Partnership Taxation Flashcards
How do tax rules differ for limited partnerships and general partnerships?
They are the same
How are limited liability companies treated for tax purposes?
They are treated as partnerships unless conditions obtain that make them taxable as a corporation (or if they decide to be taxed as one)
What must partnerships file?
Form 1065, an informational tax return, as well as Schedule K-1 for each partner, which explains his share
What is the taxable year for a partnership?
The same one used by the partners with a majority interest, though a different one can be elected if justified by a business purpose (and if the deferral period would not exceed 3 months)
What is a partnership’s taxable year if partners with a majority interest do not have the same taxable year?
Then the partnership uses the taxable year of its “principal partners,” i.e. its partners with a 5% or greater interest in the firm’s profits or capital
What is a partnership’s taxable year if its principals partners do not have the same taxable year?
The calendar year
What is a partner’s distributive share?
What a partner is entitled to receive from the partnership, and thus what he is taxed on, whether or not he actually receives any distribution
How are partners’ distributive shares determined?
Usually by the partnership agreement, but if any arrangement mentioned in the agreement does not have “substantial economic effect,” then the distribution corresponds to the partners’ interests in the partnership
If there is simply no arrangement, then it corresponds to the allocation for profits and losses
When does a partnership distributive share allocation have “substantial economic effect”?
If it could affect the dollar amount of partners’ distributive shares irrespective of tax consequences
What is the maximum limit for deductions from a partner’s distributive share?
The same as for S corporation stockholders: it is limited by (1) his basis in the partnership, (2) at-risk rules, and (3) passive loss rules
How are fixed/guaranteed payments to partners by the partnership treated?
As if they were payments to an outside person – can be deducted from partnership income and included in the partner’s personal income
Under what circumstances can gains and losses from sales of property between a partner and his partnership be forbidden?
Any losses from sales of property between the partnership and a controlling partner (with >50% interest) are forbidden, though gains on such sales are included in ordinary income
Are gains and losses recognized when partners contribute property in exchange for a partnership interest?
No
This rule does not apply when services are contributed, however
How is the holding period for a partnership interest calculated?
It includes the holding period of the property exchanged for the partnership interest, if that property is a capital asset or otherwise used in the business
Otherwise the holding period begins when the interest is acquired
If property is given to partners in a nonliquidating distribution, what is the partner’s basis in the property?
The lesser of
(1) the partnership’s basis immediately before distribution or
(2) the basis of the partner’s interest minus any cash distributed
If property is given to partners in a liquidating distribution, what is the partner’s basis in the property?
The basis of the partner’s interest minus any cash distributed
If a partner acquires another partner’s interest in the partnership, what is the acquirer’s basis in the interest?
The FMV of the consideration given
How do distributive shares affect a partner’s basis in his partnership interest?
Distributive shares of income increase, losses decrease it
How do partnership liabilities affect a partner’s basis in his partnership interest?
Any assumption of liabilities increases the partner’s basis
Likewise, any decrease in assuming liabilities counts as a distribution to that partner, thus reducing his basis
When is a gain or loss recognized by the partnership when distributing money or property to a partner?
Ordinarily it is not recognized, but:
(1) a gain can be recognized inasmuch as distributed money exceeds partner’s basis in the partnership
(2) a loss can be recognized for a liquidating distribution if the property consists only of money, unrealized receivables, and inventory
What are “hot assets”?
Partnership assets that produce income – have different rules related to their distribution
Two kinds: unrealized receivables and appreciated inventory items
As regards hot assets, what all is included in “appreciated inventory”?
Any assets besides cash, Section 1231 assets, or capital
Their FMV must be >120% of their basis in order to be sufficiently appreciated
What occurs if, in a distribution, a partner does not receive a share in hot assets proportionate to his share in the partnership?
The distribution is understood as two separate events:
(1) a proportionate distribution of the assets
(2) the partner’s sale of such assets to the partnership
What is an electing large partnership (ELP)?
A partnership which has at least 100 members and elects a simpler reporting process
The election can be revoked in the future only if the IRS consents
What kind of partnerships cannot be ELPs?
Service partnerships or commodity-trading partnerships
What is the simplified way of calculating taxable income for ELPs?
It is just like individual taxable income, but with a few modifications
Also, certain items have to be stated separately
What modifications are made to the calculation of taxable income for ELPs?
The personal-exemption deduction, the NOL deduction, and some itemized deductions are forbidden
What causes a partnership to terminate?
If either (a) none of the business is carried on or (b) at least 50% of the partnership interests are sold within a 12-month period
(b) is not a reason for termination in the case of ELPs, however
Do mergers or divisions cause a partnership to terminate?
Mergers do not, since the new partnership includes the partners who had at least a 50% interest
Divisions can, if the new partnership includes the partner who had at least a 50% interest
What kind of gains/losses are transactions involving partnership interests?
Capital gains
Which kinds of distributions give rise to ordinary gains or losses?
Distributions of unrealized receivables or inventory
What is peculiar about distributions for ordinary income items?
Such distributions must be pro rata to each partner, based on his interest
If they are not, they must be construed as (1) a pro rata distribution and (2) a (taxable) transaction to result in the disproportionate distribution
