Federal Taxation X: Partnership Tax

Question 1

Partnership

Answer 1

An association of two or more taxpayers to operate a business that is not taxed as a corporation

Income is taxed to owners regardless of distributions

Distributions are treated as return of capital

Question 2

Check-The-Box Regulations

Answer 2

Unincorporated entities may elect to be taxed as an association (corporation) or partnership

Question 3

General Partner

Answer 3

can participate in management and have joint and several liability for the partnership’s debts.

all partnerships must have at least one general partner

Question 4

Limited partners

Answer 4

only liable up to their investment, but cannot participate in management w/o losing limited status

Question 5

Partner Interests

Answer 5

Capital Interest

Profits Interest

Question 6

Partnership Basis at Formation

Answer 6

Inside Basis of property refers to aggregate basis of assets in hands of the partnership

Partnership takes carryover basis for contributed property as well as holding periods and depreciation methods

Question 7

Partner Basis at Formation

Answer 7

Outside Basis refers to adjusted basis of each partners’ interest

A substituted basis in the partnership interest from the assets contributed

Question 8

Holding Period in Partnership interest

Answer 8

1. includes holding period of contributed asset for contributions of capital assets/section 1231 assets
2. holding period partner has in the asset before contributed always transfers to the partnership
3. adjusted basis for contributions of services is the value included in the income of the partner
4. adjusted basis for partnership interests purchased from existing partners or interests received as gifts/inheritances are determined like other assets

Question 9

Partnership Calculation of outside basis

Answer 9

Initial Basis

\+ Additional Contributions
Partner's share of:
   Debt Increases
   Partnership Income
   Exempt Income

- Distributions:
   Cash Distributions
   Debt Decreases
   Asset Distributions
Partner's share of:
   Nondeductible Expenses
   Partnership Loss

Question 10

Natural Business Year

Answer 10

A year in which 25% or more of gross receipts occur in the last two months of the year (3 consecutive years)

Question 11

Partnership Allocations

Answer 11

partners receive a share of income or share of loss, according to the partnership agreement

Question 12

Measuring and Reporting Partnership Income

Answer 12

1. All items of income (gain, deduction, loss, or credit) that are required to be separately stated or that are specially allocated are removed from the partnership’s ordinary income/loss determination.

Each partner’s portion of these items is reported on K-1

2. Remaining items are lumped together to produce next ordinary income/loss (proportionately reported to each partner)

Question 13

Partnership Separately Stated Items

Answer 13

any tax items that might affect partners differently, such as:

dividends, capital gains/losses, tax-exempt interest, passive losses, charitable contributions, investment income, section 179 expenses

Question 14

Partnership Loss Limitations - can only deduct losses if

Answer 14

1. Partners must have enough basis
2. Can deduct losses only to extent of at-risk amount (partner basis less partner share of nonrecourse debt)
3. If loss is passive, can only deduct to extent of passive income

Question 15

Partnership Guaranteed Payments

Answer 15

made to partners without regard to partnership income

Question 16

Partnership Precontribution (Built-In) Gains/Losses

Answer 16

Allocated back to original contributing partners when property is sold… up to the gain/loss realized on the sale.

Question 17

Partnership Built-in gain/loss property

Answer 17

Property that has appreciated (declined) in value at the time of it’s contribution to the partnership… Value of gain property is > adjusted basis… Value of loss property is

Question 18

Partnership Nonliquidating (Current) Distributions

Answer 18

A distribution to a continuing partner, including a draw by the partner

Return of capital that reduces outside basis in a specific order

Question 19

Nonliquidating Distribution Basis Effects

Answer 19

1. partner’s adj basis is allocated to cash distributions and cash deemed distributed (reduction in liabilities)
2. partner’s adj basis is allocated to dist. of unrealized receivable and inventory in an amount equal to partnership’s basis in these assets
3. partner’s adj basis is allocated to other assets distributed
4. distributed property retains inside basis (in hands of partner) unless partner runs out of outside basis, then the inside basis is reduced to outside basis of the property

Question 20

Partnership Liquidating Distributions

Answer 20

may result in gain/loss, and requires partner to transfer his or her outside basis to assets received from partnership

Question 21

Liquidating Distribution Basis Effects

Answer 21

treated as return of capital and partner’s outside basis is substituted for inside basis of distributed property

1. distributions of cash/deemed distributions trigger gain tot eh extent cash exceeds outside basis
2. distributed property retains inside basis, but amount is adjusted up/down depending on the outside basis of the partner
3. inventory and receivables must be distributed pro rata

Question 22

Liquidating Distribution Loss Recognition

Answer 22

1. distribution must consist of only cash, inventory, unrealized receivables
2. outside basis of partner’s interest exceeds sum of cash plus inside basis of receivables/inventory

Question 23

Partnership Hot Assets

Answer 23

generate ordinary income/loss because partner has not yet been taxed on accrued, but unrealized, income

inventory/unrealized receivable

Question 24

Partnership Disproportionate Distributions

Answer 24

Occur when ordinary income assets (inventory and receivables) are distributed to partners without regard to their proportionate ownership interests

Question 25

Sale of Partnership Interest

Answer 25

Results in gain/loss calculated using outside basis to compute gain/loss.

Hot assets not eligible for capital gain treatment, must recognize ordinary income.

Question 26

Termination of Partnership

Answer 26

1. Requires closing of partnership tax-year

2. Results in deemed distribution of assets to the partners