Chapter Nine. Transactions (Other than Sales) Between a Partnership and Its Partners

list the facts and circumstances that would indicate a lack of SER

(any one indicates lack of SER) 1. capped allocation, reasonably expected to apply in most years 2. allocation for 1+ years for which the service provider's share of income is reasonably certain 3. allocation of gross income 4. allocation that is fixed and reasonably determinable, or designed to assure there'll be sufficient net profits available for the service provider 5. arrangement where the service provider waives her right to receive a fee for future services that is not binding, or she fails to notify the pship and its partners of the waiver or its terms

what does 707(a)(2)(A) say?

(i) if a partner performs services for a partnership and (ii) there is a related allocation and distribution to that partner and if these events, taken together, are properly characterized as a transaction between unrelated parties, the transaction will be treated under 707(a)

explain the proposed regs 1.707-2

1. reiterate the three necessary statutory conditions listed in 707(a)(2)(A), but limit their application to service providers 2. require a facts and circumstances analysis, list the factors to taken into account to decide if an allocation is a disguised payment and add a sixth factor; provide that the most important factor is whether payment is subject to "significant entrepreneurial risk" (SER) 3. if NOT subject to SER = disguised payment for services if subject to SER = generally not treated as payment for services

what did congress enact to identify disguised payments for services?

707(a)(2)(A) (in response to many people temporarily joining pships to characterize what otherwise would be capital expenditures as distributive shares)

what does 721 do?

affords nonrecognition treatment to exchanges of property for partnership interests, and protects both parties to the exchange (neither partner nor pship recognize gain or loss)

what's the benefit of characterizing an amount as a distributive share?

avoids the capitalization requirement, in certain cases ensures a flow through of capital gains rather than taxing a service partner on ordinary income

how would you account for payments to a partner acting in her capacity as such, that are determined with reference to the income of the partnership?

distributive share of partnership income for the year (included in partner's income at the end of the taxable year, whether or not received; not deducted by the pship)

for 704(b) payments: character? accounting method? payment subject to 263? included in 199A QBI?

flow through, partnership's via 706(a), no, yes

how do you tax guaranteed payments?

hybrid approach 1. taxed like 707(a) payments for services or capital: ordinary income to the recipient and are deductible by the pship subject to the capitalization requirement of 263 2. taxed like distributive shares: must be included in the income of the recipient under 706(a) at the end of the tax year, whether or not actually received **not included in QBI for 199A purposes

how do you determine treatment of partner compensation in addition to their distributive share?

if the partner is acting in her capacity as a partner, use 707(c) if the partner is acting as a stranger vis a vis the partnership, use 707(a)

what method do proposed regs say to use to value a partnership interest?

liquidation method

for 707(a) payments: character? accounting method? payment subject to 263? included in 199A QBI?

ordinary, partner's, yes, no

for 707(c) payments: character? accounting method? payment subject to 263? included in 199A QBI?

ordinary, partnership's via 706(a), yes, no

what code section covers when a taxpayer receives an interest in a partnership in exchange for services?

proposed regs under 707 services are not property for purposes of nonrecognition under 721

what does 1061 do?

targets private equity, hedge funds, and other investment funds if it applies, it doesn't recharacterize amounts received under a carried interest as ordinary, but rather changes the holding period necessary for these amounts to receive long-term capital gain treatment to three years

what is the threshold issue in categorizing a particular payment to a partner?

the capacity in which the partner is acting

how would you account for a partner engaging in a transaction with a partnership in a non partner capacity?

under 707(a)(1), the transaction is mostly treated as occurring between strangers and the character of the payments will depend on the underlying transaction

how would you account for a partnership making fixed payments for services or the use of capital to a partner acting in her capacity as such and if those payments are not dependent upon the partnership's income?

under 707(c), these payments are "guaranteed payments"

explain the liquidation method

value of interest is the amount of cash the partner would receive if, immediately after the service partner receives her interest, 1. all pship assets are sold for FMV 2. all resulting gains/losses are allocated amount the partners in accordance with the pship agreement 3. all pship liabilities are satisfied 4. remaining cash is distributed to the partners in accordance with the pship agreement

what's the most important factor to determine whether a given payment is made to a partner in her capacity as such, or as a stranger?

whether the payment received was subject to the entrepreneurial risk of the venture