T3-M2 Partnership Advanced Topics

Question 1

what taxation on contribution of property/ services in exchange for interest in Partnership?

Answer 1

Unlike C and S corps:
- NO gain/loss is recognized on contribution of property (as long as liabilities assumed by other partners do NOT exceed the basis of the property contributed)
- NO income is recognized if a taxpayer is received a PROFIT interest for services provided because right to future PROFITS is uncertain
- Ordinary income is recognized if a taxpayer is received a CAPITAL interest for services provided based on pro-rata share of liquidation value. The partnership either deducts or capitalizes this transaction

Question 2

what is partnership interest?

Answer 2

• partnership interest is partner’s ownership interest
• Capital interest = right to share in the net assets of the partnership when it liquidates
• Profit interest = right to share in the future profits or losses of the partnership

Question 3

what is outside basis?

Answer 3

• Outside basis refers to the basis a partner has in the ownership interest in the partnership
• partner’s initial basis in partnership interest =
  + cash contributed
  + property contributed (adjusted basis/NBV)
  + services provided (FMV, if capital interest)
• liabilities transferred to partnership, assumed by other partners
  + partner’s share of partnership liabilities
  = outside basis

Question 4

what is inside basis?

Answer 4

• Inside basis refers to the basis that the partnership itself has in the assets it owns
• partnership’s basis in the contributed property is the contributor’s basis or carryover basis (plus any gain recognized by the incoming partner, if a special election is made)

Question 5

what is holding period of partnership interest?

Answer 5

• if property contributed was a capital asset or sec 1231 asset, the partner’s holding period for his partnership interest includes the holding period of the property contributed
• in the property contributed is an ordinary income asset (inventory), the holding period begins on the date the property is contributed

Question 6

what items that increase/decrease a partner’s basis?

Answer 6

• items increase basis:
  + additional contributions
  + income and gain items
  + increase in partnership debt
• items decrease basis:
  + distributions
  + loss and deduction items
  + decrease in partnership debt

Question 7

what is special allocation for built-in gain or loss on contributed property?

Answer 7

• a built-in gain/loss exists at the date of contribution
• upon the sale of that property, the built-in gain/loss must be specially allocated to the contribution partner
• post-contribution gain/loss are allocated among all partners in the partnership

Question 8

what are the 4 loss limitations that a partner has to go through to deduct a business loss?

Answer 8

• tax basis
• at-risk basis
• PAL
• excess of business loss

Question 9

what are the tax elections affect taxable income that a partnership has to make?

Answer 9

• Organizational expenditures and start-up costs (immediate expense election)
• Accounting methods (cash or accrual), inventory methods (FIFO, LIFO,..)
• Tax year (calendar year generally required, can elect fiscal year if consistent with tax year of majority of partners)
• Depreciation methods (MACRS, straight-line,..)
• Election out of installment sale treatment
• Section 754 election for optional basis adjustment of partnership assets
• partners can make election to take a deduction or a credit for taxes paid to foreign countries

Question 10

what are the common transactions between partner and partnership?

Answer 10

• a LOSS between a controlling partner (over 50% ownership) from sale or exchange of property are NOT allowed
• a GAIN between a controlling partner (over 50% ownership) from sale or exchange of property that is not a capital asset, are taxed as ORDINARY income
• Guaranteed payments and Retired partner payments (not liquidating) are treated as ORDINARY income to the recipient and deductions to partnership

Question 11

what are the rules in non-liquidating distributions?

Answer 11

• a non-liquidating distribution to a partner is NONTAXABLE
• distribution of property as rollover adjusted basis
• distribute cash first and then property
• partner’s basis is reduced but cannot go below zero
• if cash distribution only is greater than partner’s basis => partner will recognize capital gain
• distribution orders:
  + cash first
  + hot assets (inventory and unrealized receivables)
  + any other property
• if multiple assets distributed has value greater than partner’s basis, property’s basis in the hand of partner is limit to partner’s basis, and its basis will be adjusted

Question 12

what is required tax year for a partnership in the absence of an election to adopt an annual accounting period?

Answer 12

• a tax year of one or more partners who, in aggregate, have more than 50% interest in profits and capital, per the majority interest rule
• a partnership may elect to have a tax year other than the generally required tax year if the deferral period of the tax year does NOT exceed 3 months