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Special Partnership Issues

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Title: Special Partnership Issues


1
Chapter 10
  • Special Partnership Issues

2
Nonliquidating Distributions
  • Normally, no gain or loss by either the partner
    or the partnership
  • Money distributions in excess of the partners
    basis triggers capital gain recognition by the
    partner ..731(a)(1)
  • Money includes cash, reduction of partners
    liabilities, FMV of securities distributed after
    December 8, 1994
  • OR

3
Precontribution Gain
  • Contributed property had a FMV greater than the
    tax basis at the date of transfer
  • Gain must be recognized by the contributing
    partner if either of the following occurs within
    seven years of the contribution
  • (1) Distribution of the contributed property to
    any OTHER partner .. 704(c)(1)(B)
  • (2) Distributions of property to the contributing
    partner having a FMV greater than the partners
    basis in the partnership.. 737(a)(1)

4
Precontribution Gain
  • Amount of Gain - Distribution to OTHER Partner
  • Gain or loss is recognized by the contributing
    partner as would have been recognized if the
    property had been sold
  • Amount of Gain - Distribution to Contributing
    Partner is the lesser of
  • the remaining precontribution net gain
  • excess net precontribution gains and losses of
    all property contributed to the partnership by
    the partner that has not been previously
    recognized
  • the excess of the FMV of the distributed property
    over the adjusted basis of the partnership
    interest before the distribution (after reduction
    for any cash distribution)

5
Distributions Effects on Basis
  • Partnerships basis in distributed property
    carries over to the partner
  • limited to predistribution partership basis
  • Partners partnership basis is
  • reduced by 1)the amount of money received and
    2)
    basis of other property received, and
  • increased by any gain recognized under 737

6
Sec. 751 Assets
  • Assets covered by this section include
  • unrealized receivables and
  • substantially appreciated inventory.

7
Sec. 751 Assets
  • Unrealized receivables include
  • accounts receivables for a cash basis partnership
  • ordinary income recapture items under
  • Sec. 1245 or 1250 (depreciation)
  • Sec. 617(d) (mining properties)
  • Sec. 1252 (farmland)
  • Sec. 1254 (oil, gas and geothermal)

8
Sec. 751 Assets
  • Substantially appreciated inventory includes all
    assets EXCEPT
  • cash
  • capital assets
  • Sec. 1231 assets .

9
Appreciation Test
  • Exclude cash, Sec. 1231 and capital assets.
  • Total the basis of the remaining assets.
  • Multiply the sum by 1.20.
  • Compare the product with the FMV of the assets.
  • If the FMV is larger, appreciation exists.

10
The Significance of Sec. 751
  • If Sec. 751 assets exist, certain distributions
    may be reclassified as a SALE between the
    partnership and the partner.
  • What you thought would be a tax-free distribution
    has just become a taxable event.
  • See Example C10-12 (page 10-10)

11
Liquidating Distributions
  • Three situations are possible.
  • Money plus the basis of other property 1) equals
    the partners basis, 2) exceeds the basis or 3)
    is less than the basis.
  • The money reduces the partners basis and the
    remaining basis is allocated to the other assets,
    usually with NO gain or loss.

12
Liquidating Distributions
  • If the money alone is greater than the partners
    basis, gain must be recognized.
  • If money, unrealized receivables and inventory
    are the ONLY assets distributed, and if the
    partner has any basis remaining after the
    reduction for the money, a loss must be
    recognized.

13
Liquidating Distributions
  • Under no condition is the basis of unrealized
    receivables and inventory to be increased when
    distributed from the partnership to the partner.
  • After reducing the partners basis for the money
    received, if the remaining basis is less than the
    carryover basis of the inventory and receivables,
    the carryover basis is reduced.

14
Liquidating distribution Example
  • Bill's basis in partnership interest 30,000
  • Proportionate liquidating distributions
    (partnership also liquidates) ( independent fact
    situations)
  • G H I
  • Cash 50,000 10,000 10,000
  • Unrealized rec. N/A -0- -0-
  • (Fair mkt value) N/A 16,000 16,000
  • Filing cabinet (1231) N/A N/A 300
  • (Fair mkt value) N/A N/A 300

15
Liquidating Distribution Example
  • G H I
  • Basis in interest 30,000 30,000 30,000
  • Cash distribution (50,000) (10,000) (10,000)
  • Gain recognized 20,000 N/A N/A
  • Basis after cash -0- 20,000 20,000
  • A/R distrib. N/A -0- -0-
  • Loss recognized N/A (20,000) N/A
  • Basis after A/R -0- -0- 20,000
  • Filing cabinet N/A N/A
    (20,000)
  • Ending basis -0- -0- -0-

16
Liquidating Distribution Example
  • G H I
  • Basis in p'ship int. -0- -0- -0-
  • Basis in cash 50,000 10,000 10,000
  • Basis in A/R N/A -0- -0-
  • Basis in filing cabinet N/A N/A 20,000
  • Capital (Gain)/loss (20,000) 20,000 N/A
  • Original basis 30,000 30,000 30,000

17
Liquidating Distributions
  • The holding period used by the partnership
    carries over to the partner.
  • Sec. 751 applies to liquidating distributions.

18
Sale of Partnership Interest
  • Capital gain or loss is recognized.
  • Sec. 751 applies and may require ordinary income
    treatment of the partners interest in unrealized
    receivables and/or substantially appreciated
    inventory.

19
Retirement or Death
  • The sale of the partnership interest to an
    outside party is a sale.
  • Surrender of the interest to partnership may
    involve payments for both property and other
    payments.
  • Property payments are liquidations.
  • Other payments are probably ordinary income.

20
Termination of the Partnership
  • The tax code and state laws treat this issue
    differently.
  • If a partner completely liquidates, the
    partnership tax year closes for that partner.
  • Death closes the tax year for the partner
  • Termination of the business or transfer of 50 of
    the ownership ends the partnership except for
    Electing Large Partnerships

21
Special forms of Partnership
  • Tax shelters and limited partnerships
  • Publicly traded partnerships
  • Limited Liability Companies (LLC)
  • Limited Liability Partnerships (LLP)

22
Electing Large Partnerships
  • Non-service partnership
  • Not engaged in commodity trading
  • Have at least 100 partners
  • File an election to be taxed as a large
    partnership

23
ELP Taxable Income
  • Miscellaneous itemized deductions are combined
    and subject to a 70 deduction at the partnership
    level, the remaining deductions are combined with
    other income and passed through
  • Charitable contributions are combined and are not
    separately stated by the partner subject to 10
    limit
  • Section 179 deductions are combined

24
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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