REG 5 - Partnerships: Part 1

Question 1

Define the difference between profits interest acquired for services rendered and capital interest for services rendered?

Answer 1

Profits interest - A profit interest has no income at the time profits interest is exchanged for rendering services.

Capital interest - A capital interest has ORDINARY INCOME recognizable.

Question 2

How is property contributed with excess liability by a partner treated? What is the calculation?

Answer 2

The excess liabilities on property ASSUMED BY PARTNERS is taxable BOOT and is a GAIN for the contributing partner.

NBV of asset
- Other partners % of liability assumed
= - NEGATIVE NET BASIS = Taxable boot/loot

E.g. Becker and Peter admit Tim as 1/3 partner. Tim contributes building with NBV of $100,000. There is a mortgage of $225,000.

What is Tim’s basis? What is Tim’s gain

100,000 (NBV of asset)
- 150,000 (Other partner’s % of liabilities assumed 225,000 x 2/3)
= -50,000 = TAXABLE BOOT

1) Tim’s basis is $0 because there is a negative basis
2) Tim’s gain is $50,000

Question 3

What is the calculation of the initial basis for a partner?

Answer 3

Cash - Amount contributed
+ Property: NBV
- Liabilities we put in: incoming partner’s liabilities ASSUMED BY OTHER PARTNERS is a reduction
+ Services: FMV
+ Liabilities we take in: other partner’s liabilities assumed by INCOMING PARTNER is an addition

Question 4

What is the holding period of contributed assets to partnership?

Answer 4

The holding period of contributed assets to partnership is the “OLD” contributed assets holding period.

Question 5

Define special allocation: built-in gain or built-in loss

Answer 5

• When a partner contributes property with a FMV that is higher or lower than NBV, a built-in gain (or loss) exists
• The “built-in” gain or loss is allocated to the contributing partner

E.g. Becker and Peter admit Tim as 1/3 partner. Tim contributes building with a FMV of $500,000 and NBV of $100,000.

• The built-in gain allocated to Tim on sale is $100,000.

Question 6

What is the partnership’s basis when a partner contributes property?

Answer 6

The GREATER of:

1) NBV

OR

2) DEBT ASSUMED

Question 7

What is the calendar year generally required for a partnership? What is the due date of a partnership return?

Answer 7

Calendar year ends on December 31. The partnership return is due March 15.

Question 8

What is the criteria needed for a partnership to terminate?

Answer 8

1) Operations cease
2) 50% or more of the partnership interest in both capital and profits is sold within any 12-month period (TECHNICAL TERMINATION)
3) Fewer than two partners

Question 9

What are the two effects of technical termination?

Answer 9

1) A deemed distribution to remaining partners and purchaser

2) A hypothetical recontribution of assets to a new partnership

Question 10

How is related party loss treated? How is related party gain treated?

Answer 10

• Related party loss transaction between controlling partner (over 50% interest) and their partnership is NOT ALLOWED
• Related party gain transaction between controlling partner (over 50% interest) and their partnership is ORDINARY INCOME