Ch 21 Flashcards
Chapter definitions for South-Western Federal Taxation 2015: Comprehensive, 38th Edition
Aggregate (conduit) concept
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.
Capital interest
Usually, the percentage of the entitys net assets that a partner would receive on liquidation. Typically determined by the partner’s capital sharing ratio.
Capital sharing ratio
A partner’s percentage ownership of the entity’s capital.
Constructive liquidation scenario
The means by which recourse debt is shared among partners in basis determination.
Disguised sale
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).
Disproportionate distribution
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.
Economic effect test
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.
Entity concept
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.
General partner
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.
General partnership
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.
Guaranteed payment
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.
Hot assets
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.
Inside basis
A partnership’s basis in each of the assets it owns.
Least aggregate deferral rule
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.
Limited liability company (LLC)
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.