Flashcards in Partnerships and Ethics Deck (51):
Formation of Partnership
Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest.
Interest Acquired for Services Rendered
Value of a partnership interest acquired for services rendered is ordinary income for the partner.
Property Subject to a Excess Liability
When property is contributed which is subject to a liability where the decrease in the partner's individual liability exceeds his partnership basis, the excess amount is treated like taxable boot and gain is recognized
Partner Initial Basis
Property- Adjusted basis (NBV)
-Incoming Partner's liabilities assumed by other partners is a reduction
Liabilities-Other partners liabilities by incoming partner
Holding Period of Property
If property was previously a capital asset or Section 1231 asset in the hands of the partner, the partner's holding period for his partnership interest includes the holding period of the property contributed.
Subsequent contributions will increase a partner's basis
Subsequent withdrawals will decrease a partner's basis
Increase by his pro rata share of income and increase of partnership liabilities.
Decrease by his pro rata share of losses and decrease in partnership liabilities.
When a partner contributes property with a FMV that is higher or lower than the adjusted basis or NBV, a built-in gain or loss that existed at the date of contribution must be specially allocated to the contributing partner.
Partnerships's basis for contributed property
The carryover basis is used.
1) Operations Cease
2) 50% or more of the total partnership interest in both capital and profits is sold or exchanged within any 12 month period
3) There are less than 2 partners.
Related party transactions
Related Party losses are disallowed and Related party gains are ordinary income.
Determination of Partner's Income
Must Include his distributive share of partnership income in his tax return for his taxable year.
1) Losses Limited to partners basis- tax loss deduction is limited to the partner's adjusted basis in the partnership, which is increased by any partnership liabilities for which he is personally liable.
2) Any unused loss can be carried forward an used in future year when basis becomes available
3) Partner also subject to passive loss limitations
Guaranteed payments are allowable tax deductions to the partnership for services or for the use of capital without regard to partnership income or profit and loss sharing ratios.
Ordinary income to the recipient and deductions to the partnership
A nonliquidating distribution to a partner is nontaxable.
Distributions of cash or property to a partner reduce the partner's basis by the cash or adjusted basis of the property distributed.
Basis of property =NBV, basis may not exceed basis in partnership.
Gain on Excess Cash
Gain on excess cash is recognized only to the extent that cash distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution.
3 types of liquidating distributions:
1) Complete Withdrawal
2) Sale of partnership interest
3) Retirement or death
Partner's basis for the distributed property is the same as the adjusted basis of the partner's partnership interest.
Beginning Capital Account
* Income Up to withdrawal
=Partner's Capital Account
% of liabilities
= Basis at date of withdrawal
=Remaining Basis to be Allocated Assets Withdrawn
Partner recognizes gain only to the extent that money received exceeds the partner's basis in the partnership
Recognizes loss if only money, unrealized receivables, or inventory are received and basis of the assets recieved is less than the partner's adjusted basis in the partnership.
Sale of Partnership Interest
Capital Gain or Loss is recognized.
Beginning Capital Account
* Income Up to sale
=Partner's Capital Account
% of liabilities
= Adjusted basis
=Gain or loss
Retirement or Death of Partner
Payments for the interest in the partnerships interest are capital gains
If other payments are measured by partnership income, they are treated as partnership income regardless of the period they are paid.
Estates and Trusts
Are separate tax paying entities often called fiduciaries.
Taxation of Estates
Income Tax- Due annually based on income during the year while the estate is in existence.
Estate Tax- A one-time only transfer tax based on the value of the decedent's estate.
Lifetime Gifts and Death time transfers
Gifts of $13,000 or less per year/per donee or excluded.
The unifed estate and gift tax credit of $2,117,800 effectively exempts from estate/gift tax the first $5,430,000 of otherwise taxable cumulative gifts and death time transfers
1) Amounts taxed to the fidicuary (trust or estate) and the beneficiaries are usually determined by the classification of the receipt or disbursement as either principal or income.
2) Capital gains and losses are classified as prinicpal and must remain with the trust to be taxed at the trust or estate level
Distributable Net Income
Limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries.
Estate (Trust) Gross Income
=Adjusted Total Income
+Adjusted Tax-Exempt Interest
=Distributable Net Income
1) Carrying on a trade or business
2) Production of income
3) Management or conservation income-producing property (including the trustee's or executor's fees)
4) Determination, collection or refund of any tax.
5) Contributions to a charity
Income Distribution Deduction
Equals the lesser of the actual distribution to beneficiary or DNI (less adjusted tax-exempt interest)
Estate Income Tax
Required when annual income exceeds $600.
Tax year may be either calendar year or a fiscal year and is exempt from making estimated tax payments its first 2 years.
1) Only make distributions out of current income; it cannot make distributions from the trust corpus
2) Required to distribute all its income currently
3) Cannot take a deduction for a charitable contribution
4) Entitled to a $300 exemption in arriving at taxable income.
1) Complex trust may accumulate current income
2) Complex trust may distribute principal
3) Complex trust may deduct charitable contributions
4) Complex trust is permitted an exemption of $100 in arriving at its taxable income.
Filing Requirements- If the gross value of the estate plus historical taxable gifts by the decedent exceed $5.43M
Must be filed within 9 months of decedent.
Include in trust are the following:
1) FMV of property owned
2) Insurance proceeds
3) Incomplete gifts
4) Revocable transfers
5) All property entitled to be received.
1) Medical expenses subject to the 7.5% limitation
2) Adminstrative Expenses
3) Discretionary Expenses
A transfer tax payable by certain donors of gifts. Usually $13,000 or $26,000 if married and gift splitting is elected.
Present vs Future Interest Gifts
Future gifts include reservations and remainders, trust income interests where accumulation of income by a trustee is mandatory and accumulations are distributed at some future time at the discretion of the the trustee, present interests without ascertainable value.
Present Interest Gifts-outright gifts of cash or property, trust income interests, Life estates, estates for a certain term, bonds or notes, unrestricted transfers of life insurance policies.
Gifts Complete vs Incomplete
Complete- Gift is considered complete even though the donee is not yet born, the property may revert to the donor at some future time
Incomplete- Conditional or Revocable gifts
Recipient of gifts
Non taxable to that person
IRC Code of 1986
Authority for purposes of determining whether there is substantial authority for the tax treatment of an item.
1) Applicable provisions of the Internal Revenue Code and other statutory provisions
2) Proposed, temporary, and final regulations construing such statues.
3) Revenue Rulings and revenue procedures, tax treaties, and regulations there under, and US Treasury Department
4) Court Cases
5) Congressional Intent
6) General Explantions of tax legislation
7) Private Letter Rulings
8) Actions on decisions and general counsel memoranda issued after March 12, 1981
9) IRS information or press releases.
Disregard-Includes any careless, reckless or intentional disregard of rules or regulations.
Listed Transaction- Mean a reportable transaction which is the same as or substantially similiar to, a transaction specifically identified by the Secretary of the US Treasury Department
More Likely than Not-50% chance
Negligence-Includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws.
Reasonable Basis-High standard of tax reporting
Substantial Authority- Standard is an objective standard involving an analysis of the law and application of the law to relevant facts.
Tax Return Preparer
Means any person who prepares for compensation, or who employs one or more prepares tax return for compensation.
Does not include a person who merely furnishes typing, reproducing.
Required to obtain a preparer tax identification number.
Means any partnership or other entity, investment plan or arrangement or other plan or arrangement
Understatement of Tax Liability due to Unreasonable Tax Return Preparer
Position is deemed unreasonable unless:
1) A position is deemed unreasonable unless, there is substantial authority for the position and the position does not involve either a tax shelter or a reportable transaction.
2) Position is disclosed, reasonable basis for the position and the position does not involve a tax shelter or reportable transaction
3) With respect to ta tax shelter or reportable transaction, it is reasonable to believe that the position would more like than not be sustained.
Penalty for Understatement of Liability
A penalty equal to the greater of $1,000 or 50% of the income the preparer received for tax preparation.
Understatement of Liability due to Willful or Reckless Conduct of Preparer
1) Willful attempt to understate tax liability
2) Reckless or intentional disregard of tax rules or regulations.
3) Penalty is the greater of $5,000 or 50% of the income the preparer devided with respect to the return or refund.
$50 or $25,000 per calendar year penalty
1) Failure to provide a completed tax return
2) Failure to sign tax return
3) Failure to Furnish the Tax ID Number of the Tax Return preparer
4) Failure to retain records properly
5) Failure to Correct Information Returns
Treasury Department Circular 230 Duties and Restrictions
1) Practioners must provide to the IRS any IRS requested information or records unless the practitioner believes in good faith and on reasonable grounds that the information or records are privledged.
2) No practioner may unreasonably delay any matter before the IRS.
3) Cannot accept help from someone disarment or suspended from practice.
4) Conflicts of Interest
5) Can't charge an unconsionable fee. Contingent fee is allowed only for an IRS examination or audit, Claim solely for a refund of interest and/or penalties or a judical proceeding
6) No false or misleading advertising is allowed.
Any written or electronic advice by a practioner concerning on or more federal tax issues:
1) Transaction that the at time advice is rendered, the IRS has determined to be a tax avoidance transaction and so identified by IRS published guidance as listed transaction
2) Any partnership or any other entity, plan or arrangement the principal purpose of which is federal tax avoidance or evasion
3) Any partnership or any other entity, plan or arrangement having as a signifcant purpose federal tax avoidance or evasion if the written advice is a reliance opinion, marketed opinion and subject to conditions of confidentiality.
Federal Tax Issue
Question concerning federal tax treatment of any or item or transaction, or the value of property for federal tax purposes.
Significant Federal Tax Issue
A federal tax issue with respect to which the IRS had a reasonable basis for successful challenge and the resolution of the issue has a significant tax impact under any reasonably foreseeable circumstance.
Written advice concluding at a confidence level of at least more likely than not greater than 50% likelihood that the significant tax issue would be resolved in the taxpayers favor.