Ch 9 Part 3 Flashcards
What does basis prevent?
Basis prevents a second tax levy on distribution of income that
Was taxed previously as partner’s distributive share
Sec. 752 Treasury Regulations require that recourse liabilities be allocated to…
The partner who will bear the economic loss if partnership
Can’t pay debt
What 2 operation items of a partnership increase basis?
1 partnership taxable income
2 tax exempt income of partnership
What 2 operation items decrease basis?
1 partnership losses
2 expenditures that aren’t deductible for tax purposes and that
Aren’t capital expenditures
Sec. 704 limitation on partnership loss deduction
Limits partner’s loss deduction to amount of his basis in
Partnership interest before the loss
What happens to losses that are disallowed due to lack of basis in partnership interest?
Losses are suspended until partner obtains additional basis
What is the beginning basis of a partnership interest for property contributed?
Substituted basis from property contributed plus gain
Recognized in contributions from investment partnership
What is the beginning basis of a partnership interest for services contributed?
Amount of income recognized for services rendered
Plus any additional amount contributed
What is the beginning basis of a partnership interest for purchase of partnership interest?
Cost
What is the beginning basis of a partnership interest if it is gifted?
Donor’s basis plus gift tax on appreciation
What is the beginning basis of a partnership interest if inherited?
FMV at date of death or alternative valuation date
Liability impact of basis in partnership interest: increase in basis
Increases in the partner’s share of partnership liabilities
Liabilities of partnership assumed by partner in his individual
Capacity
Liability impact on basis in partnership interest: decrease basis
Decreases in partner’s share of partnership liabilities
Liabilities of partner assumed by partnership
Operations impact on basis of partnership interest: increase in basis 3 things
1 partner’s share of ordinary income and separately stated income
And gain items (including tax exempt items
2 additional contributions to partnership
3 precontribution gain recognized
Operations impact on basis of partnership interest: decrease in basis 3 things
1 distributions from partnership to partner
2 partner’s share of ordinary loss and separately stated loss
And deduction items (including items not deductible for tax
Purposes and aren’t capital expenditures)
3 precontribution loss recognized
Special loss limitations: at risk rules
Limit losses to amount called at-risk basis
What do passive activity loss or credit limitation rules do?
Disallow most net passive activity losses
At-risk basis
Same amount as partnership basis with exception that liabilities
Increase that at risk basis only if partner is at risk for such an
Amount
What entities do at risk rules apply to? Not apply to?
Apply to individuals and closely held C corporations
Don’t apply to widely held C corporations
What liabilities are not included in partner’s at risk basis?
Why?
Non recourse liabilities
Because partner would not have to pay non recourse liabilities
Even if partnership became worthless
If partner has significant amount of non recourse liabilities, at risk rules will…
Make a partner’s loss deduction substantially less
One significant exception to application of at risk rules
At-risk rules don’t apply to nonrecourse debt if it is qualified real
Estate financing
The partner is considered at risk for his real estate financing if all 3 of the following requirements are met
1 financing is secured by real estate used in partnership’s real
Estate activity
2 debt is not convertible to any kind of equity interest in
Partnership
3 financing is from qualified person or government
Qualified person
Unrelated person who is in trade or business of lending money
Ex. Bank, financial institutions, mortgage broker
Passive activity limitations: sec. 469 three categories for income
1 amounts derived from passive activities
2 active income (salary, bonuses, income from business where
Taxpayer materially participates)
3 portfolio income (dividends, interest, capital gains from
investments)
Passive losses
1Can’t be used to offset active income or portfolio income
2 Carry over to future years where they offset passive income in
Those years
3 passive losses allowed in full when taxpayer disposes of
Entire interest in passive activity
4 passive rental activity deducted $25k/yr.
Passive activity
Any trade or business where taxpayer does not materially
Participate
Under sec. 707, no loss can be deducted on the sale or exchange of property…
Between a partnership and a person who directly or indirectly
Owns more than 50% of partnership’s capital or profits interests
Indirect ownership
Includes ownership by related parties such as family members
What is sec. 707 similar to?
Section 267 related party losses in chapter 3
If the seller is disallowed a loss under sec. 707, the purchaser can reduce…
Any subsequent gain realized on the sale of property by a
disallowed loss
When a gain is recognized on the sale of a capital asset between a partnership and related partner, sec. 707 requires that the gain be…
Be ordinary if property will not be capital asset to its new owner
Is a partner an employee of a partnership?
What does this mean for fringe benefits?
partner is generally not an employee of partnership
Fringe benefits are disallowed for partner who is “employed” by
His partnership
Guaranteed payment 2 things
Payment to partner who provides ongoing services to partnership
Is compensated like an employee
Payments made to partner for use of invested capital
No guaranteed payment occurs under arrangement unless
Partner’s distributive share is less than his…
Guaranteed minimum
How are guaranteed payments treated? By partner, by partnership .
Taxed as ordinary income to partner
Included in partner’s income statement, the same year the
Partnership deducts or capitalizes the payments
If a guaranteed payment exceeds partnership’s ordinary income, the payment creates…
An ordinary loss that is allocated among partners
Family partnership: 3 tests to determine if family members are real partners under sec. 704 safe harbor rules
1 partnership interest must be capital interest
2 capital must be a material income producing factor in
Partnership’s business activity
3 family member must be true owner of the interest
What does a capital interest give the partner the right to receive?
Right to receive assets if partnership liquidates immediately
Upon partner’s acquisition of interest
Capital is seldom considered a material income producing factor if the partnership is…
In a service business
Family partnerships: if donor gifts ownership interest of partnership, when will they be taxed?
If the donor retains control
Family partnership: what 4 factors demonstrate donor retained control?
1 retention control over distributions of income
2 over assets essential to business
3 limitation of donee partner’s right to liquidate and sell his interest
4 retention of management control
