Partnership Tax

Question 1

Basic test for economic effect

Answer 1

1. keep the c/a according to the regs
2. FOLLOW the c/a if liq’s, or p leaves
3. obligation to restore the deficit in c/a if pship liq’s, or p leaves

Question 2

Alternate test for economic effect

Answer 2

1. Meet 1 and 2 of basic test
2. allocation doesn’t create (or increase) deficit in capital account that exceeds p’s obligation to restore deficit
   - Taking into account expected distributions and offsetting allocations
   - Note that p could have partial obligation to restore capital account
   AND
3. Qualified Income Offset: QIO

Question 3

For alternate test for EE, what if there is an unexpected deficit in capital account?

Answer 3

If UNEXPECTED deficit in capital account > p’s obligation to restore deficit, partnership will allocate income items to p to eliminate the deficit excess ASAP (“as quickly as possible”) P2 went to c/a (-5), oblig to restore (-2) – ASAP: pship will allocate another 3 to p2

Question 4

How do you test an allocation that exceeds p’s obligation to restore if QIO is in place?

Answer 4

Under PIP

Question 5

When must a partner restore a deficit in capital account to meet the unlimited deficit makeup requirement of the basic test for EE?

Answer 5

any partner having a deficit in his capital account when either the partnership or his interest is liquidated must then make an additional capital contribution equal to that deficit

Question 6

Special PIP

Answer 6

IF meet 1 and 2 of basic test

THEN treated as meeting PIP (ie respected) IF:
1. compare dist’s that would be made if, at end of current year, sold assets at fmv and liq’d partnership, WITH
2. dist’s that would be made if assets had been sold at fmv and partnership liq’d at end of PREV year (date of formation, if there is no prev year)

THEN: see which p bore econ effects of allocation, AND Give the allocation to that p

Question 7

Does this meet liquidation requirement of the Basic EE test?

the partnership agreement provides that liquidation proceeds will be distributed in accordance with capital account balances if the partnership is liquidated during the first five years of its existence but that liquidation proceeds will be distributed equally if the partnership is liquidated thereafter.

Answer 7

Fails – entire life of the pship

Question 8

What is shifting tax consequences?

Answer 8

Translation: same $ amts, lower tax consequences, compared to without the allocation: c/a did not change based on special allocations, but tax liability went down

PRESUMPTION of strong likelihood – can rebut

Question 9

When is the economic effect of an allocation substantial?

Answer 9

there is a reasonable possibility that the allocation (or allocations) will affect substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences

Question 10

Does 704(c) affect book c/a, or tax c/a, or both?

Answer 10

Only tax c/a

Question 11

724 exceptions to character of contributed property

Answer 11

1. Contrib something w a cl
2. Inventory to the p, contributed, stays ord for 5 years
3. a/r contributed by p always = ord

Question 12

Suppose a partner with 100 OB receives a 75 cash distribution that liquidates her partnership interest. Suppose that because of the liquidation her 50 share of partnership liabilities is reduced to zero. What are the tax consequences to the partner?

Answer 12

Although the actual cash distributed does not exceed her basis, because the partner is treated as receiving a total of $125 in cash, she will have a $25 capital gain under 731(a)(1)

Question 13

exceptions to 731

Answer 13

section 736 (relating to payments to a retiring partner or a deceased partner’s successor in interest),
section 751 (relating to unrealized receivables and inventory items), and
section 737 (relating to recognition of precontribution gain in case of certain distributions).

Question 14

Does buyer succeed to 704(c) loss (special basis) of seller?

Answer 14

No

Question 15

Partners generally tack holding period for partnership interest as long as property is …

Answer 15

property falls under 1231 (property used in the trade or business: capital assets or used in trade or business and depreciable or real property)

Question 16

Partners generally do not tack holding period for partnership interest as long as property is

Answer 16

(cash or inventory held for sale to customers

Question 17

• If property is both tacking and non-tacking…

Answer 17

divide Pship interest into portions with tacked holding period and portions with holding period starting on contribution date (pro rata based on FMV)

o P1 contributes inventory held 2 years, FMV: 500, plus building it has owned for 3 years (FMV: 1,500)  contributed 2,000 in total; ¾ tacks (building), ¼ holding period begins day after contribution (inventory).

Question 18

o Example: A, B and C were equal partners in ABC partnership. On June 1, 1966, the partnership acquired 300 shares of X corporation stock as an investment. On February 1, 1967, A sold his partnership interest to new partner D. On May 1, 1967, the partnership sold at a gain the 300 shares of X stock (at which time D’s holding period for his partnership interest was not more than six months).

Answer 18

o Since the ABC partnership held the X stock for more than six months, the gain realized by the partnership is long-term capital gain.