Module 2

Section 752(a)

-the assumption by the partnership of a partner's debt is treated as a distribution of cash by the partnership to the partner -the assumption by a partner of partnership liabilities is treated as a contribution of cash by the partner to the partnership -net change in debt must be accounted for in calculation of the basis

Section 723

-the partnership's basis for contributed property is the same as the property's basis in the hands of the contributing partner -if the contributing partner recognizes a gain because the partnership is an investment company, it will increase the partner's basis -if due to the assumption of a liability, it will not increase basis

service partner income recognition amount

FMV of partnership interest, always focus on what's received

Section 1231 asset

a depreciable asset or real property used in a trade or business held for more than a year

notes regarding allocation of recourse liabilities

a hypothetical liquidation is used to determine economic risk of loss, this is because of partnerships with limited partners

what is a partnership interest like?

a share in a corporation

timing of income recognition

depends on transaction, partner is not required to recognize income until the interest is vested

partnership's treatment, expense if

expense if you would expense it to an unrelated third party, depends on services

contribution of property to a partnership that would be treated as an investment company if it were incorporated

gain recognition only required if the exchange results in diversification of the transferor's property interest

Section 1223(1) (PARTNER EFFECT)

if a partner contributed a 1231 or 1221 capital asset, the holding period would carry over, if not, the holding period will begin the day after contribution

contribution of property followed by a distribution in an arrangement that may be considered a sale rather than a contribution

if the distribution doesn't occur right with the contribution, the transaction is treated as a sale if the later distribution is not dependent on the normal business risk of the enterprise

notes regarding the allocation of nonrecourse liabilities

if 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 profit %

an interest is vested if:

it is transferable (you can sell it to someone), not subject to substantial risk (high probability) at forfeiture, typically tied to performance

why would is be wise to make an 83(b) election

it's shelters the appreciation from ordinary income tax rates

assets equals

liabilities plus capital accounts

Section 721(a)

no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership

legal liability of nonrecourse liabilities

no partner one person related to the partner bears the economic risk of loss for that liability

service partner income recognition amount for profits interest

not considered a taxable event per Rev. Proc 93-27

How long do you have to file an 83(b)

only have 30 days to file this election from the date of receipt of the interest, no extensions

service partner income character

ordinary income = outside basis before liabilities, holding period begins day after receipt of interest

partnership amount to expense/capitalize

ordinary income amount and FMV of partnership interest, use the timing of the partner

inside basis refers to

our partnership's basis in partnership ASSETS

what do exclusions mean?

permanent

consequences if the partnership owns appreciated assets

recognize fain on sale of underlying assets

Section 704(b) capital account

recorded at book value, tax rules are used for income, used if you make special allocation

profits interest

right to future profits, no value

capital interest

right to net assets at liquidation, has value

How are recourse liabilities allocated?

the hypothetical ending balances in the partner's capital accounts after allocating the hypothetical loss, based on economic risk of loss

why would it be a bad idea to make an 83(b) election

the interest could get forfeited, because now, no basis can be deducted

Section 722

the partner's basis and property that was contributed to the partnership will be equal to the basis in the partnership interest

outside basis refers to

the partner's basis in partnership interest, cash plus carryover basis of contributed property, gains on contributions increase basis, beginning basis includes partner's share of partnership liabilities

depreciation methods

the partnership will use the same method and life as the contributing partner, the partner incurs no depreciation recapture unless they recognize fain upon contributing property in exchange for a partnership interest

Section 1223(2) (PARTNERSHIP EFFECTS)

the partnership's holding period for its contributed assets includes the holding period of the contributing partner -the character of the asset doesn't apply

outside basis is decreased by

the share of partnership expenses, losses, or nondeductible noncapitalized expenses

outside basis is increased by

their share of both taxable and tax-exempt income passed through from the partnership

Section 705(a)

this alternative rule consists of determining a partner's basis by reference to the adjusted basis of their pro rata share

tax capital account

tracks contributions and distributions at tax basis, use tax rules for income, it's basically the outside basis without liabilities

capital accounts

used to track a partner's equity, they're unique to partnerships and do not contain retained earnings, income is closed out each year to the partner's capital accounts

GAAP capital account

uses GAAP principles, contributions and distributions at book value (at contribution recorded at market value), use GAAP rules for income, only used if maintaining financials according to GAAP

Impact on partner if liabilities reduce outside basis below zero

you cannot have a negative outside basis, distribution don't normally trigger gains unless they are cash distributions, so if the cash distributions exceed outside basis, there will be a recognized gain for the partner, this would end up as a capital gain

recognition of gain or loss (three exceptions to general rule)

-contribution of property to a partnership that would be treated as an investment company if it were incorporated -contribution of property followed by a distribution in an arrangement that may be considered a sale rather than a contribution -contribution of property to a partnership along with the partnership's assumption of the partner's liabilities if, as a result, the partner's share of partnership liabilities exceeds their basis (section 752)

contribution of property to a partnership along with the partnership's assumption of the partner's liabilities if, as a result, the partner's share of partnership liabilities exceeds their basis (section 752)

-each partner's basis is increased by their share of liabilities as if they contributed cash in the amount of their share -the partner whose personal liabilities are assumed by the partnership has a reduction in the basis of their interest as if the partnership distributed cash to them in the amount of the assumed liability -cash distributions first reduce the basis and if this exceeds the predistribution basis, the partner will recognize a gain

nonrecognition of a gain or loss

-partner's basis for their partnership interest recognize no gain or loss on the contribution of property -limited to transaction in which a partner receives a partnership interest in exchange for a contribution of property

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

to be considered a taxable event, a profits interest must meet each of the following three conditions (Rev. Proc 93-27)

1. the profits interests does not have a substantially certain and predictable stream of income 2. the partnership interest must be held for two years 3. the profits interest cannot be a limited partnership interest in a PTP

special rule for section 721 (721b)

721(a) won't apply to gains realized on transfers of property to a partnership which would be treated as an investment company if the partnership were incorporated

legal liability of recourse liabilities

all general partners are personally liable, however, a general partner has a right of recovery against the other general partners to the extent they're required to pay more than their share of any liability

how are nonrecourse liabilities allocated to partners?

allocated based on profit percentage

what does section 83(b) permit?

allows a taxpayer to recognize the income when the interest is received prior to vesting, recognizes income using today's value, this is a binding election

what is a realized gain?

amount realized - tax basis

what is a recognized gain?

amount that is actually included on your tax return

Section 752(b)

any decrease in a partner's share of the liabilities of a partnership, or any decrease in a partner's individual liabilities by a reason of the assumption by the partnership of the individual liabilities, shall be considered as a distribution of money to the partner by the partnership

property does not include:

any services, this would end up as a taxable transaction

partnership's treatment, capitalize and depreciate/amortize if

based on section 263, depends on services

Section 1221 asset

capital asset held for investment or for personal use

what does property include?

cash, tangible property, intangible property

partnership treats the transfer to the service partner as

compensation for services