10-1 ©2011 pearson education, inc. publishing as prentice hall
TRANSCRIPT
10-1©2011 Pearson Education, Inc. Publishing as Prentice Hall
10-2
SPECIALPARTNERSHIP ISSUES
Nonliquidating distributions§751 assetsTerminating a partnership
interestOptional and mandatory basis
adjustmentsSpecial forms of partnershipsTax planning considerations©2011 Pearson Education, Inc. Publishing as
Prentice Hall
10-3
Nonliquidating Distributions
General rulesPrecontribution gain (loss)Basis effects of distributionsHolding period and character of
distributed property
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General Rules
No gain or loss by either partner or partnership
“Money” distributions in excess of partner’s basis triggers capital gain recognition by partner
“Money” includes cash, reduction of partner’s liabilities, FMV of securities
©2011 Pearson Education, Inc. Publishing as Prentice Hall
10-5
Precontribution Gain (Loss)(1 of 2)
Precontribution gain (loss) definition Contributed property w/FMV >
tax basis (< for loss) on date transferred to partnership
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Precontribution Gain (Loss)(2 of 2)
Gain or loss recognized by contributing partner w/in 7 years of contribution ifDistribution of contributed property
to any OTHER partner orAny property distribution to
contributing partner if FMV of property > partner’s basisGain recognition only©2011 Pearson Education, Inc. Publishing as
Prentice Hall
10-7
Basis Effects of Distributions
(1 of 2)
General rulePartnership’s basis in distributed
property carries over to partnerPartner’s basis in partnership
reduced in the following order Money received,Basis of other property received
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10-8
Basis Effects of Distributions
(2 of 2)
Basis in new property if partnership’s basis in property > partner’s basis in partnership after adjusting for money received and preconribution gain
partner’s remaining
basis
x partnership’s basis in asset partnership’s basis in total assets
distributed
©2011 Pearson Education, Inc. Publishing as Prentice Hall
10-9
Holding Period and Character
of Distributed Property
Partner’s holding period includes partnership’s holding period
Character of gain/loss when property soldGenerally same as for partnershipOrdinary income/loss treatment
forUnrealized receivablesInventory sold w/in 5 years of
distributionAfter, character determined at partner
level
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§751 Assets
§751 assets Property likely to produce ordinary
income when sold or collectedUnrealized receivablesSubstantially appreciated
inventorySignificance of §751
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Unrealized Receivables
Unrealized receivables includeAccounts receivable for cash basis
partnershipOrdinary income recapture items
§§1245 or 1250 (depreciation)§§617(d) (mining properties)§§1252 (farmland)§§1254 (oil, gas and geothermal)
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Substantially Appreciated Inventory (1 of 2)
Substantially appreciated inventory includes all assets EXCEPTCashCapital assets§1231 assets
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Substantially Appreciated Inventory (2 of 2)
Appreciation test1. Exclude cash, §1231 & capital
assets2. Total basis of remaining assets3. Multiply sum by 1.204. Compare result of #3 w/FMV of
assets5. If FMV larger, substantial
appreciation exists©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Significance of §751
If §751 assets exist, certain distributions reclassified as a SALE between partnership & partner
What appears to be a tax-free distribution could be a taxable event
See Example C10-12 and Table C10-1
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Terminating a Partnership Interest (1 of 2)
Liquidating distributionsSale of partnership interestRetirement or death of a partnerExchange of a partnership
interestIncome recognition and transfers
of a partnership interest©2011 Pearson Education, Inc. Publishing as
Prentice Hall
10-16
Terminating a Partnership Interest (2 of 2)
Termination of a partnershipMergers and consolidationsDivision of a partnership
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Liquidating Distributions
Gain or loss recognition by partner
Basis of assets receivedHolding period carries over to
partner§751 applies to liquidating
distributionsEffects of distribution on
partnershipNo gain or loss unless §751 deemed
sale occurs
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Gain or Loss Recognition by Partner
(1 of 2)
Gain recognized if money received (and deemed received) exceeds partner’s basis in partnership
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10-19
Gain or Loss Recognition by Partner
(2 of 2)
Loss recognized if Only money, unrealized
receivables & inventory are only assets received AND
Basis in partnership > sum of money plus partnership’s basis in unrealized receivables and inventory received
©2011 Pearson Education, Inc. Publishing as Prentice Hall
10-20
Basis of Assets Received(1 of 2)
Basis of unrealized receivables and inventory same as for partnershipNever increased when distributed
from partnership partner
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Basis of Assets Received(2 of 2)
After reducing partner’s basis for money received, remaining basis in partnership is allocated to remaining property distributedGain (loss) is deferred by reducing
(increasing) the basis in the property distributed
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Sale of Partnership Interest(1 of 2)
Impact on PartnerGeneral rule
Capital gain or loss recognizedPartnership liabilities
Relief of liabilities increases the amount realized on the sale
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Sale of Partnership Interest(2 of 2)
Impact on partner (continued)§751 property
All inventory and unrealized receivables are considered §751 property
Hypothetical asset sale approach used by Treasury Regs. Under §751 to determine ordinary income or loss
No impact on partnership©2011 Pearson Education, Inc. Publishing as
Prentice Hall
10-24
Retirement or Death of a Partner
Sale of partnership interest to outside party is a “sale”
Surrender of interest to partnershipPayments for property taxed as
liquidating distributionsOther payments treated as either
guaranteed payment (ordinary income) or distributive share (retain character)
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Exchange of a Partnership Interest
(1 of 2)
Exchange for another partnership interest not a like-kind exchangeException: exchanges of interests
within a single partnershipExchange for corporate stock
May qualify for §351 treatmentPartnership interest is property under
§351 ©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Exchange of a Partnership Interest
(2 of 2)
IncorporationTax consequences depend on how
incorporation is accomplishedFormation of an LLC or LLP
If LLC elects to be taxed as a corp, treatment same as for incorporation
If LLP or LLLP, same tax-free treatment as partnership-to-partnership transfer
©2011 Pearson Education, Inc. Publishing as Prentice Hall
10-27
Termination of a Partnership
(1 of 3)
IRC & state laws treat terminations differently
Termination events (IRC)No business operated as a
partnershipSale or exchange of 50% interest
w/in 12 month period
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Termination of a Partnership
(2 of 3)
Effects of terminationTax year closes upon terminationCould cause short tax year to fall in
same calendar year as regular 12-month tax year
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Termination of a Partnership
(3 of 3)
If termination occurs because of sale of >50% ownership interest“Old” ptrshp contributes assets to
“new” ptrshp in exchange for 100% of new ptrshp
Basis and holding period of assets in new ptrshp same as in old ptrshp
Old ptrshp distributes new ptrshp interests to partners and liquidates
Partners’ basis in new ptrshp unchanged
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Mergers and Consolidations
Two or more partnerships join to form a new partnership
If partners of “Old 1” own > 50% of New partnership, then Old 1 partnership is deemed to be continuedAll other old partnerships deemed
to terminatePossible that no old partnership
continues
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Division of a Partnership
One partnership divided into two or more partnerships
New partnerships whose partners own collectively > 50% of interests in old partnerships are considered a continuation of the old partnership
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Optional and MandatoryBasis Adjustments (1 of 4)
Adjustments on transfersNew partner’s outside basis
Purchase price plus new partner’s share of partnership liabilities
New partner’s inside basis likely different than outside basis
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Optional and MandatoryBasis Adjustments (2 of 4)
Optional §754 adjustment allows partnership to adjust basis of partnership assets for new partner’s share of partnership assetsBasis adjustment belongs only to
new partner
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Optional and MandatoryBasis Adjustments (3 of 4)
ExampleIf §754 adjustment is $30,000 and
new partner is 1/3 partner, then new partner’s inside basis increases by $10,000 ($30,000 x 1/3)
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Optional and MandatoryBasis Adjustments (4 of 4)
Mandatory basis adjustment for substantial built-in lossSubstantial if Built-in loss >
$250K,Exchange of partnership interest,
ANDNo §754 optional basis adjustment
election in effect©2011 Pearson Education, Inc. Publishing as
Prentice Hall
10-36
Special Forms of Partnerships
Tax shelters and limited partnerships
Publicly traded partnershipsElecting large partnershipsLimited Liability Companies
(LLC)Limited Liability Partnerships
(LLP) ©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Publicly Traded Partnerships
PTPs are partnerships whose interests are traded on an established securities exchange
PTPs are taxed as a corporation unless 90% of income is “qualifying income”E.g., Certain interest, dividends,
real property rents©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Limited Liability Companies(LLCs)
May be taxed as a partnership or a corp using check-the-box regs
Allows entity to obtain pass-through and flexibility of partnership allocations while maintaining limited liability of a corp.
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Limited Liability Partnerships
(LLPs)
Used by many professional orgsIncluding all Big 4 & many nat’l CPA
firmsTaxed as a partnershipPartners not liable for failures in
work of other partners or people supervised by other partnersNon-liable partners can still suffer
E.g., demise of Arthur Andersen©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Limited Liability LimitedPartnership
Allowed by some statesFormed under state’s limited
partnership lawsGeneral partners have limited
liabilityLLLP potentially useful in states
where PSCs cannot be LLCs
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Electing Large Partnerships
ELP Qualifications ELP taxable incomeELP: Termination of partnershipELP: Audit rules
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ELP Qualifications
Non-service partnershipNot engaged in commodity
tradingHave at least 100 partnersFile an election to be taxed as a
large partnership
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ELP Taxable Income
Misc. itemized deductions combined & subject to a 70% deduction at partner levelRemaining misc. deductions
combined w/other partnership income
Charitable contributions combined and not separately stated by partners
§179 deductions combined©2011 Pearson Education, Inc. Publishing as
Prentice Hall
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ELP: Termination of Partnership
Termination occurs only upon cessation of any business, financial operation or venture
Termination does not occur upon transfer of 50% ownership
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ELP: Audit Rules
Partners must report all items in same manner as partnership
Audit findings & agreements reached at partnership level binding on all partners
Audit decisions binding on partners who own interest in year of decision, not year of contested transaction
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Tax Planning Considerations
Tax treatments of partner withdrawal1. Liquidating distribution OR
Partnership increases basis in §751 assets
xfer of >50% interest ptrshp not terminated
2. Sale of partnership interest to partnership xfer of >50% interest terminates
ptrshpOptional basis adjustments affect
each option differently
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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10-47©2011 Pearson Education, Inc. Publishing as Prentice Hall