Recognition of the donee as a partner in a capital partnership does not mean, however, that additional income can be shifted to the donee. Section 704(e)(1) provides that the proportion of the donee’s share of income to the donee’s share of donated capital cannot be greater than the proportion of the donor’s share of income to the donor’s share of capital. The partners’ shares of partnership capital are determined by asking what each partner would receive upon liquidation of the partnership.
- 704(e), titled “Partnership Interests Created by Gift,” addresses situations in which the donor of a partnership interest may attempt to shift income to the donee. This provision is often referred to as the “family partnership” rule, although its scope extends beyond families—it applies to any situation where a partnership interest is acquired by gift. The “family” aspect of the rule relates to the fact that the rules in § 704(e) apply to transfers of a partnership interest by a partner to a family member—transfers that are gifts and transfers that involve the family member paying for the interest.
- Why are the transactions in the regulations’ example less worthy of respect than those in Example 6-7? In both cases, the application of the § 704(b) regulations leads to a division of income and deductions from the same property that could not have been obtained without using a partnership; in that sense, both transactions are “abusive.” Extenuating factors that may have led the drafters to conclude that only the stripping transaction is invalid seem to include that the foreign partner in the example was a partner for only a short time and that the arrangement shifted income to a person not subject to U.S. taxation. Perhaps, if the stripping transaction had assigned the income to a long-term partner, who had other interests in the partnership’s business, or if it had assigned the income to a low-bracket but not completely nontaxable partner, the result would have differed. Or maybe stripping transactions just look worse than special allocations of depreciation.
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Chapter Thirteen. Payments to Retiring Partners: Section 736 and Related Problems 108 results (showing 5 best matches)
- If the amount of the § 736(a) payments is determined by reference to the partnership’s income, they are taxed as distributive shares. This means that the payments will be included in the recipient’s income to the extent appropriate for the kind of income the partnership has. Suppose that a partnership has $10,000 of tax-exempt interest, $20,000 of capital gain, and $70,000 of ordinary income. A retiring partner gets a § 736(a) payment of 10% of the partnership’s income. Since this payment is determined by reference to the partnership’s income, the payment will be taxed as a distributive share followed by an untaxed current distribution. The retiree will report 10% of each item of partnership income: $1,000 of tax-exempt interest, $2,000 of capital gain, and $7,000 of ordinary income.
- If the payments were dependent on partnership income and, therefore, characterized as a distributive share, the payments would be taxable as ordinary income or capital gain to the departing partner depending on the types of income realized by the partnership. The other partners would receive the equivalent of a deduction because their shares of partnership income would be reduced.
- It is helpful to review briefly the implications of each such characterization. If the payment to a retiring partner is characterized as a current distribution of the partner’s distributive share of partnership income, the partnership allocates income to the retiring partner and then distributes that income to her. The allocation causes the retiring partner to recognize income from the allocation that has the same character as the partnership’s income. Her actual receipt of the allocated amount does not result in any additional income recognition because her outside basis increased by the allocated income. . In addition, the other partners do not include in their shares of partnership income the retiring partner’s distributive share of income.
- serves a purpose similar to that served by § 751(b) —to assure that partners are taxed appropriately on their shares of certain types of the partnerships’ ordinary income. Consider, for instance, a § 736(a) payment made to a general partner of a service partnership (one in which capital is not a material income-producing factor) for the general partner’s share of the partnership’s unrealized receivables.
- depending on her outside basis. Since there was no allocation of income to Sharon, the remaining partners include the entire $300 capital gain in income. The partnership cannot deduct the payment because distributions are not deductible by a partnership.
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Chapter One. Choice of Entity and What Is a “Partnership” for Tax Purposes? 133 results (showing 5 best matches)
- While application of the aggregate approach to the taxation of partnerships results in a single tax, application of the entity approach to C corporations results in a double tax under Subchapter C of the Code. Income realized by a C corporation is taxable to the corporation because the corporation is treated for all purposes as an entity separate from its stockholders. When the corporation distributes that income to its stockholders, the stockholders also recognize taxable income. Similarly, the entity approach means that a C corporation’s distribution of appreciated assets is treated as a realization event that will trigger taxable income to the corporation and to its stockholders.
- If all the stockholders of a corporation elect to have the corporation subject to the provisions of Subchapter S of the Code, instead of Subchapter C, a different approach applies. As mentioned in § B.2. , above, a corporation subject to taxation under Subchapter S, (an “S corporation”) has some, but not all of the advantages of an entity taxable as a partnership. Like a partnership, income of an S corporation is taxable to its owners, i.e., to its stockholders, not to the corporation. Unlike a partnership, however, an S corporation must recognize taxable income when it distributes property that has appreciated in value. This taxable income is passed through to its shareholders. Thus, the S corporation provides less flexibility than a partnership.
- This discussion focuses on federal income taxation of partnerships, S corporations, and C corporations. State tax rules applicable to such entities and their owners may differ from the federal income tax rules.
- The central principle underlying the federal income taxation of partners is that the existence of the partnership should matter as little as possible. As an American Law Institute (“ALI”) study put it, “the ideal mode for taxing partnership earnings is to tax each partner as though he were directly conducting his proportionate share of the partnership business.” This mode of taxation is usually referred to as the “aggregate” approach because it treats the partnership as an aggregate of individuals, each conducting her share of the partnership’s business. The ALI emphasized, however, that this principle controls only in the absence of countervailing factors. A “countervailing factor” that often makes it undesirable to try to tax partners as if they were conducting their shares of the business as sole proprietors is administrative convenience. Administrative convenience normally suggests that the partnership be treated as an entity separate from the partners—i.e., that the “entity”...
- Application of the aggregate method to partnership income has traditionally been one of the most attractive features of partnerships because it results in a single tax being applied to partnership income. When a partnership recognizes taxable income, such income is taxed directly to the partners even though the income may not be distributed to them until a subsequent year. The partnership itself does not pay a tax on its income. This is why partnerships and entities taxable as partnerships are often called “flow-through” entities. In addition, the subsequent distribution of that income to the partners does not usually trigger an additional tax liability because the aggregate method treats each partner as though she had directly conducted her share of the partnership’s business and had already received her share of the income. The aggregate approach also means that a partnership can often distribute appreciated assets to its partners without triggering a tax to the partnership and...
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Chapter Fifteen. The Death of a Partner 56 results (showing 5 best matches)
- If no § 754 election has been made, a sale may lead to “double taxation” of ordinary income, as the estate will have ordinary income under § 751(a) without the buyers (the surviving partners) getting any step-up in inside basis. A liquidation will typically cause the estate to have ordinary income under § 736(a) , but the surviving partners will get deductions (or the equivalent) under § 736(a) and an inside cost basis adjustment for property deemed purchased by the partnership in the § 751(b) exchange.
- If the partnership had a § 754 election in effect at the time of the death, the successor would have adjustments for the inside basis of the assets, other than IRD items (as discussed in Example 15-4). The successor could still have ordinary income under § 751(a) on the sale, but the purchase by the surviving partners would generate inside basis adjustments for those partners under § 743(b), including for ordinary income items even if they were IRD items for the successor. These adjustments will eliminate double taxation of ordinary income. Nevertheless, a liquidation may be better for the surviving partners, especially in cases involving service partnerships.
- A common arrangement gives a deceased partner’s successor a right to receive payments equal to the decedent’s distributive share of partnership income for some period. For instance, a partnership agreement may provide that a partner’s spouse will receive payments equal to the deceased partner’s distributive share of income received by the partnership for one year after the partner dies. This is another example of a successor receiving partnership payments in liquidation of a deceased partner’s interest. Whatever portion of each payment is classified as a § 736(a) payment will be taxed as IRD, and the successor’s basis in the partnership interest will reflect zero basis for this portion.
- For example, assume that in Example 15-2, above, the partnership agreement provides that, instead of receiving a fixed payment, Gloria’s successor (her estate) will be allocated Gloria’s one-third share of partnership income for the year following her death and that this results in $90,000 of the partnership’s ordinary income being allocated to the estate. In that situation, $30,000 would again be governed by § 736(a) because it is a payment for Gloria’s share of unrealized receivables. Section 753 . Since the payment is dependent on partnership income, § 736(a) treats it as a distributive share and the estate recognizes $30,000 of ordinary income. The remaining $60,000 payment is governed by § 736(b)
- If § 1014(a) applied to unpaid receipts or deferred income, it would cause income taxation to disappear for some taxpayers, while other taxpayers, who used a different method of accounting, would already have recognized income. For example, consider two lawyers, Elise and Felix, who each engage in separate law practices. Each performs work for her or his client, sends the client a bill for $50,000, and then dies. Elise, who reports on an accrual method of accounting, recognizes income of $50,000 when she bills her client. Felix, who uses the cash method, reports no income upon billing his client. For the sake of simplicity, assume that each lawyer’s account receivable is worth $50,000 at the date of death and that each client pays the estate $50,000 soon after the lawyer’s death. If each lawyer’s account receivable took a $50,000 basis under § 1014(a), neither estate would have any income when the client paid. As a result, Elise’s income would be taxed in full (to her before her...
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Chapter Two. The Pass-Through Principle of Partnership Taxation 68 results (showing 5 best matches)
- James and Harrison are equal members of the JH partnership. During the current year, the partnership recognizes the following income and deduction items:
- $7,500 income from the partnership’s business operations. Section 702(a)(8) any remaining income and deduction items that are not separately stated are combined at the partnership level and pass through to the partners. Practitioners usually refer to this combined taxable income or loss as the partnership’s “bottom-line income” or “bottom line loss.” In this example, the partnership has $15,000 of “bottom line income,” consisting of $50,000 of gross income from the partnership’s business less $35,000 in business expenses. Each partner reports half of the $15,000, which is $7,500.
- As discussed in Chapter 1, the amount and character of a partnership’s income are calculated using an “entity” approach, but the income is taxed to the partners, not to the partnership. There are several Internal Revenue Code provisions that implement this method of taxing partnership income to partners.
- As discussed in Chapters 11 and 12, special provisions prevent partners from avoiding this ordinary-income taint by having the partnership distribute its ordinary-income assets to them and then classifying such assets as capital assets in their hands. See Chapter 11 § A.3, which discusses § 735, and Chapter 12, which discusses § 751(b). Consistent with the theme of not avoiding ordinary income, special look-through rules also require a partner who sells her interest in a partnership that holds ordinary income assets to recognize ordinary income attributable to her share of the partnership’s assets. See Chapter 10 § A.2, which discusses § 751(a).
- Taxpayers are subject to Social Security and Medicare taxes on wages they earn as employees and on income they earn from conducting a trade or business while self-employed. Section 1402 imposes Social Security and Medicare taxes on a general partner’s share of partnership income arising from the partnership’s conduct of a trade or business. In effect, a general partner is treated as though she directly conducted her share of the partnership’s trade or business. In contrast, a limited partner’s share of income arising from the limited partnership’s conduct of a trade or business is generally not subject to Social Security and Medicare taxes.
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Chapter Nine. Transactions Between Partnerships and Their Partners 73 results (showing 5 best matches)
- Sometimes it is hard to say whether a payment depends upon a partnership’s income; in particular, there is debate regarding whether “income” indicates gross income or net income. While it is clear that a payment measured by the partnership’s net income is not a guaranteed payment, it is less clear whether a payment measured by the partnership’s income similarly cannot constitute a guaranteed payment. The preamble to proposed regulations supports the view that a payment measured by partnership gross income cannot be classified as a guaranteed payment. We discuss this in § D.2, below.
- One reason for distinguishing between guaranteed payments and distributions of distributive shares has to do with the character of the partners’ incomes. For instance, suppose that Sandra is entitled to 40% of the partnership’s income from all sources, with a guaranteed minimum payment of $20,000. The partnership’s total income is $50,000, consisting of $25,000 ordinary income and $25,000 capital gains. If, following the current regulations, the entire $20,000 is a distribution of a distributive share, Sandra’s income from the distributive share consists of 40% of the partnership’s ordinary income, or $10,000, and 40% of its capital gain, also $10,000. Terry’s distributive share also consists of equal amounts of ordinary income and capital gain ($15,000 of each). Terry and Sandra do not recognize any additional income upon the distribution of their distributive shares under § 731 since the outside basis of each is increased by the distributive shares of income under § 705(a).
- The LMN partnership has $100,000 of ordinary income and no deductions. Partner Lewis is an architect. Lewis’s partnership activities for the year have consisted entirely of designing a building that the partnership will build in the near future. (Costs allocable to building construction must be capitalized into the basis of the new building instead of generating a current deduction. ) Under the partnership agreement, Lewis is entitled to a distributive share of 20% of the partnership’s taxable income, which is all ordinary income. If this distributive share is really what it purports to be, the total income of the other partners, Mairead and Nigel, will be $80,000. Lewis will report income of $20,000, which will be eligible for the § 199A 20% deduction if the partnership is engaged in a qualified trade or business. If Lewis then receives a cash distribution of $20,000, it will not generate additional tax to Lewis. (The distributive share and distribution will have the effect of...
- A distribution of partnership income tied to the allocation of the partner’s distributive share of that income. The distributive share will increase outside basis and the partner’s capital account; the distribution will decrease outside basis (but not below zero) and the partner’s capital account (possibly below zero). The determination whether her share of partnership income is qualified business income under § 199A(c) is made by examining whether the partnership, itself, is engaged in a qualified trade or business. The actual calculation of the amount of the 20% deduction, however, is determined at the partner level.
- Many payments by partnerships to partners for services or for the use of capital are neither § 707(a) guaranteed payments. A third possible classification is a distribution linked to her distributive share of partnership income. Suppose Jean’s work for the JK partnership entitles her to 10% of the partnership’s $100,000 of income for the year. The partnership will allocate to Jean her $10,000 (10% of $100,000) distributive share of partnership income, and Jean will recognize $10,000 of income on her individual tax return. In addition, Jean’s outside basis and capital account will increase by $10,000. If the partnership’s subsequent payment of $10,000 to Jean is characterized as a distribution tied to her distributive share, Jean will not recognize any income under § 731(a)(1) (so long as her outside basis prior to the distribution was at least $10,000). Also, her outside basis and capital account will decrease by $10,000. ...of caution here: tax lawyers have fallen into the... ...of...of
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Chapter Ten. Sales of Partnership Interests 113 results (showing 5 best matches)
- , the two provisions that make the taxation of transfers of partnership interests very complex in many cases, has a parallel in subchapter S. The gain recognized when the shareholder of an S corporation sells stock can be a capital gain, even if the corporation’s assets consist entirely of accounts receivable, inventory, and depreciated machinery, all of which would produce ordinary income if sold by the corporation. And no adjustment is made to the inside basis when shares of an S corporation are sold. The taxation of those who hold shares of S corporations is in these respects cruder, and much simpler, than the taxation of partners.
- The statute fails to say, however, how much of Edgar’s basis should be subtracted from that amount realized to calculate the ordinary income from the sale. The regulations fill the gap. They do not identify the amount of Edgar’s basis that should be allocated. Instead, they state that the seller’s ordinary income (or loss) attributable to the partnership’s § 751 assets is the amount of ordinary income or loss that would have been allocated to the partner if the partnership had sold all of its assets. In this case, Edgar’s share of the ordinary income from the sale of the receivable would have been $5,000 (the $20,000 amount realized by the partnership in the constructive sale minus its $0 inside tax basis multiplied by Edgar’s 25% share). Consequently, § 751(a) taxes Edgar on $5,000 of ordinary income when he sells his partnership interest.
- The process of allocating basis adjustments consists of two steps. First, the adjustment is divided between two classes of partnership property: the “capital gain property class,” consisting of all of the partnership’s capital assets and § 1231 assets, and the class of “ordinary income property,” consisting of everything else. An amount equal to the net gain or loss from the sale of ordinary-income property that would have been allocated to the new partner (but for the § 743(b) adjustment) on a sale of that property by the partnership is allocated to the ordinary-income class. Any remaining adjustment goes to the capital-asset class. (There is one exception found in Reg. § 1.755–1(b)(2)(i)(B) : if a negative adjustment to the capital-asset class would exceed the partnership’s total basis for that property, the excess reduction goes to the ordinary-income class.)
- Heloise (H), whose outside basis is $8,000, realizes a $4,000 loss by selling her one-fourth partnership interest to Leopold for $4,000. If the partnership had sold all of its assets, Heloise would have recognized $2,000 of ordinary income because of her interest in the inventory, which is a § 751 asset (25% of $8,000 gain in constructive sale at fair market value of the inventory). She therefore recognizes $2,000 of ordinary income under § 751(a) upon the sale of her partnership interest. She must also recognize a capital loss of $6,000 ($4,000 realized loss minus $2,000 ordinary income). Her total pre-tax loss equals $4,000 whether or not § 751 applies, but because it does apply, the $4,000 loss is comprised of $2,000 of ordinary income and $6,000 of capital loss.
- goes far beyond rights to payment. For purposes of most of the Code sections in which the term is used, “unrealized receivables” includes the variety of things listed in the “flush” language following § 751(c)(2). Most of the property on this list is property subject to some kind of recapture. For example, suppose a partnership buys § 1245 property for $10,000 and takes $6,000 in depreciation deductions, reducing the property’s basis to $4,000. If this asset is now worth $5,000, the partnership has a $1,000 “unrealized receivable.” For most (but not all) purposes, § 751(c) includes in the list of unrealized receivables “section 1245 property . . . to the extent of the amount which would be treated as [ordinary income under § 1245(a)] . . . if . . . such property had been sold by the partnership at its fair market value.” Note that the unrealized receivable in this kind of case is not the whole property on which ordinary income will be recaptured. It is ...a portion of the property,...
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Chapter Twelve. Distributions Subject to Section 751(b) 76 results (showing 5 best matches)
- Regulations proposed in December 2014 address this problem by focusing on each partner’s share of the potential ordinary income and loss in the § 751 The Proposed Regulations determine whether § 751(b) is triggered by comparing each partner’s share of § 751 ordinary income from a hypothetical asset sale by the partnership before the distribution with each partner’s share from a post-distribution hypothetical sale by the partnership of retained assets and by the distributee of the distributed assets. If there is a change in a partner’s “section 751(b) amount,” the Proposed Regulations require the partnership to impose tax consequences consistent with the purposes of § 751(b). . In Example 12-4, above, under the Proposed Regulations, Richard’s “section 751(b) amount” would be $200, the amount of ordinary income he shifted to the other partners. Richard would be required to recognize $200 of ordinary income, which would increase his basis in his partnership interest by $200 for purposes
- In this Example 12-3, Richard was taxed on one-third of the inventory’s ordinary-income potential. Sophia and Tess will recognize the rest of the ordinary income when the partnership sells the inventory. Section 751(b) has achieved its objective of taxing the ordinary income to the same partners who would have been taxed if the partnership had sold the inventory before liquidating Richard’s interest. One odd thing has happened, though: $100 of capital gain has disappeared from the tax base. This came about because the last step of the transaction, as reconstructed under § 751(b), was a liquidating distribution of a two-thirds interest in the capital asset. This distribution increased the basis of that two-thirds interest from $600 (its basis in the partnership’s hands) to $700 (Richard’s basis for his partnership interest) under § 732(b), without anyone’s having recognized gain. If the partnership has a § 754 election in effect, this basis change will be made up for by reducing the
- , the distributee would have been taxed on too little of the partnership’s ordinary income. If a distribution contains too high a percentage of the partnership’s § 751 property, the concern is to prevent the distributee from being taxed on too much of the partnership’s ordinary income. (Looking at things from the point of view of the continuing partners, § 751(b) tries to prevent those partners from having too small a share of the partnership’s potential ordinary income.)
- suppose that the RST partnership’s inventory consists of three pieces of property. One has no built-in gain with a basis of $400 and a value of $400. The other two inventory items each has a basis of $100 and value of $400, representing a total of $600 of combined ordinary income potential. If the partnership makes a liquidating distribution to Richard of $800 worth of capital assets (or $800 cash) plus the inventory item with a basis and value of $400, the distribution will not trigger § 751(b) . Richard has received his proportionate share of inventory, by value, so the distribution did not give him non-§ 751 property in exchange for § 751 property or vice versa. But note that Richard has successfully shifted his $200 share of the $600 built-in ordinary income from the inventory to Sophia and Tess since he will report no ordinary income upon selling the inventory item for $400. Rather, Sophia and Tess will report all $600 of the partnership’s ordinary income when the partnership...
- Richard’s basis for his partnership interest is $900. He receives all of the partnership’s inventory in a liquidating distribution. Under § 731 ), Richard would recognize a $300 capital loss on the distribution (the excess of his $900 outside basis over the $600 basis of the inventory). so he would have $600 of ordinary income if he sold the inventory for $1,200 within five years of getting it. Sophia and Tess would have no ordinary income because their partnership would hold no ordinary-income property.
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Chapter Five. Allocations of Partnership Income, Deductions, and Credits: An Introduction 140 results (showing 5 best matches)
- Partners’ capital accounts are increased by their additional contributions (if any) and by their shares of the partnership’s income and gains. These gains are measured by reference to the asset’s book value, not its tax basis. Partnership expenses and losses (also determined by reference to book values) and withdrawals from a partnership reduce the capital account balances of partners.
- Up to this point, we have not had to worry about how a partnership’s income, deductions, and credits (the partnership’s “tax items”) are allocated among the partners. We have assumed, tacitly, that a 40% partner would report 40% of all the partnership’s tax items. In fact, however, a partnership may allocate different portions of its tax items to different partners. For example, partner may report 50% of a partnership’s ordinary income but only 10% of its capital gains, or partner may be taxable on half of the taxable income of a partnership’s New York office but only 10% of the taxable income of its Washington office.
- Finally, assume that the partnership did not sell the real estate or refinance the debt, but instead that Kara contributed $390,000 to the partnership that the partnership then used to pay off the nonrecourse loan. The partnership’s minimum gain would decrease to zero and the minimum gain chargeback would be triggered. The chargeback would allocate $12,000 of income to John. Although Kara would normally also be allocated income because her share of partnership minimum gain decreased by $8,000, the regulations save her. The regulations say that a partner will not be subject to a chargeback to the extent that the partner made a contribution that was used to decrease partnership minimum gain by paying off the debt or increasing the asset’s basis. The rationale is that Kara has assumed the risk of loss previously held by the lender as a result of contributing the amount used to pay the loan.
- Roughly speaking, an allocation has economic effect if it will affect the wealth of the partners. Some kind of principle like this must control allocations of partnership income. It would be absurd to say that a partnership agreement allocating all of a partnership’s income to partner will share equally in all the money and property the partnership has and will get in the future. The regulations under § 704(b) have, however, gone far beyond this common-sense notion of “economic effect.” They have taken that short statutory phrase and built upon it a remarkably elaborate, detailed, complex, and yet incomplete set of rules. These rules are so difficult that only a handful of partnership-tax specialists will be able to apply them. Garden-variety partnerships and limited liability companies (small businesses advised by ordinary lawyers and accountants) will seldom make allocations that satisfy all the requirements for “substantial economic effect” in the regulations. Instead, their...
- The partners discover early in the year that the partnership will recognize a capital gain of at least $100,000 from the sale of Orangeacre, a partnership asset. It will also have several hundred thousand dollars of ordinary income. The partners amend their partnership agreement to allocate the first $100,000 of partnership capital gains to Charlie. The first $200,000 of partnership ordinary income is allocated equally between Acme and Beta. All other income is allocated equally. These allocations are appropriately reflected in the partners’ capital accounts. In effect, the partnership is replacing a portion of Charlie’s share of ordinary income with an equal amount of capital gain in order to reduce his tax liability.
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Chapter Four. Contributions to Partnerships 116 results (showing 5 best matches)
- In many cases, however, an interest in partnership profits received by a service partner should be viewed, not as compensation for services, but as the first step in an arrangement giving the service partner an opportunity to earn income. When that is the case, the service partner should not be seen as having engaged in a taxable transaction. For example, two lawyers, Lloyd and Maria, form a partnership for the practice of law. Lloyd contributes $100,000 cash to buy essential supplies and pay expenses for the first few months of the operation. Both partners agree to perform services. Maria, who has contributed neither cash nor property, will receive 45% of the partnership’s profits, if any, during its first year of operation, but she has no interest in the partnership’s capital. Thus, if the partners change their minds about the venture tomorrow and unwind the partnership, Lloyd will get his $100,000 back and Maria will get nothing. On these facts, fundamental notions of what
- any interest in a partnership that is transferred to a service provider by [a] partnership in connection with services provided to the partnership (either before or after the formation of the partnership), provided that the interest is not (a) related to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease, (b) transferred in anticipation of a subsequent disposition, or (c) an interest in a publicly traded partnership within the meaning of § 7704(b)
- 724(b) limit the ability of partners to convert ordinary income into capital gain by contributing “unrealized receivables” and “inventory items” to partnerships in whose hands the property would be capital or § 1231 assets. “Unrealized receivables” and “inventory items” are terms of art, defined in 751(d). The definition of these terms will be discussed in detail in Chapter 10 § A.2. The definitions are so broad that almost any item of ordinary-income property is either an “unrealized receivable” or an “inventory item” (or both). Gain or loss recognized by a partnership that disposes of unrealized receivables contributed by a partner is ordinary. § 724(a) . Gain or loss on a partnership’s disposition of inventory items contributed by a partner is ordinary if the disposition takes place within five years of the contribution. § 724(b) . Of course, the disposition of inventory items more than five years after a contribution will also generate ordinary income if the property is still “...
- Suppose a partner who owns an appreciated ordinary-income asset, such as an item of inventory, contributes that asset to a partnership. If the asset is a capital or § 1231 asset in the partnership’s hands, without more, § 702(b) would make gain on the sale of the asset by the partnership a capital or § 1231 gain even though the gain would have been ordinary if the partner had sold the property. Nevertheless, § 724 by “tainting” some kinds of contributed property having undesirable tax attributes. Partnership gain or loss on tainted property contributed by a partner has the same character it would have had if the partner had sold the property.
- Nothing in the Code provides for nonrecognition when a partner acquires a partnership interest in exchange for performing services (or promising to perform services in the future). The taxation of these transactions may turn upon whether the partner receives an interest in the partnership’s capital or only an interest in the partnership’s future profits; for this reason, these kinds of cases will be discussed separately. Further, § 1061, added by the 2017 Act, complicates matters for non-corporate service partners in certain capital-raising or investment partnerships (such as private equity partnerships) by requiring that they must hold an interest for more than three years in order to obtain long-term capital gain treatment. We provide additional discussion of § 1061 in § B.3 below.
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Chapter Seven. Allocations Attributable to Contributed Property: Section 704(c) 136 results (showing 5 best matches)
- The facts are the same as in Example 7-6, except that the partnership earns ordinary income from the depreciable asset of $1,000 per year. The partnership now has income it may use to cure the distortion for Freya. The partnership will divide the $1,000 of the book income equally among the partners ($500 of book income for each partner), but it will allocate all $1,000 of the tax income to Eli. As the table illustrates, this will cure the distortion for Freya. The table assumes that the partnership holds the ordinary income as a cash reserve.
- There is no authority that addresses the interaction of § 199A with § 704(c) and § 737. Because the § 704(c) and § 737 rules affect partnership items of income and expense allocated to each partner, however, these rules should also affect each partner’s share of qualified business income from the partnership. Section 199A(c)(3)(A)(ii) states that a tax item must be “included or allowed in determining taxable income for the taxable year” in order to be included in the computation of qualified business income (discussed in Chapter 1 note 13 ). For example, if the partnership is a § 199A qualified business, it seems that a § 704(c) allocation of tax depreciation to a partner should be considered in calculating that partner’s net qualified business income from the partnership.
- This chapter continues the discussion of the interaction of partnership tax allocations and the assignment-of-income doctrine by examining the specialized statutory and regulatory rules that address situations in which the fair market value of property contributed to a partnership differs from its tax basis. Can a partner, who purchased property for $30,000 that has appreciated in value to $40,000, shift the $10,000 built-in tax gain to other partners by contributing the property to the partnership and having the partnership sell it and then allocate all the tax gain to the other partners? The short answer is no. If the partnership sells the property for $40,000, § 704(c)
- The traditional method with curative allocation works by allocating other items of partnership income or deduction in a way that makes up for the distortion caused by the ceiling rule. The For example, a partnership cannot make a curative allocation of capital gain to make up for a misallocation of ordinary income or loss. Curative allocations are tax allocations only; they do not change the book allocations provided in the partnership agreement.
- regulations prevent the shifting of built-in gain among partners by focusing on the difference between the contributed property’s book value and tax basis. If property contributed to a partnership in a transaction subject to § 721 has a tax basis that differs from its book value, the tax consequences attributable to that difference must be borne by the contributing partner. Suppose that a new partner contributes unimproved land with a tax basis of $30,000 and a value of $40,000 in exchange for an interest in a partnership. The contributing partner’s capital account is $40,000, and the partnership’s book value for the asset is $40,000. The partnership later sells the land for $44,000. The contributing partner should report all of the $10,000 tax gain that was “built in” at the time of the contribution. If the partnership agreement could allocate that built-in gain to a different partner (for example, one in a lower rate bracket than the contributor), the partners would easily be...
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Chapter Fourteen. Basis Adjustment Under Section 734 45 results (showing 5 best matches)
- adjustments in cases involving changes in the basis of distributed property is to keep the total amount of potential income in the world unchanged. Consistently with this objective, the regulations require that basis adjustments caused by changes in the bases of distributed capital assets and § 1231 assets be allocated to the partnership’s remaining capital and § 1231 assets; basis adjustments resulting from changes in the bases of distributed ordinary-income assets must be allocated to ordinary-income property. Were it not for this requirement, a reduction in the basis of inventory might be “made up for” by an increase in the basis of capital assets.
- by the law of partnership taxation
- If a distribution changes the basis of the distributed property from what the basis was when inside the partnership, that change will increase or decrease the amount of potential income in the world. To make up for this, § 734(b) will either (1) decrease the basis of property remaining inside the partnership to make up for an increase in the basis of distributed property, or (2) increase the basis of remaining partnership property to make up for a reduction in the basis of distributed property.
- Cesar’s outside basis is $400,000. The partnership distributes Capital Asset A to Cesar in liquidation of his partnership interest. As a result of § 732(b) , Cesar takes Capital Asset A with a basis of $400,000. Had the partnership made a § 754 would have required the partnership to reduce the basis of its remaining assets by $350,000 (the difference between the partnership’s basis in Capital Asset A of $50,000 and Cesar’s new basis in Capital Asset A of $400,000). Because the amount of this downward adjustment exceeds $250,000, the partnership must reduce the inside basis of its remaining assets by $350,000, even though no § 754 election has been made. § 734(b) and (d).
- the partnership; the remaining partners resemble buyers of partnership interests. Just as sales of partnership interests are followed by basis adjustments under § 743(b) , taxable distributions are followed by adjustments under § 734(b)(1)(A) (when the partner recognizes a loss). Basis adjustments caused by recognition of gain or loss are allocated to the partnership’s capital-gain property.
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Chapter Eleven Partnership Distributions: An Introduction 95 results (showing 5 best matches)
- Sometimes partners, such as partners in a law partnership, will receive “draws,” cash distributions during the year representing advances on their year-end share of partnership profits. If the partners have a low outside basis at the time of a distribution, § 731(a)(1) eliminates this potential problem, however, by stating that “advances or drawings . . . against a partner’s distributive share of income shall be treated as current distributions made on the last day of the partnership taxable year. drawings” are loans from the partnership that the partner is obligated to return to the extent they exceed his share of partnership income at the end of the year. The regulation is quite advantageous since it allows partners to use their share of profits at year-end to increase their outside basis and thereby reduce the likelihood that the draws will trigger gain recognition.
- Adriana, a partner with an outside basis of $30,000, receives a liquidating distribution of depreciable equipment having a basis of $20,000 in the partnership’s hands and a value of $25,000. Had the partnership sold the equipment for its $25,000 value, the partnership would have recognized the $5,000 gain as ordinary income under the depreciation recapture rules of § 1245
- The rationale for the rules applied in Example 11-11 is this: treating the transaction as a nonrecognition event would require stepping up the basis of unrealized receivables and inventory, which would reduce the amount of ordinary income taxable to the partners. Taxing the distributee on a gain measured by the difference between the total value of the distribution and the distributee’s basis would substitute capital gain for ordinary income because the distributee would get a higher basis for the assets at the cost of a capital gain under § 741 . The statutory scheme preserves the ordinary-income potential of the distributed assets by keeping their bases in the partner’s hands the same as their bases when they were held by the partnership. The distributee partner will need to consider whether special rules affect the character of the distributed assets, as discussed in § A.3.
- In the distribution, Lana took the same basis in each asset that the partnership had in the asset, and after the distribution she held all three assets as investments. (Assume that § 751(b), which will be discussed in Chapter 12, did not apply to the distribution because the other partners each received a distribution of the same amount by value of § 751(b) items.) Three years after the distribution, Lana sells the unrealized receivable for $9,000, the land for $68,000, and the equipment for $42,000. Lana recognizes 9,000 of ordinary gain on the unrealized receivable and $20,000 of ordinary gain on the land. Even though she has been holding the land as a capital asset, it remains categorized as inventory for 5 years from the distribution. Lana recognizes $20,000 of ordinary § 1245 recapture income on the equipment and $7,000 of long-term capital gain. Even though the equipment was not inventory or an unrealized receivable in the hands of the partnership and is being held as a...
- The LMN partnership made a nonliquidating distribution to Lana of three assets: (1) an unrealized receivable worth $10,000 in which the partnership had $0 basis; (2) land held by the partnership as inventory in which the partnership had a $48,000 basis and worth $50,000 at the time of the distribution; and (3) equipment held by the partnership as a § 1231 asset in which the partnership had a $15,000 basis after having taken $20,000 of depreciation deductions and worth $40,000 at the time of the distribution.
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Index 272 results (showing 5 best matches)
- Law of partnership taxation, distributions triggering adjustments as determined by, 271–272
- Gross income of partnership, payments measured by, 186–187
- Gross income of partnership, payments measured by, 186–187
- Overview of taxation of partnerships, C corporations, and S corporations, 1–14
- Taxation as partnerships, 27
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Chapter Eight. Allocation of Partnership Debt 112 results (showing 5 best matches)
- If the $10,000 obligation were treated as a liability, Imelda would be overtaxed. Suppose, for instance, that the partnership engages in only two transactions: it pays the employee, and it sells the asset contributed by Imelda for $70,000. If the obligation is a “liability” in the § 752 sense, Imelda’s outside basis immediately after the partnership was formed becomes $35,000 ($40,000 under § 722 for the $5,000 of Imelda’s debt shifted to John). John’s outside basis becomes $65,000 ($60,000 for his actual cash contribution plus $5,000 under § 752(a) for the increase in his share of Imelda’s debt). Upon selling the asset, the partnership has a gain of $30,000, while payment of the $10,000 salary gives it a $10,000 deduction; its income is therefore $20,000. Under § 704(c) (see Chapter 7), all of this income should be taxed to Imelda. This taxable income increases Imelda’s outside basis from $35,000 to $55,000. § 705 . Payment of the $10,000 salary also reduces each partner’s share of...
- The rules for allocating recourse debt can often result in an unpleasant surprise for a partner contributing property encumbered by recourse debt. As shown in Example 8-6 below, there is a significant risk of income recognition when a partner contributes property encumbered by recourse debt and the partnership assumes the debt.
- The facts are the same as in Example 8-13. Because Imelda’s obligation to pay the salary is not a “liability,” for purposes of § 752 , her outside basis when the partnership is formed is $40,000 (the basis of the contributed property). John’s outside basis is $60,000. When the partnership sells the asset and pays the salary, its income (all allocable to Imelda) consists of a $30,000 gain and a $10,000 deduction, and so Imelda’s outside basis increases by $20,000 to $60,000. Neither partner has a gain when the partnership is liquidated, and each receives $60,000. When the dust settles, Imelda recognizes a $30,000 gain and a $10,000 deduction for business expenses, just as if the partnership had never been formed.
- The reduction of each partner’s capital account to negative $500,000 will not trigger a qualified income offset. Each partner is treated as sharing in partnership minimum gain to the extent of the $500,000 distribution because, as discussed in the text, the debt increased partnership minimum gain by $1 million. The regulations in turn treat a partner’s share of partnership minimum gain as being the equivalent of a limited deficit restoration obligation. iii for further discussion of this.) Consequently, each partner is treated as having a limited deficit restoration obligation equal to $500,000.
- At the end of the first year, the partnership has $100 of partnership minimum gain because the partnership’s nonrecourse debt exceeds its book value (and tax basis) of zero in the asset by $100. Qiu’s share of the partnership minimum gain is $100 because all the depreciation expenses (i.e., nonrecourse deductions) were allocated to her.
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Table of Contents 92 results (showing 5 best matches)
SUMMARY OF CONTENTS 50 results (showing 5 best matches)
Dedication 1 result
Editorial Board 7 results (showing 5 best matches)
- William B. Graham Distinguished Service Professor of Law and Former Dean of the Law School University of Chicago
- Agnes Williams Sesquicentennial Professor of Law Associate Dean for Strategy, and Professor of Management
- Charles J. Ogletree Jr. Professor of Law
- Ernest W. McFarland Professor of Law
- Dean and the Sol & Lillian Goldman Professor of Law
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Copyright Page 2 results
- The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
- Printed in the United States of America
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Table of Cases 3 results
- Publication Date: April 24th, 2023
- ISBN: 9781685613716
- Subject: Taxation
- Series: Concepts and Insights
- Type: Hornbook Treatises
-
Description:
This book provides the simplest possible introduction of partnership taxation to students and beginning practitioners trying to understand the taxation of partnerships. Partnership taxation is an intricate body of law with the result that any “simplified” description of its rules would be so misleading as to be useless. We have therefore tried to make the subject accessible not by paraphrasing the rules, but by including over one hundred and forty examples of the rules that are as straightforward as possible. The text and examples focus on simple partnerships and limited liability companies that hold few assets and engage in routine transactions. The text places the rules in context by pointing out the purposes of the statute and regulations and presenting background information about practical matters such as how partnerships maintain capital accounts and how nonrecourse financing works. Using many examples, it then shows the operation of the rules in everyday cases encountered by practitioners.
This is not a reference book: many interesting and difficult issues have been ignored. Some matters, such as the application of § 736 to noncash distributions and the taxation of tiered partnerships, are not discussed at all. Most of the points that are addressed, however, are discussed at considerable length. Our goal is to give students and beginning practitioners background material and illustrations so that they can begin to understand and work with a statute that was drafted for (and by) experienced practitioners and so that they can be prepared to make sense of the current law and any future changes.
Most chapters end with a section comparing the tax treatment of partners with that of the shareholders of S corporations. Many students encountering partnership taxation for the first time have already studied subchapter S. We expect that an examination of some of the basic differences between subchapters S and K should help those students understand both subjects.