Flashcards in Partnership 5 - Sales and Terminations Deck (13)
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1
What is the classification of a partnership interest?
Capital asset.
2
What is the classification of G/L from the sale of a partnership interest? Exception?
Capital in nature.
Except to the extent the partnership has hot assets, gain will be re characterized as ordinary income.
3
What is the rule of hot asset? What is this rule also called?
Instead of viewing "selling" partnership interest, a partner sells percentage of assets on the balance sheet.
Look though rule.
4
What does look through rule also affect?
The tax rates applied to a portion of the gain.
5
What are 2 types of hot assets?
*Unrealized receivables (receivables of a cash basis TP, including depreciation recapture)
*Inventory (anything other than cash, Sec. 1231 assets, capital assets)
6
What must the selling partner do if the partnership has hot assets at the time of a partnership interest is sold?
He must allocate a portion of the sale proceeds to these assets and recognize ordinary income.
7
Question:
The personal service partnership had cash basis BS at Dec. 31, Yr 4.
Cash: AB $102,000. FMV $102,000.
Unrealized A/R: AB n/a. FMV $420,000.
C, an equal partner with A and B, sold his interest to D, an outdier for $154,000 cash on Jan 1, Yr 5. D assumed C's share of the partnership liability.
Liability and capital note payable: AB $60,000. FMV $60,000
Capital accounts:
A: AB $14,000. FMV 154,000
B: 14,000. 154,000.
C: 14,000. 154,000.
What was the total amount and character of the gain recognized by C?
Total amount realized:
Cash (154,000) + Debt relief (20,000) = 174,000 - Adjusted basis (14,000 + 20,000) = Recognized gain ($140,000).
Now apply hot asset rule;
If hot asset is sold, amount realized (FMV 420,000) - Adjusted basis (0) = Ordinary income (420,000) x 1/3 (allocated to C) = 140,000.
Total gain was 140,000 and therefore, the whole amount is recognized as ordinary income.
If the ordinary income allocated to C was $200,000 instead of 140,000, Total gain (140,000) - ordinary income (200,000) = (60,000) capital loss.
8
What are other 2 assets besides hot assets that could impact the gain from the sale of a partnership asset?
Collectibles (taxed at 28%) or Sec. 1250 assets (ie. buildings. to the extent straight depreciation was taken, it will be taxed at 25%).
9
What are 2 cases of partnership terminations?
*No part of the business continues by any partner in the partnership form.
*Technical termination: there is a sale or exchange of at least a 50% interest in both capital and profits within a consecutive 12-month period.
10
What does termination require?
Requires a closing of the partnership tax-year.
11
What are the 2 assumption would be made when technical termination occur (business and financial operations are continued by other members)?
*A deemed distribution of assets to the remaining partners and the purchaser.
*A hypothetical re-contribution of assets to a new partnership.
12
What happens to the original partnership when a partnership divides into 2 or more partnerships?
The original partnership is continued in each of the new partnerships which contain partners that controlled 50% or more of the partnership interest in the original partnership.
13
