General Flashcards
Up to what date can the partnership agreement be modified to?
Can be modified up to the original due date of the partnership tax return
What code section limits 706(d) limits ability to allocate income/loss to newly admitted or retired partners?
706 (d)
What is the controlling principle of 704 (b)?
The controlling principle of the
§ 704(b) regulations is economic substance,
i.e., tax must follow economics
Allocations contained in the partnership agreement are valid if they satisfy
any one of the three regulatory tests. What are these tests?
1.) the allocations have “substantial economic effect” or
2.) the allocations are in accordance with PIP; or
3.) the allocations are deemed to be in accordance with PIP
Describe these three regulatory tests in more detail:
Come Back
What is a Deficit Restoration Obligation (DRO)?
A DRO is an obligation to restore deficit capital accounts on liquidation
What is a Qualified Income Offset (QIO)?
QIO requires an immediate income allocation to restore a partner’s negative capital account caused by an unexpected distribution
What do partnership agreements mean when they refer to income/profits/losses?
Almost all agreements refer to 704(b) income rather than GAAP or taxable income. This definition affects capital account maintenance and income allocations.
What is the fundamental idea behind partnership taxation?
To facilitate a flexible business arrangement between parties with no entity-level tax. That is, income generated at the partnership level is allocated (or, stated differently, passes through) to its partners, who then pay their share of tax on the income allocated to them.
Where are income allocation rules found?
Section 704(b). This code section intends to support this flexibility by matching the economic business arrangement among partners with the income tax consequences.
