R5-M2 Partnerships 1

Question 1

what is recourse debt and its characteristics?

Answer 1

• debts for which a partner has personal liability and can go after partner’s personal assets
• Usually debts are allocated to only general partner’s share.
• For limited partners and LLC member, only if they are personally responsible for the debt

Question 2

what is nonrecourse debt and its characteristics?

Answer 2

• debts are typically secured by property
• debts are allocated to all partners or LLC members based on their relative profit-sharing ratio

Question 3

what are rules when contributing property for partnership interest?

Answer 3

• No gain or loss recognized when a partner contributes property to a partnership in exchange for a partnership interest unless there is liability of the property assumed by other partners (debt relief to the contributing partner).
• The basis of the property carries over and becomes the partnership’s basis in the property. same if there is any related loans come with the property.
• Ex: FMV of the partnership interest received (.25*600k) 150k + basis of the property contributed 30k = LTCG realized 120k and recognized 0 until sold partnership

Question 4

what is built-in gain in partnership?

Answer 4

• built-in gain happens when a partner contributed a property (FMV > adjusted basis) to a partnership and later the partnership sold the property with a higher price
• the built-in gain is allocated (100% pre contribution amount and ownership % post contribution) to the partner who contributed property

Question 5

what is rule of contributing service for partnership interest?

Answer 5

• recognize ownership % of FMV as ordinary income

Question 6

what is holding period of the partnership interest?

Answer 6

• if capital assets or section 1231 are contributed, holding period of the partnership begins on the date the partner’s holding period of capital asset began (old holding period)
• if ordinary income assets such as inventory, the holding period begins on the date the property is contributed to the partnership

Question 7

what is outside basis and its characteristics?

Answer 7

is basis a partner has in the ownership interest in the partnership. This partnership interest has a tax basis similar to ownership interests in other property

Question 8

what is inside basis and its characteristics?

Answer 8

is basis that the partnership itself has in the assets it owns. This inside basis can come from contributions made by the partners. As a general rule, the basis of an asset contributed by a partner would carry over and be the basis of the asset in the hands of the partnership. In addition, inside basis can come from asset purchases the partnership makes with partnership funds.

ex: partnership basis is the adjusted basis of the property a partner contributed without adjusting for any liability

Question 9

what is year end date required for partnership?

Answer 9

• It is required that the partnership will use the year end date of the partners who have more than 50% of the partnership ownership in the absence of an election to adopt an annual accounting period.
• If the partnership wanted to elect a different year end, only if the deferral period is no longer than 3 months per section 444.

Question 10

what are rules of related party transactions in the partnership?

Answer 10

Losses between a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale/exchange of property are not allowed

Question 11

what are rules about partnership’s termination?

Answer 11

• Partnership does not terminated if the partners separate their business into a different business. the partners who split together and own more than 50% of the old partnership will continue the old partnership