taxation of partnership Flashcards
(25 cards)
What are the three situations where a partner recognizes gain on a contrib to a partnershiip?
(1) When prop contributed is subj. to a liab, and the resulting decrease in the partner’s indiv. liab. exceeds the partner’s partnership basis. (a ) The excess of lab. over AB is treated as a cap gain form sale or exchng of partnership interest. (b) The gain will be treated as ord income to extent prop xferred was sub to deprec. recap under 1245 or 1250. (2) Gain will be recog. on contrib. in xchng for interest in partnership if partnership would be an investment co if incorporated. (3) Partner must recog. compensation income when interest in partnership capital is received in xchng for services rendered.
How is a built-in loss treated when determining the amt of partnership items allocated to the contrib. partner?
The basis of the contrib’d prop. is treated as being equal to the FMV at date of contribution.
How do you treat a situation where prop is distributed within 7 yrs to a partner other than the partner who contributed such property?
The partner who contrib’d the property must recognize the precontribution g or lto the extent tha tthe precontribution g or l would be recognized if the partnership had sold the property for it’s FMV at time of distribution.
Define guaranteed payments.
Payment made to partners determined without regard to income of the partnership. Guar. payments are deductible by the partnership and reported as income by the partner.
How are a partner’s fringe benes treated?
Partners are not generally considered to be employees , A partner’s fringe benes are deductible by the partnership as guaranteed payments and are included in partner’s gross income.
Are family members considered partners?
If business is primarily service oriented, a fam member will be considered a partner only if the fam member shares in the management or performs needed services.
When is a fam member considered a partner?
If the fam member actually owns a cpaital interest ins the bus in which capital is a material income producing factor.
What rules apply if the capital interest in a partnership is a material income producing factor and is treated as created by gift?
The distributive shares of partnership income of the donor and donee are determined by first making a reasonable allowance for services rendered to the partnership and then allocating the remainder according to the relative cap interests of the donor and donee.
What items would increase a partner’s basis in the partnership?
Any distributive share of: partnership ord. income, cap gains and other special income items, TE income of the partnership, excess of the deduction for depletion over the partnership’s basis of the prop subject to depletion.
What items would decrease a partner’s basis in the partnership?
The amt of money and AB of other prop. distributed to the partner, partner’s distributive share of partnership ord. loss and special exp. items as well as nondeductible items not properly chargeable to capital, the amt of partner’s deduction for depletion on oil and gas wells.
In what order do you adjust a partner’s basis?
(1) Increased for all income items (including TE income), (2) decreased for distributions, (3) decreased by deductions and losses (including nondeductible items not charged to capital).
What rules apply if transactions involve a more than 50% owned partnership?
(1) No losses deductible from sales or exchanges of prop between a partnership and a person owning more htan 50% of the cap or profits interests. A gain later realized on a subsequent sale by the transferee will not be recognized to the extent of the disallowed loss. (2) If a person related to a partner does not indirectly own a more than 50% partnership interest, a transaction between the related person and the partnership, or between two partnerships in which the same person own more than 50% of the cap or profits interests, will be treated as ord. income if the prop is not a cap asst int the hands of the transferee. (3) a gain recognized on sale of xchg of property between a partnership and a person ownng more tan 50% of the cap. or profits interests in such partnership will be treated as ord income if the prop is depreciable prop in the hands of the partner.
In electing a taxable year, what does the IRS consider a vallid bus. purpose?
The partnership must receive at least 25% of gross receipts in the last two mos of a 12 mo pd. and this “25
%” test has been met for 3 consecutive years.
May a partnership use the cash method?
Any partnership (other than a tax shelter) can use the cash method if for every year it has avg Gr. receipts of $5 Million or less for any prior three yr pd. and does not have inventory for sale to customers.
A sm partnership with avg annual gr receipts of $1 Mill of less for any prior 3 yr pd can use the cash method and is excepted for the requirements to account for inventories and use the accrual method for puchases and sale of merchandise.
What events will terminate a partnership?
Terminates when partnership no longer has at least 2 partners.
A partnership and its taxable yr. will terminate for all partners if there is a sale or exchange of 50% or more of the total interests in partnership cap and profits within a 12 mo pd.
Sales or exchanges of at least 50% during any 12 mo. pd. cause a termination (if same partnership int is sold more than once during 12 moo. pd., it is only counted once).
Does a sale of a partnership interest result in capital g or l?
Partnership interests are generally a capital asset.
Gain is excess of amt realized over the
AB for partnership interest (include the selling partner’s share of partnership liabs in the am realized, the selling partner is relieved of them).
When is there an ordinary gain realized on sales of partnership interests?
Gain is ord to extent attrib to unrealized receivables or appreciated inventory ()Sec 751 items). The term unrealized rec’s generally refers to the AR of a cash method taxpayer, but for this purpose also includes any potential recapture under 1245, 1250, and 1252.
The term inventory refers to all assets except cap assets and Sec 1231 assets.I
n a pro-rata dist., does a partnership recognize any g or l
No
In what order does a single dist consisting of multiple items of property reduce the partner’s basis in the partnership interest?
a. Money
b. AB or unrealized rec’s and inventory,
c. AB of other property.
When does a partner recognize gain in a pro-rata distrib. from partnership?
Partner recognizes gain only to extent that money rec’d exceeds the partner’s partnership basis.
Relief from liabs is deemed a distrib. of money.
Gain is cap except for gain attrib to unrealized rec’s and substantially appreciated inventory.
The receipt of property other than money will not cause the recognition of gain.
In a pro-rata dist. when does a partner recognize a loss?
Only upon complete liquidation through receipt of only money, unrealized rec’s or inventory.
Amt of loss is the basis in partnership interest less the money and the partnership;s basis in unrealized rec’s and inventory rec’d by the partner. (Loss is generally a capital loss).
If prop. other than money, unrealized rec’s, or inventory is distributed in complete liquidation, no loss can be recognized.
What is partner’s basis in distrib. property in a nonliquidating (current dist.)?
Partner’s basis will generally be the same as the partnership’s former basis in the property, but is limited to the basis for the partner’s partnership interest less any money rec’d.
In what order is the partner’s basis in the partnership interest allocated if multiple props are distributed in a liquidating distribution or if the partnership’s basis for distributed properties exceeds the partner’s basis for the partnership interest?
Allocate in the following order:
a. Basis is first allocated to unrealized rec’s and inventory items in the amount equal to their AB to the partnership. If basis for the partner’s interest to be allocated to the assets is less than the total basis of those properties to the partnership, a basis decrease is required.
b. To the extent a partner’s basis is not allocated to assets under a. basis is allocated to other distributed props by assigning each property it’s AB in the hands of the partnership, and then increasing or decreasing the basis to the extent required in order for the AB of the distributed properties to equal the remaining basis for the partner’s partnership interest.
In mult. prop. liquidating distributions or if the partnership’s basis for distributed properties exceeds the partner’s basis for the partnership interest, how is a basis decrease allocated?
a. First to properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation (but only to the extent of each properties unrealized depreciation), and
b. Then in proportion to the respective AB of the distributed properties.
