Ch 21

Question 1

Aggregate (conduit) concept

Answer 1

The theory of partnership taxation under which, in certain cases, a partnership is treated as a mere collection of the activities of each partner. See also entity concept.

Question 2

Capital interest

Answer 2

Usually, the percentage of the entitys net assets that a partner would receive on liquidation. Typically determined by the partner’s capital sharing ratio.

Question 3

Capital sharing ratio

Answer 3

A partner’s percentage ownership of the entity’s capital.

Question 4

Constructive liquidation scenario

Answer 4

The means by which recourse debt is shared among partners in basis determination.

Question 5

Disguised sale

Answer 5

When a partner contributes property to the entity and soon thereafter receives a distribution from the partnership, the transactions are collapsed, and the distribution is seen as a purchase of the asset by the partnership. ? 707(a)(2)(B).

Question 6

Disproportionate distribution

Answer 6

A distribution from a partnership to one or more of its partners in which at least one partner’s interest in partnership hot assets is increased or decreased. For example, a distribution of cash to one partner and hot assets to another changes both partners’ interest in hot assets and is disproportionate. The intent of rules for taxation of disproportionate distributions is to ensure each partner eventually recognizes his or her proportionate share of partnership ordinary income.

Question 7

Economic effect test

Answer 7

Requirements that must be met before a special allocation may be used by a partnership. The premise behind the test is that each partner who receives an allocation of income or loss from a partnership bears the economic benefit or burden of the allocation.

Question 8

Entity concept

Answer 8

Even in so-called flow-through entities, tax accounting elections are made (e.g., a tax year is adopted) and conventions are adopted (e.g., with respect to cost recovery methods) at the entity level. This may seem to violate the conduit concept, but such exceptions tend to ease the administration of such conduit taxpayers, especially in the context of a large number of shareholders/partners/members/beneficiaries.

Question 9

General partner

Answer 9

A partner who is fully liable in an individual capacity for the debts of the partnership to third parties. A general partner’s liability is not limited to the investment in the partnership. See also limited partner.

Question 10

General partnership

Answer 10

A partnership that is owned by one or more general partners. Creditors of a general partnership can collect amounts owed them from both the partnership assets and the assets of the partners individually.

Question 11

Guaranteed payment

Answer 11

Made by a partnership to a partner for services rendered or for the use of capital, to the extent that the payments are determined without regard to the income of the partnership. The payments are treated as though they were made to a nonpartner and thus are deducted by the entity.

Question 12

Hot assets

Answer 12

Unrealized receivables and substantially appreciated inventory under ? 751. When hot assets are present, the sale of a partnership interest or the disproportionate distribution of the assets can cause ordinary income to be recognized.

Question 13

Inside basis

Answer 13

A partnership’s basis in each of the assets it owns.

Question 14

Least aggregate deferral rule

Answer 14

A test applied to determine the allowable fiscal year of a partnership or S corporation. Possible tax year-ends are tested, and the fiscal year allowed by the IRS is the one that offers the least amount of income deferral to the owners on an individual basis.

Question 15

Limited liability company (LLC)

Answer 15

A form of entity allowed by all of the states. The entity is subject to Federal income tax treatment as though it were a partnership in which all owners of the LLC are treated much like limited partners. There are no restrictions on ownership, all partners may participate in management, and none of the owners has personal liability for the entity’s debts.

Question 16

Limited liability limited partnership (LLLP)

Answer 16

A limited partnership for which the general partners are also protected from entity liabilities. An LLLPor triple LPcan be formed in about 20 states. In those states, a limited partnership files with the state to adopt LLLP status.

Question 17

Limited liability partnership (LLP)

Answer 17

A legal entity allowed by many of the states, where a general partnership registers with the state as an LLP. Owners are general partners, but a partner is not liable for any malpractice committed by other partners. The personal assets of the partners are at risk for the entity’s contractual liabilities, such as accounts payable. The personal assets of a specific partner are at risk for his or her own professional malpractice and tort liability, and for malpractice and torts committed by those whom he or she supervises.

Question 18

Limited partner

Answer 18

A partner whose liability to third-party creditors of the partnership is limited to the amounts invested in the partnership. See also general partner and limited partnership.

Question 19

Limited partnership

Answer 19

A partnership in which some of the partners are limited partners. At least one of the partners in a limited partnership must be a general partner.

Question 20

Liquidating distribution

Answer 20

A distribution by a partnership or corporation that is in complete liquidation of the entity’s trade or business activities. Typically, such distributions generate capital gain or loss to the investors without regard, for instance, to the earnings and profits of the corporation or to the partnership’s basis in the distributed property. They can, however, lead to recognized gain or loss at the corporate level.

Question 21

Nonliquidating distribution

Answer 21

A payment made by a partnership or corporation to the entity’s owner is a nonliquidating distribution when the entity’s legal existence does not cease thereafter. If the payor is a corporation, such a distribution can result in dividend income to the shareholders. If the payor is a partnership, the partner usually assigns a basis in the distributed property that is equal to the lesser of the partner’s basis in the partnership interest or the basis of the distributed asset to the partnership. In this regard, the partner first assigns basis to any cash that is received in the distribution. The partner’s remaining basis, if any, is assigned to the noncash assets according to their relative bases to the partnership.

Question 22

Nonrecourse debt

Answer 22

Debt secured by the property that it is used to purchase. The purchaser of the property is not personally liable for the debt upon default. Rather, the creditor’s recourse is to repossess the related property. Nonrecourse debt generally does not increase the purchaser’s at-risk amount.

Question 23

Operating agreement

Answer 23

The governing document of a limited liability company. This document is similar in structure, function, and purpose to a partnership agreement.

Question 24

Outside basis

Answer 24

A partner’s basis in his or her partnership interest.

Question 25

Partnership agreement

Answer 25

The governing document of a partnership. A partnership agreement should describe the rights and obligations of the partners; the allocation of entity income, deductions, and cash flows; initial and future capital contribution requirements; conditions for terminating the partnership; and other matters.

Question 26

Precontribution gain or loss

Answer 26

Partnerships allow for a variety of special allocations of gain or loss among the partners, but gain or loss that is built in on an asset contributed to the partnership is assigned specifically to the contributing partner. ? 704(c)(1)(A).

Question 27

Profit and loss sharing ratios

Answer 27

Specified in the partnership agreement and used to determine each partners allocation of ordinary taxable income and separately stated items. Profits and losses can be shared in different ratios. The ratios can be changed by amending the partnership agreement or by using a special allocation. ? 704(a).

Question 28

Profits (loss) interest

Answer 28

A partner's percentage allocation of partnership operating results, determined by the profit and loss sharing ratios.

Question 29

Proportionate distribution

Answer 29

A distribution in which each partner in a partnership receives a pro rata share of hot assets being distributed. For example, a distribution of $10,000 of hot assets equally to two 50 percent partners is a proportionate distribution.

Question 30

Qualified nonrecourse debt

Answer 30

Debt issued on realty by a bank, retirement plan, or governmental agency. Included in the at-risk amount by the investor. ? 465(b)(6).

Question 31

Recourse debt

Answer 31

Debt for which the lender may both foreclose on the property and assess a guarantor for any payments due under the loan, even from personal assets. A lender also may make a claim against the assets of any general partner in a partnership to which debt is issued, without regard to whether that partner has guaranteed the debt.

Question 32

Required taxable year

Answer 32

A partnership or limited liability company must use a required tax year as its tax accounting period, or one of three allowable alternative tax year ends. The required tax year is determined using the least aggregate deferral rule. But if there is a common tax year used by owners holding a majority of the entity's capital or profits interests, or used by all of the owners who hold five percent or more of the capital or profits interests, then that tax year end is used by the entity.

Question 33

Schedule K-1

Answer 33

A tax information form prepared for each partner in a partnership, each shareholder of an S corporation, and some beneficiaries of certain trusts. The Schedule K-1 reports the owner's share of the entity's ordinary income or loss from operations, as well as the owner's share of separately stated items.

Question 34

Separately stated item

Answer 34

Any item of a partnership or S corporation that might be taxed differently to any two owners of the entity. These amounts are not included in the ordinary income of the entity, but instead are reported separately to the owners; tax consequences are determined at the owner level.

Question 35

Special allocation

Answer 35

Any amount for which an agreement exists among the partners of a partnership outlining the method used for assigning the item among the partners.

Question 36

Syndication costs

Answer 36

Incurred in promoting and marketing partnership interests for sale to investors. Examples include legal and accounting fees, printing costs for prospectus and placement documents, and state registration fees. These items are capitalized by the partnership as incurred, with no amortization thereof allowed.

Question 37

Unrealized receivables

Answer 37

Amounts earned by a cash basis taxpayer but not yet received. Because of the method of accounting used by the taxpayer, these amounts have a zero income tax basis. When unrealized receivables are distributed to a partner, they generally convert a transaction from nontaxable to taxable or an otherwise capital gain to ordinary income, i.e., as a hot asset.