P ship operations

Question 1

Must NOT be separately stated by pship - 6 examples

Answer 1

Ordinary income and ordinary deductions

1. Gross receipts from inventory sales = ordinary income
2. Cost of goods sold = ordinary deduction; can be aggregated
3. Salaries paid to non-partners = ordinary deduction under 162(a)
4. Depreciation = ordinary deduction
5. Advertising expense = ordinary deduction
6. Gain from sale of machine – 1245 gain = ordinary income to whoever collects it

Question 2

NEGATIVE tax items that must be separately stated by the pship - 2 examples

Answer 2

1. Interest expense on margin account = margin account owned by pship; pship has borrowed proceeds to and has borrowed amounts to make investments and has incurred interest expense; this is INVESTMENT INTEREST under 163 that can only be deducted against investment income so must separately state this expense
2. Charitable Contributions

Question 3

POSITIVE tax items that must be separately stated by the pship - 7 examples

Answer 3

1. Gain from sale of machine = 1231 gain = gain beyond on sale of machine beyond depreciation recapture but actual 1231 gain; means that the machine actually appreciated in value from its purchase price; whether 1231 gain ends up being capital gain or ordinary income depends on the total mix of 1231 gains and losses THAT NEEDS TO BE DETERMINED AT THE PARTNER LEVEL = must be separately stated
2. Dividend income = bc it’s investment income
3. Tax-Exempt Interest = doesn’t generate taxable income but we need to tell the partners what their share of tax-exempt interest is so that we can increase the partner’s outside basis
4. STCG on sale of stock = 702(b)
5. LTCG on sale of stock = can be netted at entity level but need to separately state the figure
6. LTCL on sale of stock = can be netted at entity level but need to separately state the figure
7. Section 1231 casualty gain = separately stated

Question 4

What is the rule for determining whether tax items must be separately stated? 702(b)(1)(6)

Answer 4

If aggregating all items will affect partners’ outside basis (pship shares) = can’t be aggregated and must be separately stated by pship and separately reported by the partners

Question 5

What are the 3 steps for deterimining outside basis?

Answer 5

Step 1: Positive adjustments are taken into account first:
1. If a partner receives a distributive share of income or gain, this increases outside basis. IRC 705(a)(1)(A)
2. If a partner receives a distributive share of tax-exempt income. IRC 705(a)(1)(B)

Step 2 - Interim basis: After taking into account positive tax items, the partner’s outside basis first is reduced on account of any distributions of cash or property from the entity. IRC 705(a)(2).
- Use the increased basis to shield any distributions of cash from the pship from gains so that we get to apply that interim basis to cash distributions. We take out of account of the cash distributions and property distributions first

Step 3 - Downward adjustments: Then, outside basis is further reduced as a result of:
1. The partner’s distributive share of loss or deduction. IRC 705(a)(2)(A). If we don’t have enough outside basis to make that download adjustment, then we’ll suspend those losses and deductions under 704(d)
2. The partner’s distributive share of expenditures that do not give rise to a deduction and are not capitalized. IRC 705(a)(2)(B)
3. Charitable contributions