PARTNERSHIP TAX

Question 1

Recourse & Nonrecourse rules for partnerships

Answer 1

Recourse - measured by each partner’s economic risk of loss. Limited partners are not allocated at share of recourse debt.

Nonrecourse - allocated based on partner’s profit-sharing ratio. Both GP and LPs are allocated amounts.

Question 2

When property contributed is subject to a mortgage, the amount assumed by the partnership creates a negative basis, what happens to the excess?

Answer 2

The partner’s basis is 0 and whatever makes it go below 0 is a recognized gain

Question 3

When a partner contributes services to a partnership, how is this treated for tax purposes?

Answer 3

Taxed as wage income at FMV (ordinary income)

Question 4

Effects of partnership losses

Answer 4

Can only deduct losses to the extent of a partner’s basis

partnership loss is passive to a limited partner

Question 5

3 hurdles of loss limitations

Answer 5

1. Basis - in partnership interest
2. At-Risk - basis less nonrecourse debt
3. Passive Income - if passive loss

Question 6

What is the tax treatment when there are net losses in excess of at-risk basis

Answer 6

Suspended and carried forward indefinitely and deductible against income in future years

Question 7

Guaranteed Payment

Answer 7

Payment made to partners without regard to partnership income. Taxed as if paid on the last day of partnership’s taxable year.

Ordinary income to recipients
Reduces partnership income

Question 8

Built-in Gains/Losses

Answer 8

Partnership disposes of an asset distributed by a partner that had a BIG(L), recognized gain/loss is allocated back to contributing partner. i.e.

FMV = 10
AB = 7
BIG = 3

When sold, take the proceeds - AB. Lower of:
BIG or Realized gain = amount allocated to partner

Question 9

Non-liquidating distributions

Answer 9

No gain/loss is recognized for partnership and partners

allocated in order:

1. Cash
2. Unrealized receivables & inventory
3. Capital and 1231 assets

Question 10

Liquidation of partnership

Answer 10

No gain/loss on property received unless a partner receives cash in excess of his AB

Question 11

What makes liquidating and non-liquidating distributions different?

Answer 11

Liquidating
1. loss is recognized if:
A. only cash, inventory or unrealized receivables are received
B. Inside basis of the assets are less than the outside basis the partner has in the partnership
2. The partnership basis must be reduced to 0

Question 12

Sale of Partnership interest is what kind of gain/loss

Answer 12

Capital except the extent of hot assets which are ordinary income

Question 13

Calculating partnership interest sale

Answer 13

FMV of cash received
+ Debt relief
- AB + debt
= recognized gain

If hot assets sold:
Amount realized
- AB
* % owned
= amount and determine how much can fill up the recognized gain from above

Question 14

What happens when partner contributes services

Answer 14

Record percentage owned at FMV of interest earned