Ch 9 Part 1 Flashcards
What does the formation of a partnership not require?
no legal documentation required
For tax purposes the definition of a partnership includes… 5 things
What do they carry on?
Syndicate, group, pool, joint venture or other unincorporated
Organization
That carries on business or financial operation or venture
2 business forms of partnerships
1 General partnership
2 limited partnership
General partnership
Exists when 2 or more partners join together
And don’t specify one or more partners is a limited partner
In a general partnership, who has the right to participate in management of the partnership?
Each partner in the partnership
Although a general partnership is flexible enough to allow its
Business affairs to be managed by single partner chosen by
General partners
What is the single biggest drawback for a general partnership?
Unlimited liability for all partners
Limited partnership: 2 classes of partners
1 at least 1 limited partner
2 at least 1 general partner
In a limited partnership, who has that right to participate in management?
Only the general partner
What is a common form for a tax shelter investment?
What are 2 benefits?
Limited partnership having a corporation with a small amount of
Capital as its sole general management
Advantages: Allows tax advantages of partnership form while
Retaining limited liability for every investor
Limited liability limited partnership (LLLPs), define
What states is it used in?
Limits liabilities for general partners
Used in states that don’t allow personal service firms to have
LLC status
LLCs give business’s what opportunity?
Opportunity to be treated as partnership for tax purposes
While having limited liability protection for every owner
How can an LLC be taxed?
Check in the box rules allow LLC to be taxed as partnership or
Corporation
Difference of LLP from general partnership?
In LLP partner isn’t liable for damages resulting from failures
In work if other partners or people supervised by other partners
Under check in the box regulations an LLP can be treated as…
A partnership or corporation
Large Partnerships: what can they elect to do? What power does the IRS have?
Large partnerships can elect to have simplified set of reporting
Rules
Election is irrevocable without IRS permission
What qualifies as a Large Partnership?
1 must not be service partnership
2 not engage in commodity trading
3 must have at least 100 partners throughout tax year
Form 1065 (US Partnership Return of Income)
Must be filed by partnership to provide IRS with info about
Partnership earnings and how they are allocated to partners
Schedule K-1
Form each partner receives from partnership
Informs the partner of amount and character of his or her share
Of partnership items
One major advantage of partnership form of doing business is…
Partnership losses are allocated among partners
3 reasons partner needs to know his basis in his partnership interest?
1 determine gain or loss on sale of partnership interest
2 determine amount of partnership losses a partner can deduct
3 determine amount of distributions nontaxable to partner
Because partners can be personally liable for partnership debts, a partner’s basis in his partnership interest is…
Increased by his share of partnership liabilities
What do partnership losses decrease?
Each partner’s basis
Limit on partnership loss deductions?
Can only be deducted up to partner’s basis
Any remaining losses are carried over until there is an increase
In the partner’s basis in his partnership interest
Tax treatment of current nonliquidating distributions, explain why they are treated that way .
Generally nontaxable to partners because represent receipt
Of earnings that already have been taxed to partners
And have increased partner’s bases in their partnership
Interests
How do partnership distributions affect a partner’s basis?
Reduce partner’s basis in his partnership interest
What happens if a large cash distribution exceeds partner’s basis in his partnership interest?
Partner recognizes gain equal to amount of excess over basis
Liquidating distributions 2 things
Partner only recognizes gain if cash received exceeds partner’s
basis in his partnership interest
Partner may recognize loss if he receives only cash, inventory,
Unrealized receivables
Contribution of property for partnership interest section 721
Partner who contributes property in exchange for partnership
Interest recognizes no gain or loss
Basis increased by property transferred
Property
Cash, tangible property, intangibles
Does not include services
Contribution of services for partnership interest
Taxable transaction
3 exceptions to section 721: contribution of property for partnership interest that is taxable
1 contribution of property to partnership that would be treated
As investment company if incorporated
2 contribution of property followed by distribution, may be
considered sale instead of contribution
3 contribution of partnership liabilities when portion of liabilities
Exceed partner’s basis in partnership
A contribution that is later distributed to contributing partner is treated like a sale if…
The distribution is not dependent on normal business risk of
The enterprise
Liabilities effect on basis
Each partner’s basis is increased by his share of partnership’s
Liabilities as if he had contributed cash in amount of his share
Of partnership liabilities
How is a partner’s relief of debt treated?
2) What happens if liability relief or cash distribution exceeds the partner’s predistribution basis in the partnership interest?
As if partner receives cash distribution that reduces partner’s
Basis in the partnership interest
2) the partner recognizes a gain
No basis adjustment is required for the portion of liability…
Transferred to the partnership by the transferor that he will retain
As a partner
If adjusted basis of non cash property is higher than the properties current FMV, when should it be contributed to a partnership?
It could be sold to a 3rd party so a tax loss could be recognized
And cash could be contributed to the partnership
Or the individual could sell the property to the partnership to
Recognize a loss
Cash distributions exceeding predistribution basis always result in…
Gain recognition, where gain is deemed to be gain from sale of
Partnership interest
What is the character of a gain on a partnership interest?
Capital gain, partnership interest is a capital asset
Partner’s basis in partnership interest (AKA Outside Basis) calculation
Partner’s basis in partnership interest =
(Money contributed)
+ (basis in contributed property)
+ (amount of recognized gain)
+ (partner’s share of partnership liabilities)
Any gain recognized because of effects of liabilities on partner’s basis… Why?
Does not increase basis for partnership interest
Because basis is 0
Holding period for contribution to partnership interest
1 includes transferor’s holding period when contributed property
Is capital asset or sec. 1231 property
2 holding period is day after for ordinary income asset
(ex. Inventory)
Partnership’s basis in contributed property
Same as property’s basis in hands of contributing partner
Recognized gains (investment companies) increase partnership's basis, though gains from liabilities do not
Character of property when contributed to partnership
Property retains its character
Unrealized receivables, define, example
Any right to payment for goods or services the holder has
Not included in income because accounting method used
Ex. Cash basis taxpayer’s A/R
Character of gain or loss recognized on unrealized receivable
Always treated as ordinary income or loss
Character of treatment of gain/loss on Inventrory
Gain/loss on disposition of inventory recognized as ordinary
In character beginning 5 year period from contribution of property
Capital loss property
Loss recognized by partnership on disposition of property
Within 5 yrs. of contribution to partnership is capital loss
The amount of loss characterized as capital may not exceed
The capital loss the contributing partner would recognize on
The contribution date (thus an ordinary loss)
Partnership’s holding period for contributed assets
Includes holding period for contributing partner
Doesn’t matter what the character of property is
Depreciation recapture rules on property contributed to partnership
No gain recognized upon contribution, Adjusted basis and depreciation recapture carry over
If partnership later sells property at a gain, it is recognized
Why is nontaxable treatment more rare with corporations
Compared to partnerships?
Corporations have 80% control requirement for contribution to
Be nontaxable
Partnerships do not have control requirement
Character of gain in which services are contributed for partnership interest
Ordinary in character
2 components of partnership interest
1 capital interest
2 profits interest
How do Treasury Regulations value a capital interest?
Valued by amount partner would receive if partnership
Liquidated on day partner receives partnership interest
Profits interest
Partner’s interest is in future earnings of partnership
Does not include interest in partnership assets
Which component of partnership interest is taxable?
Capital interest in partnership is taxable
Receiving profits interest in exchange for providing services is…
Taxable as ordinary income when profits interest is sold
Payments by the partnership for services, tax treatment
Either deductible as expense or capitalized
Deductible service expense, when does partnership take deduction
Partnership takes deduction in same year partner includes value
Of his partnership interest in income
Allocating expense deduction, who is it allocated too? why does it occur?
Partnership allocates expense deduction or amortization of
Capital expenditure among partners other than service partner
Allocation occurs because these partners make outlay by
Relinquishing part of their interest in partnership
When a partnership transfers ownership interest in the partnership to a service partner they must…
Recognize the gain or loss existing on then proportionate
Share of assets deemed transferred to the service partner
From recognizing the gain or loss it must adjust its bases
Of the assets
What is the importance of the distinction between organizational expenditures and syndication expenditures?
Organizational expenditures can be deducted $5,000 and
Amortized over 180 months
Syndication expenditures aren’t deductible or amortizable
Election to either capitalize or amortize organizational expenditures is…
Irrevocable once made
Partnership tax year
Partnership elects its tax year upon formation
Critical because it determines when each partner reports his
Share of income or loss
