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Flashcards in Partnership Deck (24):


When a partner receives property as a distribution from the partnership, the partner's basis is generally the same basis that the partnership had in the property


partnership loss

A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest:


built in gain or loss

A built-in gain or loss on the date of contribution must be allocated to the contributing partner when the property is subsequently disposed of by the partnership in a taxable transaction.


Holding period

When a partner contributes property to a partnership, his adjusted basis in the partnership interest increases by the adjusted basis of the property contributed. This is called a carryover basis. Generally, the holding period will “attach” to the basis used for the property. Therefore, if the adjusted basis is carried forward, so is the holding period of the property.



If property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership, all of the following will apply:the contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution.the contributing partner's gain recognized is limited to the gain that would be recognized by the partnership.the basis in the property and partnership interests will be adjusted for the gain or loss recognized.



The basis of a partner's interest is increased by any increase in his share of partnership liabilities since the increase is treated as a contribution of money to the partnership.


Partnership formation general rules

General rule: No gain or loss is recognized, either by the partnership or the partner, when property is contributed in exchange for a partnership interest.


Exceptions to the general rule above:

If a partner receives a partnership interest as compensation for services rendered or to be rendered, resulting in taxable income to the incoming partner, then that income is added to the basis of his interest.
If the contributed property is subject to debt or if liabilities of the partner are assumed by the partnership, the basis of the contributing partner's interest is reduced by the portion of the indebtedness assumed by the other partners.



The basis of contributed property is the same in the hands of the partnership as it was in the hands of the partner who contributed it.



The general rule is that when a partner contributes “property” to a partnership, no gain or loss is recognized. The exception to the general rule is that when a partner contributes “services” to a partnership, the partner will recognize ordinary compensation income on the fair market value of the services rendered.


Partnership loss limitations

A partner may deduct his share of partnership losses subject to three levels of limitations:

Level 1: Any deductible loss is limited to the adjusted basis of the partner’s interest in the partnership.
Level 2: If there is enough adjusted basis to deduct a loss, then the partner is only allowed to deduct the amount of loss for which he is at risk.
Level 3: If there is enough adjusted basis and enough at risk, then the partner applies the passive activity limits.


non-liquidating distribution

Generally, a partner does not recognize a gain or loss when property is distributed in something other than the liquidation of a partner’s interest. In this case, the partner would receive the property with an adjusted basis equal to their remaining basis in the partnership. If they were to subsequently sell or dispose of the property, then they would realize a gain (loss) on it at that time.



The only way a capital gain is recognized in a proportionate liquidating distribution from a partnership is if the cash received by the partner is greater than the partner's adjusted basis in his partnership interest. In this case, no cash was received and no gain is recognized.



In general, no gain or loss is reported by a partner receiving a distribution from the partnership unless cash or marketable securities are received in excess of the partner's basis.


non-liquidating - general rule

The general rule for gain or loss recognition for nonliquidating partnership distributions is no gain or loss is recognized by the partner or the partnership in a nonliquidating distribution of cash or property.


exception the to general rule

The exception to the above general rule is that a partner will recognize a gain if the cash received in a nonliquidating partnership distribution exceeds the partner's adjusted basis before the liquid distribution in the partnership


partnership dissolution

A partnership is considered terminated only if there has been a sale or exchange of 50% or more of the total interest in partnership capital and profits.

Together Able and Benz own 60%, so the original partnership will continue with them.

There is no penalty surtax, no one must get permission from the IRS, and a formal dissolution is not necessary.


Retirement of patner

When a partner retires from a partnership, all debt relief and cash payments are first treated as a return of capital and then capital gains.meaning first you decrease the basis , and than anything beyond that is a gain


order of allocation in a liquidation

Partner Chang's outside basis is $12,000, which is reduced to $8,000 with the distribution of the cash. Chang sells the inventory for $5,000, resulting in an ordinary gain of $1,000 ($5,000 sale - $4,000 basis). This reduces Chang's outside basis to $4,000, which becomes the basis of the land to Chang. When Chang sells the land for $3,000, the result is a $1,000 capital loss ($3,000 - $4,000). Chang's basis is now zero.


Partnership termination

A partnership ordinarily terminates only on discontinuance of operations or on sale or exchange of 50% or more of the total interests in the partnership. A partnership terminates for tax purposes (whether or not it has terminated under applicable local law) when:

it stops doing business or
50% or more of the total interest in partnership capital and profits changes hands by sale or exchange within 12 consecutive months.


partnership termination

When Poe sold her entire interest to an unrelated party on February 4, Year 5, there was still a partnership between Dean and Ritt. When Dean sold his 25% interest in Able to another unrelated party on December 20, Year 5, the partnership terminated because over half of the partnership was sold within a 12-month period.


Separately stated items

Any income, losses, deductions, or credits that might affect the tax liability of a member in a different manner depending on any other factors in their particular tax situation must be separately stated on the tax return. In this problem, the separately stated items include gain on sale of securities and charitable contributions.

Guaranteed payments to partners are included with the nonseparately stated items.


Guaranteed payments

compensation paid to the partners for services or use of capital. The are tax deductions for the partnership and income to the receiving partner


Partnership tax year

Generally, a partnership cannot have a tax year other than its “majority interest taxable year” (IRC Section 706(b)). This means that the partnership year-end must be the same year-end that partners having over 50% interest in partnership profits and capital have. Usually this is a calendar year-end, since most individuals (partners) have a calendar reporting tax year. (IRC Section 706(b); Regulation Section 1.706-1)

A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months. This is known as a “Section 444 election.” This election is made by filing Form 8716. (IRC Section 444(b)(1))