Partnership Quiz 2 (Ch. 2-4)

How do the aggregate theory and entity approach interact with respect to income taxation of a partnership?

Aggregate: partnership is an extension of its owners. Ex. Flow-through income, tax-free contributions and distributions Entity: Treats partnership as if it stands on its own. Ex. Makes most elections with respect to the partnership, files its own tax return

What does § 83(b) permit? Why would it be wise to make this election?

Allows a service partner to recognize income currently instead of waiting for timing restrictions to lapse. File election within 30 days. However, if we make the election and later forfeit the interest, then no deduction is permitted. If you think the FMV of your interest is going to increase, should make the election today and recognize income currently.

What is the general rule related to separately stated items that may help me remember what is or is not a separately stated item?

An item must be separately stated if the income tax liability of any partner that would result from treating the item separately is different from the liability that would result if that item were included in the partnership ordinary income

Qualified Business Income Deduction

For tax years beginning after December 31, 2017 (subject to a sunset at the end of 2025), an individual taxpayer (and a trust or estate) is permitted a deduction for 20% of the individual's domestic qualified business income from a partnership, S corporation, or sole proprietorship. Qualified business income generally equals the net income, gain, deduction, and loss effectively connected to a US trade or business Specified service-related businesses are eligible only if the individual has taxable income less than $157,000 (single) and $315,000 (married, filing jointly).

How is all remaining income or loss reported?

As ordinary business income/loss.

Josie performs accountings services in exchange for a 20% partnership interest in JUL Partnership. The January 31, 2019 value of the 20% interest is $35,000. Assume the January 31, 2022 value of the 20% interest is $50,000. What is the effect to Josie if she receives the partnership interest in 2019 but she must perform services for three years or else give up the partnership interest?

No 83(b) election: $50,000 ordinary income in 2022. No basis in 2019. 83(b) election: $35,000 ordinary income in 2019

What are guaranteed payments?

Payment when partner is acting in their capacity as a partner. Partner always treats a guaranteed payment as ordinary income.

George is a 40% partner in The Wendt Partnership, an accrual-basis, calendar-year partnership that manufactures furniture. George is a CPA and prepared Wendt's 2018 tax return in March 2019. On January 31, 2020, George receives $3,000 from Wendt. Assume George is an accrual-basis taxpayer, how is the payment treated?

Still treated as 707(a)(1) ordinary income. George recognizes it in 2019, and so does the partner. They have to wait until George recognizes it or their accounting method allows the deduction, whichever occurs last.

Guaranteed payments (without regard to pship income) (§ 707(c)): timing

Timing is the same as our distributed share of income

All other payments to partners acting in their capacity: tax treatment

Treated as a distributive share of income Similar to our sec. 731 distributions

treatment of syndication fees

cannot be amortized; NO deductions

profits interest

gives a partner the right to a share of future earnings but gives no right to a distribution of a share of net assets. (has no value)

Sec. 707(c) payment to partner

guaranteed payments without regard to partnership income; payments for services or use of capital; our partnership will capitalize or expense

Sec. 707(a)(1) payment to partner

outside of capacity as a partner; treat as paid to a third party; partnership will capitalize or expense

The partnership is not a taxable entity, yet the IRC requires the calculation of partnership taxable income. Taxable income of a partnership is comprised of two components TAXABLE ____________ and ordinary business ______ or _______.

separately stated items; income; loss

Continue with the JJJ Partnership scenario. For calendar year 2017, Janet receives the $21,000 as provided by the partnership agreement, Julia's guaranteed payment for 2017 is $17,000 and Jetta withdraws $20,000. Before these amounts, the partnership's ordinary income for 2017 is $650,000. What amount does Janet report?

$21,000 of the guaranteed payment + (1/3 x $612,000) = $225,000

A, B, C and D each contribute $25,000 to ABCD partnership, which then purchases a $1,000,000 building, paying $100,000 in cash and borrowing $900,000 on a nonrecourse basis. 1) If the partners are equal general partners, what is each partner's outside basis?

$25,000 + 225,000 = $250,000

A, B, C and D each contribute $25,000 to ABCD partnership, which then purchases a $1,000,000 building, paying $100,000 in cash and borrowing $900,000 on a nonrecourse basis. 2) What result if the partnership is a limited partnership, A is the sole general partner and all the partners share profits and losses equally?

$25,000 + 225,000 = $250,000

Why would a partner receive a payment from a partnership?

-Performed services for the partnership -distribution to cover taxes -use of partner property -distribution of profits

examples of organization expenses

-legal fees incurred in drafting the partnership agreement -filing fees for registering the partnership with the state and local authorities -accounting fees for services incident to the organization of the partnership

Most commonly seen separately stated items:

1. Charitable Contributions 2. Portfolio income items (qualified dividends, interest, and royalties) 3. Taxes paid or accrued to a foreign country 4. Tax exempt or partially tax exempt interest 5. Net short term and net long term capital gains or losses 6. Section 1231 gains and losses 7. Section 179 deduction (depreciation election) 8. Passive Activity Items (Rental income and loss)

b) Z contributes land with a basis of $30,000; FMV of $75,000 and a liability of $45,000 in exchange for a 50% interest in a partnership. The debt is nonrecourse. What is the effect of Z?

50% interest in a partnership. The debt is nonrecourse. What is the effect of Z? Minimum gain: $45,000 Z's basis: $30,000 - $45,000 = -15,000 Allocate 15,000 to Z Remaining 30,000 split 50% Z's basis: -15,000 + 15,000 + 15,000 = 15,000

What is a typical guaranteed payment for the use of capital?

A guaranteed payment for the use of capital is similar to interest.

a) Z contributes land with a basis of $30,000; FMV of $75,000 and a liability of $25,000 in exchange for a 50% interest in a partnership. The debt is nonrecourse. What is the effect to Z?

Basis > liability, so allocate according to profit percentage Z's basis: 30,000 - 25,000 + (50% * 25,000) = $17,500

b) Zoe contributes land with a basis of $15,000; FMV of $75,000 and a liability of $45,000 in exchange for a 50% interest in a partnership. All partners share equally in risk of loss. What are the effects to Zoe?

Basis: $15,000 Liab: ($45,000) Liab: $22,500 Outside basis: ($7,500) Z has a gain of $7,500

When is a partner acting as a partner?

When our partner is performing a service that is ongoing and integral to the business of the partnership.

section 444

under section 444, entities forced to have calendar years are entitled to a one-time election to select a taxable year other than the one the IRC requires. each year that an election under sec. 444 is in effect, partnerships must make a "required payment" which is an amount that crudely approximates the tax deferral arising from the fiscal year.

Nonrecourse Liabilities

•secured by the property and doesn't give lender the right to go after partners •allocated based on profit percentage Allocated based on profit percentage but we run into an issue when nonrecourse liabilities in excess of basis are contributed.

Josie performs accounting services in her capacity as a partner in exchange for a 20% partnership profits interest in JUL Partnership. Josie received the interest on January 20, 2018. Assume Josie's 20% of 2018 partnership income is $15,000. What is the effect to Josie?

$15,000 income to be recognized. $15,000 outside basis.

Continue with the JJJ Partnership scenario. For calendar year 2017, Janet receives the $21,000 as provided by the partnership agreement, Julia's guaranteed payment for 2017 is $17,000 and Jetta withdraws $20,000. Before these amounts, the partnership's ordinary income for 2017 is $650,000. What amount does Julia report?

$17,000 of guaranteed payment + (1/3 x $612,000) = $222,000

A, B, C and D each contribute $25,000 to ABCD partnership, which then purchases a $1,000,000 building, paying $100,000 in cash and borrowing $900,000 on a nonrecourse basis. 3) What result in (2) if the partnership were personally liable for the debt?

A: $25,000 + 900,000 B: $25,000 C: $25,000 D: $25,000 B, C and D are not required to give additional contributions.

Continue with the JJJ Partnership scenario. For calendar year 2017, Janet receives the $21,000 as provided by the partnership agreement, Julia's guaranteed payment for 2017 is $17,000 and Jetta withdraws $20,000. Before these amounts, the partnership's ordinary income for 2017 is $650,000. What is the final amount of JJJ's ordinary business income?

$650,000 - $21,000 - $17,000 = $612,000

Continue with the JJJ Partnership scenario. For calendar year 2017, Janet receives the $21,000 as provided by the partnership agreement, Julia's guaranteed payment for 2017 is $17,000 and Jetta withdraws $20,000. Before these amounts, the partnership's ordinary income for 2017 is $650,000. What amount does Jetta report?

(1/3 x $612,000) = $204,000

To be considered a nontaxable event, a profits interest must meet each of the following six conditions:

1) The profits interest does not have a substantially certain and predictable stream of income (e.g., income from high-quality debt securities or a high-quality net lease) 2) The partnership interest must be held for two years 3) The profits interest cannot be a limited partnership interest in a PTP (publicly traded partnership). Three additional conditions which must be met per Rev. Proc. 2001-43: 1) The partnership and the service partner treat the partner as the owner of the interest from the date of its grant and the partner must report his distributive share of income; 2) Neither the partnership nor the partner may deduct any amount for the FMV of the interest either upon the grant of the interest or when it substantially vests; 3) all requirements of Rev Proc 93-27 must be met.

The EK Partnership is owned equally by Emma and Kate. Kate's basis is $14,000 at the beginning of the tax year. EK reported the following income and expenses for the current tax year: Ordinary Business Income $130,000 Tax-Exempt Interest Income 4,500 Distribution to Kate 10,000 Calculate Kate's basis in his partnership interest at the end of the tax year.

= $14,000 + $65,000* +$2,250* - $10,000 = $71,250 *Split in half b/c Kate has a 50% interest.

A and B each contribute $30,000 cash to the ABC Partnership and C contributes land held for more than one year worth $60,000 and subject to a recourse debt of $30,000. A, B and C are all general partners with a one-third interest in the profits and losses of ABC. b) Same as (a) except that the land has a basis to C of $10,000.

A, B and C increase their outside basis by $10,000 because they share the economic risk of loss. C further decreases his outside basis by $30,000 since the partnership assumes the liability. C: Basis from land: $10,000 Less debt: (20,000) Outside basis: (10,000) can't be negative; is viewed as a sale of partnership interest.

A and B each contribute $30,000 cash to the ABC Partnership and C contributes land held for more than one year worth $60,000 and subject to a recourse debt of $30,000. A, B and C are all general partners with a one-third interest in the profits and losses of ABC. a) What are the tax consequences to A, B and C and ABC if the land has a basis to C of $40,000 and the partnership assumes the debt?

A, B and C increase their outside basis by $10,000 because they share the economic risk of loss. C further decreases his outside basis by $30,000 since the partnership assumes the liability. C: Basis from land: $40,000 Less debt: (20,000) Outside basis: $20,000

How does the partnership treat the value of this partnership interest given to a "service partner?"

Partnership treats transfer of partnership interest as if they were paying in cash. Will either expense this or capitalize it. This gets allocated among the nonservice partners. Must look at nature of underlying services to determine which to do.

Janet, Julia and Jetta are equal partners in JJJ Partnership. The partnership and all partners are calendar year taxpayers. Per the partnership agreement, Janet is to manage the partnership and receive a $21,000 distribution from the entity every year, payable in 12 monthly installments. Julia is to receive an amount that is equal to 18% of her capital account as it is imputed by the firm's accountant at the beginning of the year, payable in monthly installments. Jetta is the partnership's advertising specialist. She withdraws approximately 3% of the partnership net income every month. How are the guaranteed payments taxed to the partners?

As ordinary income.

a) Jonah contributes land with a basis of $30,000; FMV of $75,000 and a liability of $45,000 in exchange for a 50% interest in a partnership. All partners share equally in risk of loss. What are the effects to Jonah?

Basis: $30,000 Liab: ($45,000) Liab: $22,500 Outside basis: $7,500

capital interest

is an interest in the underlying assets of the partnership. The partner is entitled to a share of the partnership's net assets in the event the partner withdraws or the partnership is liquidated (has value)

Describe the self-employment income for a general partner.

it is his/her share of the partnership's trade or business income

Josie performs accounting services in her capacity as a partner in exchange for a 20% partnership profits interest in JUL Partnership. Josie received the interest on January 20, 2018. Now assume Josie sells her partnership interest on February 13, 2019 for $25,000. What is the effect to Josie?

Violates second rule of rev proc 93-27. Must recognize $25,000 of income.

Josie performs accountings services in exchange for a 20% partnership interest in JUL Partnership. The January 31, 2019 value of the 20% interest is $35,000. Assume the January 31, 2022 value of the 20% interest is $50,000. What are the effects to the partnership and the "non-service" partners if Josie receives the partnership interest in 2019? Assume the partnership has assets with a FMV of $175,000 and a basis of $87,500 and the partnership has no liabilities.

Expense the accounting services she has provided ($35,000); this goes to our non-service partners. 20% x $175,000 = $35,000 20% x $87,500 = $17,500 $35,000 - $17,500 = $17,500 gain to non-service partners

principal partner required taxable year

if there is no business purpose year-end and no one year-end that a majority of the partners share, the partnership must adopt the same tax year as that of all of its principal partners -principal partner: one who owns at least 5% of partnership capital and profits

year of least aggregate deferral

if there is no year-end that can satisfy the majority interest test and the principal partner test, the partnership must select a year-end resulting in the least aggregate deferral of income to the partners

Nonrecourse Liabilities in Excess of Basis

If a nonrecourse liability is contributed and the liability exceeds the asset's basis, the partner who contributed the property is allocated the portion of the liability that equals the gain that would be allocated to the partner if the partnership sold the property for the liability amount. The remaining liability is allocated based on share of partnership profits. Basically, the liability will first be allocated to the contributing partner in an amount equal to the excess of liability over the asset's basis. Remainder of nonrecourse liability is allocated according to profit percentage

With respect to services, what is a guaranteed payment similar to?

If they receive a guaranteed payment to the use of services, it's similar to a salary.

What is an example of an interest that does not vest immediately and how is that treated?

If you have to work for a number of years and will not have the rights if you discontinue work within this period.

All other payments to partners acting in their capacity: timing

Include in our partner's year in which the partnership tax year ends

Calculation of partner outside basis

Initial Basis: Contributed property=carry-over basis Contribution of services=fmv of partnership interest received Purchase=cost basis Gift= Donor's basis plus gift tax on appreciation Inheritance= Fair market value at date of death or alternative valuation date Plus: Partner's subsequent contributions Plus: Increase in partnership's liabilities Plus: Partner's share of ordinary income items Plus: Partner's share of separately stated income items Plus: Partner's share of separately stated gain items Plus: Partner's share of tax exempt items Less: Decrease in partnership's liabilities Less: Liabilities of the partner assumed by the partnership Less: Partner's distributions and withdrawals Less: Partner's share of ordinary loss Less: Partner's share of separately stated deduction items Less: Partner's share of items non-deductible for tax purposes

Janet, Julia and Jetta are equal partners in JJJ Partnership. The partnership and all partners are calendar year taxpayers. Per the partnership agreement, Janet is to manage the partnership and receive a $21,000 distribution from the entity every year, payable in 12 monthly installments. Julia is to receive an amount that is equal to 18% of her capital account as it is imputed by the firm's accountant at the beginning of the year, payable in monthly installments. Jetta is the partnership's advertising specialist. She withdraws approximately 3% of the partnership net income every month. Which amounts are guaranteed payments?

Janet: guaranteed payment for services ($21,000/year) Julia: receives 18% for use of capital; guaranteed payment Jetta: this is a distribution (3% of net income) So, only Janet and Julia's amounts.

When does a partner include his/her share of self-employment income?

in his or her year with or within which the partnership's year ends

When do partners report income/pay tax on partnership income?

in the taxable year of the partnership that ends with or within his or her own tax year

Describe the self-employment income for a limited partner.

includes guaranteed payments for services rendered; when the services provided to the partnership are significant, the limited partner's share of income can be treated as self-employment income

Majorie works for a large firm whose business is to find suitable real estate, establish a limited partnership to purchase the property, and then sell the limited partnership interests. In the current year, Majorie received a 5% limited partnership interest in the Eldorado Limited Partnership. Majorie received this interest partially in payment for her services in selling partnership interest to others, but she also was required to contribute $5,000 in cash to the partnership. Similar limited partnership interests sold for $20,000 at approximately the same time that Majorie received her interest. What are the tax consequences for Majorie and the Eldorado Limited Partnership of Majorie's receipt of the partnership interest?

Marjorie: Income: $15,000 ($20,000 FMV of interest - $5,000 cash) Basis in partnership interest: $15,000 income recognized + $5,000 cash contributed + Marjorie's share of partnership liabilities (not given in problem). Eldorado: Capitalizes the $15,000. This amount is a syndication fee and cannot be deducted now nor amortized in the future as an organizational expenditure. The $5,000 cash contribution increases the partnership's assets. Marjorie's capital account includes $15,000 + $5,000, or $20,000. In addition, the partnership would recognize gain or loss on the deemed exchange of property for Marjorie's services, and this gain or loss would be allocated to the other partners. The partnership also would adjust the basis of its assets for the recognized gain or loss.

A and B each contribute $30,000 cash to the ABC Partnership and C contributes land held for more than one year worth $60,000 and subject to a recourse debt of $30,000. A, B and C are all general partners with a one-third interest in the profits and losses of ABC. c) Same as (a) except that the debt is nonrecourse and the partners agree that for purposes of allocating nonrecourse liabilities they each have a one-third interest in profits.

Nonrecourse debt is allocated based on profits, so the answer would be the same as (a) A, B and C increase their outside basis by $10,000 because they share the economic risk of loss. C further decreases his outside basis by $30,000 since the partnership assumes the liability. C: Basis from land: $40,000 Less debt: (20,000) Outside basis: $20,000

A contributes land with a basis $10,000; FMV $30,000 with a $30,000 nonrecourse liability to AB Partnership. How is the $30,000 nonrecourse liability allocated among A and B? Assume A and B are equal partners.

Nonrecourse liab: 30,000 Less basis: (10,000) = Minimum gain 20,000 A: 20,000 + (50% * (30,000-20,000)) = $25,000 B: (50% * (30,000-20,000)) = $5,000

What are the consequences if the partnership owns an appreciated asset?

Nonservice partners will recognize gain/loss equal to the percentage of the ownership that they are giving to service partner. Service partner "contributes" property back to partnership at FMV.

Josie performs accounting services in her capacity as a partner in exchange for a 20% partnership profits interest in JUL Partnership. Josie received the interest on January 20, 2018. What is the effect to Josie if she receives the partnership interest in 2018?

Nontaxable; $0 income; $0 basis.

Guaranteed payments (without regard to pship income) (§ 707(c)): tax treatment

Ordinary income to our partner Partnership will deduct or capitalize

In 2019, the PWJ Partnership reflected the following activity: Sales $100,000 Salaries Paid 30,000 Depreciation 10,000 Supplies and Repairs 3,000 Payroll Taxes Paid 9,000 Contribution to Art Museum 6,000 Short-term capital gain 12,000 Passive income (rental operations) 7,500 Qualifying dividends received 1,500 Exempt income (bond interest) 2,100 What is the partnership's ordinary income?

Ordinary: sales, salaries paid, depreciation, supplies & repairs, payroll taxes paid $100,000 - $30,000 - $10,000 - $3,000 - $9,000 = $48,000 ordinary income

A partner who is not acting in his capacity (§ 707(a)): timing

Our partner's timing/section 267

When does the "service partner" realize the income?

Partner will recognize income when that interest is transferrable and it is also no longer subject to substantial risk of forfeiture.

What is the treatment of the guaranteed payment by the partnership and the partner?

Partner: ordinary income Partnership: capitalize or expense depending on the nature of what was provided

Continue with the JJJ Partnership scenario. For calendar year 2017, Janet receives the $21,000 as provided by the partnership agreement, Julia's guaranteed payment for 2017 is $17,000 and Jetta withdraws $20,000. Before these amounts, the partnership's ordinary income for 2017 is $650,000. Assume partnership's tax year ends on March 31, 2018. When are the guaranteed payments taxable to the partners?

Partners are calendar year taxpayers. Tax year runs 4/1/2017-3/31/2018. Guaranteed payments are picked up on Janet and Julia's 2018 tax returns.

What does § 703(b) provide?

Provides that the partnership will make its own elections.

When is nonpartner status more likely to exist?

Providing services in an independent capacity of a technical nature.

Josie performs accountings services in exchange for a 20% partnership interest in JUL Partnership. The January 31, 2019 value of the 20% interest is $35,000. Assume the January 31, 2022 value of the 20% interest is $50,000. What is the effect to Josie if she receives the partnership interest in 2019 with immediate vesting?

Recognize $35,000 of ordinary income; basis is also $35,000. Holding period: February 1, 2019 (next day)

How does a "service partner" typically realize income when receiving a capital interest?

Recognize ordinary income equal to the FMV of the capital interest. Will ignore the FMV of services.

When is a guaranteed payment deducted by the partnership and included in partner income?

Same timing as our distributed share of income. Include in our partner's year in which the partnership tax year ends. Example: Partnership tax year ends on 4/30/19. Partner includes income from 5/1/18 to 4/30/19 on 2019 return.

Sean is admitted to the calendar year XYZ Partnership on December 1 of the current year in return for his services in managing the partnership's business during the year. The partnership reports ordinary income of $100,000 for the current year without considering this transaction. Assume a nonleap year and that the partners agree to the proration method with a calendar day convention. a. What are the tax consequences to Sean and the calendar year XYZ Partnership if Sean receives a 20% capital and profits interest in the partnership with a $75,000 FMV?

Sean reports $75,000 of ordinary income and has a $75,000 basis in his partnership interest. The partnership deducts $75,000 as compensation, allocating the deduction to the old partners (none to Sean). The partnership (and the remaining partners) also recognize gains and losses as if 20% of each asset had been sold at its FMV to pay for Sean's services. The basis in each asset having a gain (or loss) related to it will be adjusted upward (or downward) by the amount of the gain (or loss) recognized. Also, any gains allocated to the old partners will increase the basis in their partnership interests, and any deduction or losses will decrease their basis. In addition, the $100,000 of current year ordinary income is allocated as follows under the varying interest rule and also will increase the basis in their partnership interests: Old partners: (100% x 335/365 x $100,000) + (80% x 30/365 x $100,000) = $98,356 Sean: 20% x 30/365 x $100,000 = $1,644

In 2019, the PWJ Partnership reflected the following activity: Sales $100,000 Salaries Paid 30,000 Depreciation 10,000 Supplies and Repairs 3,000 Payroll Taxes Paid 9,000 Contribution to Art Museum 6,000 Short-term capital gain 12,000 Passive income (rental operations) 7,500 Qualifying dividends received 1,500 Exempt income (bond interest) 2,100 What are the separately stated items?

Separately stated: contribution to art museum, short-term capital gain, passive income, qualified dividends received, exempt income; will NEVER total these as they go in separate places on the tax return

When is a § 707(a) payment deducted by the partnership and included in partner income?

The latter of when 1) it's currently deductible by partnership according to partnership's method of accounting (paid or accrued) OR 2) under § 267, the day the partner must report the income.

Why will a partnership never have a tax net operating loss?

The loss flows through to the partner.

What does § 703(a) require? Why is this important?

The partnership (NOT the partner) determines the taxable income. The partnership also determines the character of income.

A partner who is not acting in his capacity (§ 707(a)): tax treatment

Treat it as it's paid to a third party Ordinary income to our partner Partnership will deduct or capitalize

George is a 40% partner in The Wendt Partnership, an accrual-basis, calendar-year partnership that manufactures furniture. George is a CPA and prepared Wendt's 2018 tax return in March 2019. On January 31, 2020, George receives $3,000 from Wendt. George is a cash-basis, calendar-year taxpayer. How is the payment treated?

Treated as 707(a)(1). George recognized as ordinary income when it was paid (in 2020). Partnership cannot deduct payment until George recognizes it in 2020. They have to wait until George recognizes it or their accounting method allows the deduction, whichever occurs last.

Sean is admitted to the calendar year XYZ Partnership on December 1 of the current year in return for his services in managing the partnership's business during the year. The partnership reports ordinary income of $100,000 for the current year without considering this transaction. Assume a nonleap year and that the partners agree to the proration method with a calendar day convention. b. What are the tax consequences to Sean and the XYZ Partnership if Sean receives only a 20% profits interest with no determinable FMV?

Under Sol Diamond, 33 AFTR 2d 74-852, 74-1 USTC ¶9306 (7th Cir., 1974), if an ascertainable FMV exists for the interest, such value must be reported as income by Sean and is deductible by the XYZ Partnership. However, if the 20% interest has no ascertainable FMV, neither Sean nor the XYZ Partnership has any current tax consequences except that the $100,000 ordinary income is allocated as in Part a. In addition, under Rev. Proc. 93-27, 1993-2 C.B. 343, the IRS will not treat receipt of a profits interest as a taxable event unless one of the following events occurs: (1) the profits interest relates to a substantially certain and predicable income stream, (2) the partner disposes of the interest within two years of receipt, or (3) the interest is in a publicly traded partnership

A and B each contribute $30,000 cash to the ABC Partnership and C contributes land held for more than one year worth $60,000 and subject to a recourse debt of $30,000. A, B and C are all general partners with a one-third interest in the profits and losses of ABC. d) Same as (b), above except that the debt is nonrecourse and the partners agree that for purposes of allocating nonrecourse liabilities they each have a one-third interest in profits.

What is the minimum gain? FMV $60,000 basis $10,000: built-in gain $50,000; if property sold for loan, then gain would be $30,000 less $10,000 = $20,000 Minimum gain $20,000. The remaining debt of $10,000 will be split between the three. C: Basis from land: $10,000 Less debt: (6,667) Outside basis: 3,333

Janet, Julia and Jetta are equal partners in JJJ Partnership. The partnership and all partners are calendar year taxpayers. Per the partnership agreement, Janet is to manage the partnership and receive a $21,000 distribution from the entity every year, payable in 12 monthly installments. Julia is to receive an amount that is equal to 18% of her capital account as it is imputed by the firm's accountant at the beginning of the year, payable in monthly installments. Jetta is the partnership's advertising specialist. She withdraws approximately 3% of the partnership net income every month. How does the partnership treat the guaranteed payments?

Will deduct the guaranteed payments; distributions are never deducted.

According to Rev. Proc. 93-27, how will the IRS treat the receipt of a profits interest?

Will not be treated as a taxable event.

majority interest required taxable year

a partnership must have the same tax year as that of its majority partners

Partnerships are typically required to use the _______________________ method of accounting. The IRS will allow a qualifying taxpayer with $25 million or less in average annual gross receipts (over a three-year period) use to the _________________ method

accrual; cash

examples of syndication expenses

amounts paid and incurred to promote the sale of (or to sell) an interest in such partnership -brokerage fees -registration fees -legal fess of an underwriter, place management, an issuer for securities advice and for advice pertaining to the adequacy of tax disclosure in the prospectus -accounting fees for preparation of representations to be included in the offering materials -printing costs of the prospectus, placement memorandum, and other selling and promotional material

treatment of organization expenses

can be amortized; up to $5,000 of organizational expenses incurred by be deducted in the taxable year in which the trade or business begins. this $5,000 is reduced by the amount that all organizational expenses exceed $50,000. any additional organizational expenses are amortizable over the 180-month period that begins with the inception of the trade or business.

business purpose tax year

to establish a business purpose for a taxable year, the taxpayer must show one of the following: 1. they have a natural business year 2. they have facts and circumstances that support the use of a business purpose taxable year, or 3. they have a non-tax reason to support a business purpose taxable year, and agree to certain additional terms, conditions, and adjustments that have the effect of neutralizing the tax effects of any resulting substantial distortion of income 25% test: a partnership's natural business year is determined by applying a mechanical 25-percent gross receipts test to each year over the most recent three-year period. To pass the test, gross receipts from sales and services for the last two months of each of the three 12-month periods must exceed 25% of the total gross receipts for each respective 12-month period. facts and circumstances test: the partnership may request approval of a natural business year characterized by a general facts and circumstances analysis. However, the IRS anticipates that approval of a natural business year under this facts and circumstances test will be granted only in rare and unusual circumstances.