Partnership Tax

Partnership Liquidating Distribution: Gain or Loss Recognition

-A partner recognizes gain only if any money distributed exceeds the partner's predistribution basis in his or her partnership interest. Distributed money includes money deemed distributed to the partner from a liability reduction or the FMV of marketable securities treated as money -the partner recognizes no loss if the distribution includes any property other than money, unrealized receivables, and inventory -Partner CAN recognize a loss from a liquidating distribution, but only if (1) the liquidating distribution consists of money (including money deemed distributed), unrealized receivables, and inventory, but no other property and (2) the partner's basis in the partnership interest exceeds the total basis of these distributed properties (including cash) -The amount of the loss is the difference between the partner's basis in the partnership interest before the distribution and the sum of money plus the bases of the receivables and inventory (to the partnership immediately before the distribution) that the partner receives. (money received + liability reduction+ FMV securities + basis of receivables and inventory - Partner's outside basis)

Effects of Distribution on the Partnership

-A partnership generally recognizes no gain or loss on liquidating distributions made to its partners. If a Sec. 751 deemed sale occurs, however, the partnership may recognize gain or loss on assets deemed sold to its partner. Although a liquidating distribution normally does not itself terminate the partnership, the partnership terminates if none of the remaining partners continue to operate the business of the partnership in a partnership form. In this case, all partners will receive liquidating distributions

Sec 702 (separately stated items)

-Net ST CG, Net LTCG, Net Sec 1231 Gains/Losses, Unrecaptured 1250 gains, Sec 179 expense, Charitable contributions, dividend and interest income, taxes paid or accrued to a foreign country, tax exempt interest, investment income and expenses, -any item that would produce an income tax liability treating separately is different than the tax liability treating it as partnership ordinary income Sec 702(b) -character of each separately stated item is determined at the partnership level, and then flows through to each partner

Partnership Entity

-Not a taxpaying entity, a flow-through entity -partners report own share of tax items on their individual return -corporate partners pay a 21% rate on partnership income -unincorporated entity

Sec 721(a) Exceptions (three)

Three exceptions to Sec 721(a) may require the partner to recognize gain upon contribution of property in exchange for a partnership interest: 1)(Sec 721(b)) Contribution of property to a partnership that would be treated as an investment company if it were incorporated --> recognize gain, not loss 2)Contribution of property followed by a distribution in an arrangement the may be considered a sale (disguised sale) --> recognize gain or loss 3)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 his or her basis in the partnership -->recognize gain, not loss

Sec 752

-752(a): Each partner's basis is increased by his or her share of the partnership's liabilities as if he or she had contributed cash to the partnership in the amount of his or her share of partnership liabilities. -752(b): The partner whose personal liabilities are assumed by the partnership has a reduction in the basis of his or her partnership interest as if the partnership distributed cash to him or her in the amount of the assumed liability.

Contribution of property with little or no basis

-AR or Notes Receivable of a partner using the cash method -beginning basis of partnership interest is zero

Partnership Ordinary Income Or Loss

-Gross profit, admin expenses, salary expense, Sec 1245 recapture (not eligible for preferential treatment)

Capital interest

-Usually, the percentage of the entity's net assets that a partner would receive on liquidation (on the day the partner receives the partnership interest) -if the partner would receive proceeds from the sale of the partnership's assets or receive the assets themselves, the partner is considered to own a capital interest

If a partner's predistribution basis plus Sec. 737 gain recognized exceeds the sum of his or her money distribution plus the carryover basis for any receivables and inventory

-a carryover basis is allocated to the other property received. If the partner has an insufficient basis in the partnership interest to provide a carryover basis for all the distributed property, the remaining basis for the partnership interest is allocated to the other property first to any decrease in FMV below basis and then based on the relative bases of such property in the partnership's hands just as was calculated above

Unrealized Receivables (Sec 724)

-any right to payment for goods or services the holder has not included in income because of the accounting method used -cash basis taxpayer's AR -any gain or loss recognized on the partnership's disposition or collection of receivables is treated as ordinary income or loss (regardless of how long partnership holds the receivables)

Section 705

-mandates a basis increase for additional contributions made by the partner to the partnership plus the partner's distributive share of the following: 1)partnership taxable income (separately stated and ordinary) 2)tax exempt income of the partnership -mandates a basis decrease by distributions from the partnership to the partner plus the partner's distributive share of the following: 1)partnership losses (separately stated and ordinary) 2)expenditures that are not deductible for tax purposes and that are not capital expenditures

Partnership Agreement

-may indicate profits and loss interest (together or separate) -first total partnership taxable income to determine net profit or loss, then apply the percentage

Section 707(b)(1)

-no loss can be deducted on the sale or exchange of property between a partnership and person who directly/indirectly owns more than 50% of the partnership's capital or profits interests -losses are disallowed on sales or exchanges of property between two partnerships in which the same persons own, directly or indirectly, more than 50% capital or profits interest -if the seller is disallowed a loss, the purchaser can reduce any subsequent gain realized on a sale of property by the previously disallowed loss

Suppose a partnership has had a Dec 31 year-end for many years. All of its partners are individuals with calendar tax year-ends. Using Sec. 444, what tax year-ends are available for ABC?

-only dec 31 -existing deferral period is zero months

Org Expenditures (Sec 709)

-partnership can elect to deduct the first $5,000 of these expenditures in the tax year it begins business -Must reduce the $5,000 by the amount org expenditures exceed 50,000 -amortize remaining org expenditures over 180 month period -partnership is deemed to have made Sec 709 election -can forgo and elect to capitalize expenditures for the tax year it begins business

Partnership Gain or Loss (Exchanging interest in the partnership for services)

-partnership must recognize the gain or loss existing in the proportionate share of its assets deemed to be transferred to the service partner -because partnership recognizes, it must adjust the bases of the assets -% interest * (FMV total assets - basis total assets) = recognized gain or loss on assets deemed paid to partner -character of each asset determines character of gain or loss recognized -recognized gain is allocated to all partners other than Maria -partnership's original basis in its assets is increased by the recognized gain

NOLs

-partnership never has an NOL carryover (unlike corporations) -NOL losses are allocated to partners on their individual tax returns

Partnership's Basis in Property (Sec 723)

-partnership's basis for contributed property is the same as the property's basis in the hands of the contributing partner -if the partner recognizes gain (investment partnership), the gain also increases the partnership's basis of the contributed property

Partner's Distributive Share (Sec 704(b))

-partnership's distributive share normally is determined by the terms of the partnership agreement or partner's overall interest in the partnership taking into account all facts and circumstances

Sec 469 Passive Activity Limits

-passive activity losses cannot offset or portfolio income -passive losses carry over to future years and can offset passive income -passive losses are allowed in full when a taxpayer disposes of the entire interest in the passive activity -passive rental activity (active participant) - max 25,000 deduction (phases out 50% AGI over 100,000) -losses disallowed under phase-out are deductible to the extent of passive income -losses from most limited partnership interests can be used only to offset passive income even if the partner has sufficient Sec 704(d) and at-risk basis

Section 707(c)

-permits a partnership to make guaranteed payments for capital and services to a partner that are separate from the partner's distributive share -guaranteed payments are not eligible for ABI

Section 444 Election

-permits a partnership to use a year-end that results in a deferral of the lesser of the current deferral period or three months -deferral period is the time from the beginning of the partnership's fiscal year to the close of the first required tax year ending within such year (usually Dec 31) -election is available to both new partnerships or existing partnership changing tax years

Section 724

-prevents the transformation of ordinary income into capital gains (or capital losses into ordinary losses) when a partner contributes property into a partnership -unrealized receivables, inventory, capital loss property in the hands of the contributing partner (retains character)

Capital Loss Property (Sec 724)

-property that would generate a capital loss if sold by the contributing partner rather than contributed to the partnership -the loss recognized by the partnership on the disposition of the property within five years of its contribution is a capital loss -amount of loss characterized as capital may not exceed the capital loss the contributing partner would have recognized had the partner sold the property on the contribution date -character of any loss exceeding FMV - adjusted basis on the contribution date is determined by the property's character in the hands of the partnership

Section 707(b)(2)

-requires that the gain recognized on the sale of a capital asset between a partnership and a related partner to be ordinary if the property will not be a capital asset to its new owner -applies to transfers between a partnership and a person who owns directly or indirectly more than 50% capital and profits interest or two partnership in which the same partners own directly or indirectly more than 50% capital or profits interest -prevents related parties from increasing the depreciable basis of assets (and reducing future ordinary income) at the cost of recognizing only a capital gain

Partner's Basis in Partnership interest (Outside Basis)

Tax basis for the partner's partnership interest

Are partnership nonliquidating distributions taxable?

The distributions are nontaxable to the extent of the partner's outside basis, then capital gain for the excess. Partner may recognize a loss if he or she receives cash, inventory, unrealized receivables in complete liquidation of the partner's partnership interest.

Why are partnership current distributions nontaxable?

The distributions represent a receipt of earnings that have already been taxed to the partners and that have increased the partners' basis in their partnership interests. (Basically return of capital to the extent of the partner's outside basis)

Nonliquidating Distributions Under Sec 751:

-A current distribution receives treatment under Sec. 751 only if the partnership has Sec. 751 assets and exchange of Sec. 751 property for non-Sec. 751 property occurs -Similarly, a distribution that is proportionate to all partners or (1) consists of only the partner's share of either Sec. 751 property or non-Sec. 751 property and (2) does not reduce the partner's interest in other property is not affected by the Sec. 751 rules -However, any portion of the distribution that represents an exchange of Sec. 751 property for non-Sec. 751 property must be isolated and is not treated as a distribution at all. Instead, it is treated as a sale between the partnership and the partner, and any gain or loss realized on the sale transaction is fully recognized. The character of the recognized gain or loss depends on the character of the property deemed sold. For the party deemed the seller of the Sec. 751 assets, the gain or loss is ordinary income or loss

Partnership Tax Year Election (Section 706)

-Determines when each partner reports his/her share of partnership income or loss -Sec 706(a) each partner's tax return includes his/her share of partnership income, gain, loss, deduction, or credit items for any taxable year of the partnership ending within or with the partner's tax year

Section 721

-Governs the formation of a partnership General Rules: 721(a) neither the partnership nor any partner recognizes gain or loss when partners contribute property in exchange for a partnership interest -gain or loss realized, but not recognized -The partner's basis for his/her partnership interest and the partnership's basis for the property transferred is both the same as the basis of the property transferred (substituted/exchange basis).

Inventory (Sec 724)

-If property was inventory to the contributing partner , the character remains ordinary for five years (disposition) -ordinary gain or loss treatment occurs even if the property is a capital asset or Sec 1231 asset in the partnership's hands

Should a partner contribute a loss asset?

-If the partner contributes the asset to the partnership, the partner cannot recognize the loss until the partnership disposes of the property. -If the partnership can afford, the partner can sell the asset to the partnership and contribute the proceeds (cash) to the partnership in exchange for the partnership interest (recognize loss right away) -If the asset is not useful to the partnership, the partner can sell the asset to a third party and contribute the proceeds to the partnership in exchange for a partnership interest (recognize loss right away)

Liability Exception to Sec 721(a)

-The third condition that may cause a partner to recognize gain (but not loss) on the formation of a partnership is the contribution of property to a partnership along with the partnership's assumption of liabilities previously owed by the partner. -The transferor partner is deemed first to have made a contribution of property plus a contribution of cash equal to the partner's share of any partnership liabilities existing prior to his or her entrance into the partnership (or contributed by other partners concurrently with this transaction). The partner then is deemed to have received a cash distribution equal to the total amount of his or her own liability assumed by the other partners.

Partnership Nonliquidating Distributions: Sec 731 Recognition of Gain

-Under Sec 731, partners who receive distributions recognize a gain if they receive money distributions that exceed their basis in the partnership -For distribution purposes, money includes cash, deemed cash from reductions in a partner's share of liabilities, and the fair market value (FMV) of marketable securities

Non-recourse loan

-a loan where the borrower is not personally liable on loan deficiency in a foreclosure. -the lender has no recourse against the borrower for additional amounts

Other partnership elections

-accounting method, inventory method, depreciation method

Allocating Expense Deduction (contribution of services)

-allocate among partners other than the service partner -partnership can deduct expense when the service providing partner includes payment in this year's gross income

Recourse Loans

-borrower remains liable until the loan is paid off -any partner or related party will bear an economic loss if the partnership cannot pay the debt

Contribution of an asset with Debt

-debt assumption by the partnership -debt relief by the partners often results in a deemed cash distribution to the partner (100% debt relief - debt partner assumption) -net debt relief -then reduce basis by the net debt relief (deemed cash distr), and if there is not enough basis, recognize the excess

Sec 706(d)(1) Varying Interest Rule

-if during any taxable year of the partnership there is a change in any partner's interest in the partnership, each partner's distributive share of any item of income, gain, loss, deduction, or credit of the partnership for such taxable year shall be determined by: 1) closing method 2)proration method (# days/365 days)

Guaranteed Minimum

-if the distributive share is less than the guaranteed minimum, the guaranteed payment is (guaranteed minimum - distributive share) -no guaranteed payment occurs under this arrangement unless the partner's distributive share is less than his or her guaranteed minimum

General Partners vs Limited Partners

Limited Partners: -not liable to pay partnership debts beyond the original contribution and any additional amount the partner has pledged to contribute -recourse debt increases a limited partner's basis only to the extent the partner has a risk of economic loss -non-recourse debt General Partners: -share of nonrecourse liability is determine by profit ratio -share all recourse liabilities beyond any amounts limited partners can claim according to their economic loss potential

Outside Basis (Effect of Liabilities)

Partner's Basis before changes in liabilities + Increases in share of partnership liabilities - Decreases in share of partnership liabilities + partnership liabilities assumed by this partner - partner's liabilities assumed by the partnership = partner's basis in the partnership interest

Hypothetical Liquidation Analysis (More than one general partner) 9-30

Partnership has 900,000 assets and each partner's capital account is 100,000, 300,000 non-recourse liability, 400,000 recourse liability -partnership hypothetical loss: 600,000 (300-900) Economic Risk Of Loss: Anna: Beg basis 100,000 - (600,000*.75) = (350,000) Clay: Beg basis 100,000 - (600,000*.25) = (50,000) Year-End Basis: Anna: Beg Basis 100,000 Recourse share: 350,000 Non-recourse: 180,000 Ending Basis: 630,000 Clay: Beg Basis 100,000 Recourse share: 50,000 (risk of economic loss) Non-recourse share: 120,000 (profit %) Ending basis: 270,000

Beginning Basis

Purchase interest --> cost basis (including assumption of partnership liabilities) inherits interest --> FMV at date of death, or alternate valuation Receive interest as gift --> equal's donor basis plus portion of gift tax paid by donor relating to appreciation of the gift property

Nonliquidating Distribution Sec 751 Treatment

STEP 1: DIVIDE THE ASSETS INTO SEC. 751 ASSETS AND NON-SEC. 751 ASSETS. -test inventory for substantial appreciation to know whether it is a Sec 751 asset for distribution purposes STEP 2: DEVELOP A SCHEDULE TO DETERMINE WHETHER THE PARTNER EXCHANGED SEC. 751 ASSETS FOR NON-SEC. 751 ASSETS OR VICE VERSA STEP 3: ANALYZE COLUMN 5 TO DETERMINE WHETHER SEC. 751 ASSETS WERE EXCHANGED FOR NON-SEC. 751 ASSET STEP 4: DETERMINE THE GAIN OR LOSS ON THE SEC. 751 DEEMED SALE STEP 5: DETERMINE THE IMPACT OF THE CURRENT DISTRIBUTION

Sec 737 Triggered Recognition Ex C10-3

Several years ago, Sergio contributed land, a capital asset, with a $20,000 FMV and a $15,000 basis to the STU Partnership in exchange for a 30% general interest in the partnership. The partnership still holds the land on January 31 of the current year, and none of the $5,000 precontribution gain has been recognized. On January 31 of the current year, Sergio has a $40,000 basis in his partnership interest when he receives an $8,000 cash distribution plus property purchased by the partnership with a $45,000 FMV and a $30,000 basis. -Under the Sec. 731 distribution rules Sergio recognizes no gain because the cash distribution ($8,000) does not exceed Sergio's pre-distribution basis in his partnership interest ($40,000). -However, under Sec. 737 he recognizes gain equal to the lesser of the $5,000 remaining precontribution gain or the $13,000 difference between the FMV of the property distributed ($45,000) and the basis of the partnership interest after the cash distribution but before any property distributions ($32,000 = $40,000 adjusted basis - $8,000 cash distributed). Thus, Sergio recognizes a $5,000 capital gain. (Land --> capital asset) -The partnership's basis in the land is increased to $20,000

Hypothetical Liquidation Analysis (Recourse/Non-recourse liabilities) C9-29

Anna (General): Loss-75%, Profit-60%, 100,000 basis Clay (limited): Loss- 25%, Profit-40%, 100,000 basis, additional obligation 5,000 contribution Partnership has two liabilities year-end: 300,000 non-recourse, 400,000 recourse Anna (recourse) - 395,000 Clay (recourse) - 5,000 Anna (non-recourse)-180,000 Clay(non-recourse)-120,000 Year end basis: Anna: 675,000, Clay: 225,000

Holding period for partnership interest

Capital asset/Sec 1231 property --> includes transferor's holding period (tacked) Ordinary income asset --> day after contribution date

Effect of Distributions on the Partner's Basis

-In general, the partner's basis for property distributed by the partnership carries over from the partnership. The partner's basis in the partnership interest is reduced by the amount of money received and by the partner's basis in the distributed property -The total bases of all distributed property in the partner's hands is limited to the partner's predistribution basis in his or her partnership interest plus any gain recognized on the distribution under Sec. 737 -If the partner's predistribution basis plus Sec. 737 gain is less than the sum of the money received plus the carryover basis of any noncash property received, the order in which the basis is allocated becomes crucial. First cash and deemed cash distributions reduce the partner's outside basis, then the remaining basis is allocated to provide a carryover of the partnership's basis for receivables and inventory

Capitalizing the service

-Partner recognizes ordinary income for the interest payment -partnership must capitalize the amount as part of the asset's cost and depreciate the amount over the cost recovery period

Section 706 Restriction

-Partnership must use the same tax year as one or more majority partners who have an aggregate interest in partnership profits and capital exceeding 50% (rule must be used only if these majority partners have a common tax year and have had this tax year for shorter of 3 previous year or partnership's period of existence -Otherwise, partnership must use the tax year of all its principal partners (owns 5% or more interest) -Otherwise, the partnership must use the tax year that allows the least aggregate deferral (each partner's ownership percentage * (# months from partnership year end to partner year end, then totalled) -Otherwise, if the partnership has a business purose for using some tax year other than the year under the rules, IRS must approve. (acceptable bus purpose: end at natural business year, or end of peak season)

Sec 1223(2) Partnership Holding Period

-Partnership's holding period for its contributed assets includes the holding period of the contributing partner (regardless of character of the property)

Contribution of Property after Formation

-Partnerships have must easier chance of nonrecognition on contribution to existing partnerships -Much harder to satisfy nonrecognition with corporations because of the 80% control requirement

Consequences to Partnership (Contribution of services)

-Payments by the partnership for services are deductible or capitalized, depending on the nature

Example Capital Loss Property (Sec 724) -Pam holds investment land purchased 6 years ago for $50,000. FMV was $40,000 2 years ago when she contributed it to the partnership, in the business of selling lots. PK holds land and sells it in the current year for $28,000 or at a $22,000 loss.

-The $10,000 loss that accrued while Pam held the land as a Capital asset retains its character as a capital loss, the remaining $12,000 of loss accrued is part of the partnership's inventory is an ordinary loss

Holding Period in Distributed Assets

-The distributee partner's holding period for any assets received in a liquidating distribution includes the partnership's holding period for such property -If the partnership received the property as a contribution from a partner, the partnership's holding period also may include the period of time the contributing partner held the property prior to making the contribution Character of gain or loss in subsequent disposition 1) If the partnership distributes property that is an unrealized receivable in its hands, the distributee partner recognizes ordinary income or loss on a subsequent sale of that property. This ordinary income or loss treatment occurs without regard to the character of the property in the distributee partner's hands or the length of time the partner holds the property before its disposition. 2) If the partnership distributes property that is inventory in its hands, the distributee partner recognizes ordinary income or loss on a subsequent sale that occurs within five years of the distribution date. The inventory rule mandates the ordinary income or loss result only for the five-year period beginning on the distribution date. After five years, the character of the gain or loss recognized on the sale of such property is determined by its character in the hands of the distributee partner

Special Allocations: Substantial Economic Effect (Substantiality)

-The economic effect must be substantial, which requires that a reasonable possibility exists that the allocation will substantially affect the dollar amounts to be received by the partners independent of tax consequences -allocations that involve shifting of tax benefits not allowed shifting occurs when two conditions are present: 1)the net change in the partner's capital accounts will be the same for a normal allocation and the special allocation 2) the total tax liability of the partners will be less with the special allocation that with normal allocation

Section 1245 and 1250 Property Rules

-The partner incurs no depreciation recapture unless the partner recognizes gain upon contributing the property in exchange for a partnership interest. -Adjusted basis and depreciation recapture potential carry over to the partnership -If the partnership later sells the property at a gain, Sec 1245 and 1250 affect the character of the gain -Unrecaptured 1250 gain is taxed to individuals at a 25% capital gains rate (possible additional 3.8% net investment income tax)

Partner's Holding Period and Character of Distributed Property

-The partner's holding period for property distributed as a current distribution includes the partnership's holding period for such property -If the partnership distributes property that is an unrealized receivable in its hands, the distributee partner recognizes ordinary income or loss on a subsequent sale of that property -If the partnership distributes property that is inventory in its hands, the distributee partner recognizes ordinary income or loss on a subsequent sale that occurs within five years of the distribution date. After five years, the character of the gain or loss recognized on the sale of such property is determined by its character in the hands of the distributee partner

How to allocate predistribution basis if Partner outside basis cannot take a full carryover basis in receivables and inventory (ex C10-7)

-if the outside basis cannot take a full carryover of the receivables and inventory, the partner's remaining basis is allocated among the receivables and inventory items based on both the partnership's basis in the assets and their FMV First, each asset is given its basis to the partnership. Then, the difference between the carryover basis from the partnership and the partner's basis in the partnership interest is calculated. A decrease must be allocated if the partner's basis in the partnership interest (after any money distribution) is less than the carryover basis from the partnership. The decrease is first allocated to any asset that has declined in value in an amount equal to the smaller of the decline in value for the asset or the asset's share of the decrease. If the decrease is not fully used at this point in the calculation, the remaining decrease is allocated to the assets based on their relative adjusted bases at this point in the calculation

Advantages over Corporations

-immediate tax savings because losses are allocated among partners (offsetting partners' income) -partners may be eligible for QBI deduction

When looking at a partnership that makes a current or nonliquidating distribution

-is this really a distribution? (Sec 707) 50% ownership sale to the partnership or guaranteed payment -is this a disguised sale -take partner's capital account down for the cash received -is there debt along with the asset (net debt assumption or deemed cash contribution) outside basis increases for the net debt assumption -Check if any portion of the distribution counts for Sec 751 treatment -Check is Sec 704(c) is triggered -remember to reduce partner's predistribution basis by amount of money received (cash + deemed cash + Securities) and then increase by Sec 737 gain recognition (if any) before allocated basis to other assets (ordering is important) -holding period is always tacked from partnership -character varies based on the property distributed

Section 704(d)

-limits a partner's loss deduction to the amount of his or her basis in the partnership interest (outside basis) before the loss -all positive basis adjustments for the year and all reduction for distributions must be made before determining the amount of the deductible loss -partner can deduct the disallowed portion the following year if the partner regains sufficient basis in the partnership interest (capital contributions, partnership borrowing, partnership earnings)

Special Allocations: Sec 704(c)

-pre-contribution gain/loss allocated to the contributing partner when the partnership disposes of property

The point of Section 705

-preserves the tax treatment of the items for the partner (prevents double taxation, preserves nondeductible expenses)

Section 707(b)

-restricts sales of property between the partner and partnership by disallowing certain losses and converting certain capital gains into ordinary income -without this restriction, a controlling partner could sell prop to partnership to recognize a loss for tax purposes while retaining substantial interest in the property through ownership of a partnership interest

Contribution of Services to Partnership

-results in ordinary income recognition (compensated) -partner may receive both capital and profits interest or just a profits interest in exchange for services -receipt of a capital interest in a partnership in exchange for services is taxable (FMV interest - any cash/property contributed) -to the extent the profits interest has a value, the value is taxed when the partner receives the profits interest, as any other property received for services would be taxed

profits interest

-right or obligation to receive a share of future profits or future losses

At-Risk loss limitation

-same amount as the regular partnership basis with the exception that liabilities increase the at-risk basis only if the partner is at risk for such amount (usually non-recourse liabilities cannot be included in any partner's at-risk basis) EXCEPTION -at-risk rules do not apply to non-recourse debt if it is qualified real estate financing

Partnership Liquidating Distribution: Basis in Assets Received

-the basis in unrealized receivables and inventory is generally the same as the property's basis in the partnership's hands -Occasionally, however, the partner's basis in his or her partnership interest is so small that after making the necessary reduction for money (and deemed money) distributions, the basis in the partnership interest is smaller than the partnership's bases for the unrealized receivables and inventory distributed. In such cases, the remaining basis in the partnership interest must be allocated among the unrealized receivables and inventory items based first on their decline in value and then on their relative bases as adjusted to reflect the decline in value -if the partner does not recognize a loss, all the remaining basis in the partnership interest must be allocated to the other property received regardless of that property's basis to the partnership or its FMV -If the partnership distributes two or more assets other than unrealized receivables or inventory in the same distribution, the remaining basis in the partnership interest is allocated among them based on both their relative FMVs and bases in the partnership's hands. Such an allocation process can lead to either a decrease or increase in the total basis of these assets. This potential for increasing the assets' bases is unique to liquidating distributions. if the amount to be allocated is greater than the carryover bases of the distributed assets, the basis is first allocated among the distributed assets in an amount equal to their carryover basis from the partnership. Then, allocations are made based on relative appreciation of the assets up to the amount of appreciation, and further allocations are made to the assets based on their relative FMVs.

Hypothetical Liquidation Analysis (More than one general partner)

-the hypothetical loss computation assumes the partnership sells all its assets (including cash) for the amount of non-recourse liabilities. -If the partnership does not have non-recourse li-abilities, the assets are deemed sold for zero dollars. -The hypothetical loss then is subtracted from the partners' capital accounts to determine the economic risk of loss

Guaranteed Payments Tax Impact

-treated like salary or interest income (ordinary income to the recipient) -must be included in income for the recipient partner's tax year during which the partnership year ends and the partnership deducts or capitalizes payments

Nonliquidating Distributions With Sec 751: Sec 751 Assets

-unrealized receivables: certain rights to payments to be received by a partnership to the extent they are not already included in income under the partnership's accounting methods. (AR cash method partnership, potential 1245 or 1250 recapture) -inventory: includes three major types of property 1) Items held for sale in the normal course of partnership business 2) Any other property that, if sold by the partnership, would not be considered a capital asset or Sec. 1231 property 3) Any other property held by the partnership that, if held by the selling or distributee partner, would be property of the two types listed above -For purposes of calculating the impact of Sec. 751 on distributions, inventory is considered a Sec. 751 asset only if the inventory (inventory + unrealized receivables) is substantially appreciated (FMV exceeds 120% adjusted basis to the partnership)

Why is outside basis important?

1) Determine gain or loss on the sale of the partner's partnership interest 2)Determine the amount of partnership losses a partner can deduct 3)Determine the amount of distributions that are nontaxable to the partner

Only time Partner recognizes gain or loss in a liquidating distribution

1) when the money received exceeds the partner's basis in his or her partnership interest, causing the partner to recognize a gain 2) when money, unrealized receivables, and inventory are the only assets distributed and the partner recognizes a loss

Partnership Nonliquidating Distribution- Sec 704(c): Precontribution Gain Recognition

11-a distribution also may trigger recognition of previously unrecognized precontribution gain or loss Two Events: 1) if a partner contributes property with a precontribution gain or loss, the contributing partner must recognize the precontribution gain or loss when the partnership distributes the property to any other partner within seven years of the contribution -The partnership's basis in the property immediately before the distribution and the contributing partner's basis in his or her partnership interest are both increased by any gain recognized or decreased by any loss recognized 2) Second, under Sec. 737, property distributions to a partner may cause the partner to recognize his or her remaining precontribution gain if the partner receives a distribution of property other than money from a partnership -The gain recognized under Sec. 737 is the lesser of 1) the remaining precontribution net gain or 2) the excess of the FMV of the distributed property over the adjusted basis of the partnership interest immediately before the property distribution (but after reduction for any money distributed at the same time) -The remaining precontribution gain --> the net of all precontribution gains and losses for property contributed to the partnership in the seven years immediately preceding the distribution to the extent that such precontribution gains and losses have not already been recognized -The character of the recognized gain is determined by referencing the type of property that had precontribution gains or losses -If a partner recognizes gain under Sec. 737, that gain increases the partner's basis in his or her partnership interest. Further, the recognized gain also increases the partnership's basis in the property that was the source of the precontribution gain.

Special Allocations: Substantial Economic Effect (Economic Effect)

Allocation has economic effect if it meets all three of the conditions: 1) allocation results in the appropriate increase or decrease in the partner's capital account 2) the proceeds of any liquidation occurring at any time in the partnership's life cycle are distributed in accordance with positive capital account balances 3)partners must make up negative balances in their capital accounts upon the liquidation of the partnership, and these contributions are used to pay partnership debts or are allocated to partners having positive account balances

Excess business loss (C9-36)

Carl is single and is a one-third partner in the CDE Partnership, which engages in active businesses. In the current year, the partnership incurs a $900,000 ordinary loss, $300,000 of which is Carl's share. Carl also receives $500,000 of salary from his consulting business. Carl's excess business loss is $41,000 ($300,000 - $259,000 threshold). Thus, he can offset $259,000 of the partnership pass-through loss against his salary, but the remaining $41,000 carries over as an NOL to his next taxable year.

Passive loss limit example: C9-35

Chris purchases a 20% capital and profits interest in the CJ Partnership in the current year, but he does not participate in CJ's business. Chris owns no other passive investments. His Sec. 704(d) basis in CJ is $80,000, and his at-risk basis is $70,000. Chris's distributive share of the CJ Partnership's loss for the current year is $60,000. -Results: Chris's Sec. 704(d) basis is $20,000 ($80,000 - $60,000), and his at-risk basis is $10,000 ($70,000 - $60,000). -However, Chris cannot deduct any of the CJ loss in the current year because it is a passive activity loss. The $60,000 loss, however, can be used in a subsequent year if the partner generates passive income. Because the $60,000 loss already has reduced basis for purposes of both Sec. 704(d) and the at-risk rules, the disallowed loss need not be tested against those rules a second time.

Limit on Excess Business Loss

Excess business loss: excess of: 1) the aggregate deductions for the year attributable to trades and businesses over 2) the sum of aggregate gross income or gain attributable to such trade/business plus 259,000 -