Capital Accounts

Question 1

What are the three types of capital accounts?

Answer 1

GAAP Basis, Tax Basis, 704(b) Basis

Question 2

Sec. 704(b) capital account generally should reflect a partner’s?

Answer 2

Equity in the partnership

Question 3

Sec. 704(b) capital account is increased to reflect?

Answer 3

• Amount of cash and/or net fair market value (FMV) of property contributed to the partnership;
• Partner’s allocable share of partnership income/gain.

Question 4

The capital account is decreased to reflect:

Answer 4

• Amount of cash and/or net FMV of property distributed;
• Partner’s allocable share of partnership loss/deduction.

Question 5

A partner’s Sec. 704(b) capital account generally cannot go negative unless..?

Answer 5

(unless there’s a DRO or the negative amount is required to be restored under
a minimum-gain chargeback provision)

Question 6

Partnership may revalue assets and restate partners’ Sec. 704(b) capital accounts to reflect each partner’s
economic share of underlying assets at what value when certain events occur?

Answer 6

FMV

Question 7

What are the events that permit a partnership to revalue assets and restate partners’ Sec. 704(b) capital accounts?

Answer 7

• Contributions of money/property by new or existing partner
• Distributions of money/property to a partner as consideration for a partnership interest
• Grant of partnership interests in exchange for services
• Issuance of non-compensatory options

Question 8

A general principle of subchapter K is that tax allocations follow..?

Answer 8

Sec. 704(b) allocations

Question 9

How is Sec 704(b) income calculated?

Answer 9

1.) Begin with taxable income
2.) Add back tax amount for Sec. 704(c) items
– Inventory
– Depreciation and amortization
– Gain/loss on sale of assets
– Contingent liabilities (i.e., non-tax liabilities)
3.) Add/subtract Sec. 704(b) amount for Sec. 704(c) items
– Depreciation and amortization
– Gain/loss on sale of assets
– Revaluation gain
4.) Add/subtract tax-exempt income and non-deductibles

Question 10

What is the difference between a partner’s outside tax basis and a partner’s tax capital account?

Answer 10

Come Back

Question 11

A partner’s ability to take partnership losses on an individual income tax return is limited if..?

Answer 11

Outside tax basis is zero.

Question 12

Can a partner’s outside basis go negative?

Answer 12

No

Question 13

What happens if a partner receives a distribution of cash or property that exceeds the partner’s outside basis?

Answer 13

The excess is taxable income to the partner

Question 14

Gain or loss recognized on a sale of a partnership interest is calculated by reference to..? What happens if If the cash/other consideration exceeds the partner’s outside basis?

Answer 14

• Partner’s outside basis
• Partner recognizes gain on sale of the interest that’s reported on his/her individual income tax return