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Corporate Tax > Ch 9 Part 1 > Flashcards

Ch 9 Part 1 Flashcards

0
Q

What does the formation of a partnership not require?

A

no legal documentation required

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1
Q

For tax purposes the definition of a partnership includes… 5 things

What do they carry on?

A

Syndicate, group, pool, joint venture or other unincorporated
Organization

That carries on business or financial operation or venture

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2
Q

2 business forms of partnerships

A

1 General partnership

2 limited partnership

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3
Q

General partnership

A

Exists when 2 or more partners join together

And don’t specify one or more partners is a limited partner

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4
Q

In a general partnership, who has the right to participate in management of the partnership?

A

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

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5
Q

What is the single biggest drawback for a general partnership?

A

Unlimited liability for all partners

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6
Q

Limited partnership: 2 classes of partners

A

1 at least 1 limited partner

2 at least 1 general partner

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7
Q

In a limited partnership, who has that right to participate in management?

A

Only the general partner

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8
Q

What is a common form for a tax shelter investment?

What are 2 benefits?

A

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

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9
Q

Limited liability limited partnership (LLLPs), define

What states is it used in?

A

Limits liabilities for general partners

Used in states that don’t allow personal service firms to have
LLC status

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10
Q

LLCs give business’s what opportunity?

A

Opportunity to be treated as partnership for tax purposes

While having limited liability protection for every owner

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11
Q

How can an LLC be taxed?

A

Check in the box rules allow LLC to be taxed as partnership or
Corporation

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12
Q

Difference of LLP from general partnership?

A

In LLP partner isn’t liable for damages resulting from failures
In work if other partners or people supervised by other partners

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13
Q

Under check in the box regulations an LLP can be treated as…

A

A partnership or corporation

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14
Q

Large Partnerships: what can they elect to do? What power does the IRS have?

A

Large partnerships can elect to have simplified set of reporting
Rules

Election is irrevocable without IRS permission

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15
Q

What qualifies as a Large Partnership?

A

1 must not be service partnership
2 not engage in commodity trading
3 must have at least 100 partners throughout tax year

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16
Q

Form 1065 (US Partnership Return of Income)

A

Must be filed by partnership to provide IRS with info about

Partnership earnings and how they are allocated to partners

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17
Q

Schedule K-1

A

Form each partner receives from partnership

Informs the partner of amount and character of his or her share
Of partnership items

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18
Q

One major advantage of partnership form of doing business is…

A

Partnership losses are allocated among partners

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19
Q

3 reasons partner needs to know his basis in his partnership interest?

A

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

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20
Q

Because partners can be personally liable for partnership debts, a partner’s basis in his partnership interest is…

A

Increased by his share of partnership liabilities

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21
Q

What do partnership losses decrease?

A

Each partner’s basis

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22
Q

Limit on partnership loss deductions?

A

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

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23
Q

Tax treatment of current nonliquidating distributions, explain why they are treated that way .

A

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

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24
Q

How do partnership distributions affect a partner’s basis?

A

Reduce partner’s basis in his partnership interest

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25
Q

What happens if a large cash distribution exceeds partner’s basis in his partnership interest?

A

Partner recognizes gain equal to amount of excess over basis

26
Q

Liquidating distributions 2 things

A

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

27
Q

Contribution of property for partnership interest section 721

A

Partner who contributes property in exchange for partnership
Interest recognizes no gain or loss

Basis increased by property transferred

28
Q

Property

A

Cash, tangible property, intangibles

Does not include services

29
Q

Contribution of services for partnership interest

A

Taxable transaction

30
Q

3 exceptions to section 721: contribution of property for partnership interest that is taxable

A

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

31
Q

A contribution that is later distributed to contributing partner is treated like a sale if…

A

The distribution is not dependent on normal business risk of

The enterprise

32
Q

Liabilities effect on basis

A

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

33
Q

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?

A

As if partner receives cash distribution that reduces partner’s
Basis in the partnership interest

2) the partner recognizes a gain

34
Q

No basis adjustment is required for the portion of liability…

A

Transferred to the partnership by the transferor that he will retain
As a partner

35
Q

If adjusted basis of non cash property is higher than the properties current FMV, when should it be contributed to a partnership?

A

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

36
Q

Cash distributions exceeding predistribution basis always result in…

A

Gain recognition, where gain is deemed to be gain from sale of
Partnership interest

37
Q

What is the character of a gain on a partnership interest?

A

Capital gain, partnership interest is a capital asset

38
Q

Partner’s basis in partnership interest (AKA Outside Basis) calculation

A

Partner’s basis in partnership interest =
(Money contributed)
+ (basis in contributed property)
+ (amount of recognized gain)
+ (partner’s share of partnership liabilities)

39
Q

Any gain recognized because of effects of liabilities on partner’s basis… Why?

A

Does not increase basis for partnership interest

Because basis is 0

40
Q

Holding period for contribution to partnership interest

A

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)

41
Q

Partnership’s basis in contributed property

A

Same as property’s basis in hands of contributing partner

Recognized gains (investment companies) increase partnership's 
basis, though gains from liabilities do not
42
Q

Character of property when contributed to partnership

A

Property retains its character

43
Q

Unrealized receivables, define, example

A

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

44
Q

Character of gain or loss recognized on unrealized receivable

A

Always treated as ordinary income or loss

45
Q

Character of treatment of gain/loss on Inventrory

A

Gain/loss on disposition of inventory recognized as ordinary

In character beginning 5 year period from contribution of property

46
Q

Capital loss property

A

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)

47
Q

Partnership’s holding period for contributed assets

A

Includes holding period for contributing partner

Doesn’t matter what the character of property is

48
Q

Depreciation recapture rules on property contributed to partnership

A

No gain recognized upon contribution, Adjusted basis and depreciation recapture carry over

If partnership later sells property at a gain, it is recognized

49
Q

Why is nontaxable treatment more rare with corporations

Compared to partnerships?

A

Corporations have 80% control requirement for contribution to
Be nontaxable

Partnerships do not have control requirement

50
Q

Character of gain in which services are contributed for partnership interest

A

Ordinary in character

51
Q

2 components of partnership interest

A

1 capital interest

2 profits interest

52
Q

How do Treasury Regulations value a capital interest?

A

Valued by amount partner would receive if partnership

Liquidated on day partner receives partnership interest

53
Q

Profits interest

A

Partner’s interest is in future earnings of partnership

Does not include interest in partnership assets

54
Q

Which component of partnership interest is taxable?

A

Capital interest in partnership is taxable

55
Q

Receiving profits interest in exchange for providing services is…

A

Taxable as ordinary income when profits interest is sold

56
Q

Payments by the partnership for services, tax treatment

A

Either deductible as expense or capitalized

57
Q

Deductible service expense, when does partnership take deduction

A

Partnership takes deduction in same year partner includes value
Of his partnership interest in income

58
Q

Allocating expense deduction, who is it allocated too? why does it occur?

A

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

59
Q

When a partnership transfers ownership interest in the partnership to a service partner they must…

A

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

60
Q

What is the importance of the distinction between organizational expenditures and syndication expenditures?

A

Organizational expenditures can be deducted $5,000 and
Amortized over 180 months

Syndication expenditures aren’t deductible or amortizable

61
Q

Election to either capitalize or amortize organizational expenditures is…

A

Irrevocable once made

62
Q

Partnership tax year

A

Partnership elects its tax year upon formation

Critical because it determines when each partner reports his
Share of income or loss

Corporate Tax (23 decks)

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