Tax Chapter 10 Study Cards

How is partnership basis adjusted?

Initial Basis +Partner's share of the partnership: (Partnership debt increase or debt assumed from partnership. Taxable income items. Exempt income items. Depletion adjustment) -Distributions and withdrawals from partnership -Partner's share of partnership: (Partnership debt decreases or debt transferred to partnership. Nondeductible expenses. Deductions and losses)

What is the advantage of an LLC?

It combines the corporate benefit of limited liability with benefits of partnership taxation. Can elect to either be taxed as a partnership or as a corporation

What is the partner's initial basis in a partnership interest equal to?

It equals the basis of the contributed assets IF there is no transfer of debt to the partnership and the partnership has no debt. This basis is adjusted for partnership liabilities. The outside basis is DECREASED by the amount of the liabilities transferred to the partnership and the INCREASED by the partners share of partnership liabilities at the time of a contribution and afterwards.

Partnership income (loss) does what in regards to the partners basis in the partnership interest?

It increases and (decreases) the partner's basis in their partnership interest.

Is the partner's capital account also equal to it's outside basis? Why or why not?

It is often NOT equal to the partner's outside basis in a partnership interest. This is because the contribution (distribution) of assets to or from a partnership is reflected in the partners capital account at the FMV of the assets, less the liabilities transferred to the partnership. While they are reflected in outside basis at the contributiing partners basis in the assets less liabilities transferred.

How is an increase in a partner's share of liabilities treated? What is it's effect on the partner's outside basis?

It is treated as a cash CONTRIBUTION to the partnership and INCREASES the partner's outside basis.

How is a decrease in a partner's share of liabilities treated? What is it's effect on the partner's outside basis?

It is treated as a cash DISTRIBUTION to the partner and DECREASES the partner's outside basis.

The portion treated as a sale under a disguised sale is dealt with in what manner?

It is treated as a recognized gain.

What does an inside basis refer to?

It refers to the partnership's adjusted basis in each asset that it owns. Each partner owns a share of the partnership's inside basis for all its assets

What does an outside basis refer to?

It represents each partner's basis in the partnership interest All partners must maintain a record of their respective outside bases

What happens when one receives a future profits interest with no liquidation value in exchange for assets/services?

It will generally not result in any immediate taxable income and will have an initial outside basis of zero.

Can a partner's basis in the partnership interest ever be negative?

No it cannot. Any allocated partnership deductions and losses that exceed the partners outside basis are not currently deductible by the partnership, but are SUSPENDED until future activity results in a positive outside basis.

What is nonrecourse debt and how is it allocated?

No partner is personally liable for this kind of debt. Nonrecourse debt is allocated under a three-tiered approach (not discussed in detail in this couse). When assets and nonrecourse debt is transferred to a partnership, it will first be allocated to the contributing partner to the extent of that such debt exceeds the basis of the contributed asset. Any remaining nonrecourse debt is generally allocated based on the partners profit sharing ratios.

Is there a control requirement for the contributions of assets to form a partnership?

No there is not. Additionally, there is also no gain or loss recognized by a partner or partnership on the contribution of money or property to the partnership in echange SOLELY for a partnership interest.

What are the three conditions that must be satisfied under the substantial economic effect test?

1) The allocation must be reflected in the partner's capital account 2) If a partner's interest in the partnership would be liquidated, the partner must receive assets with fair market value equal to the positive balance in their capital account 3) If a partner's interest in the partnership would be liquidated, the partner with a negative capital account balance must restore that account upon liquidation (contribute cash to partnership to eliminate negative balance)

Partnership allocations must also have what effect?

A "substantial" effect. In general, an allocation does not meet the "substantial" test unless it has economic consequences in addition to tax consequences

What are the loss limitations for a partner's share of partnership losses? What happens to any loss amount that is not currently deductible?

A partner can deduct their share of the partnership losses in computing their taxable income - only to the extent of the partner's positive outside basis in their partnership interest. Any amount that is not currently deductible is SUSPENDED and can be carried forward and deducted in future years if and when a positive basis amount arises.

What category does most partnership debt fall under?

Since most partnerships are now structured as limited liability companies, most debt will fall under the category of nonrecourse debt.

What are syndication costs? How are they treated?

Syndication costs are expenditures incurred for marketing and promoting the partnership to potential investors. These costs are NOT deductible by the partnership. This is the same as the treatment of stock issuance costs for a corporation

What is the capital interest account for partnership ownership? When assets are contributed to the partnership, at what value are they recorded?

The capital account indicates the amount that each partner would receive if the partnership was liquidated. Any assets contributed to the partnership are measured at FMV in this account.

When can the cash method of accounting not be adopted by the partnership?

The cash method cannot be adopted if the partnership: Has one or more C corporation partners unless the partnership meets the $5 million or less gross receipts test. The gross receipts test is met if the average annual gross receipts of the partnership for the prior three tax years does not exceed $5,000,000

What happens if the contributed property is disposed of at a loss by the partnership and the property had a "built-in" capital loss on the contribution date?

The loss will be treated as a capital loss if disposed by the partnership within 5 years of the contribution date, irrespective of the use of the assets by the partnership. The capital loss characterization is limited to the amount of the "built-in" loss on the date of the contribution.

What happens if a partner transfers a liability to a partnership?

The partner's outside basis is first DECREASED by the full amount of the liability and then INCREASED by the partners allocated share of such liability. The partners capital account is reduced by liabilities transferred to the partnership by the partner but is not further adjusted.

How are "guarenteed payments" i.e. payments from the partnership to the partner - treated by the partnership?

The partnership claims an ordinary deduction for guarenteed payments in computing taxable income

What happens when depreciable property and intangible assets are contributed?

The partnership continues the same cost recovery and amortization calculations that the partner underwent

What is recourse debt and how is it allocated?

The partnership or at least one partner is personally liable for the debt. Recourse debt is allocated using a "constructive liquidation" approach - which means it is allocated based on the partners that would be liable for the debt.

What is the holding period for partnership assets?

The partnership's holding period includes the prior holding period of the contributing partner

What does "check the box" regulation allow for partnerships to elect to do?

To elect to be treated as a limited liability company

(T/F) A partner in a partnership generally cannot be considered an employee of the partnership for tax purposes.

True

Is gain recognized by partnerships upon the distribution of property and other non-cash distribution? Does it result in taxable income?

When a partnership distributes property and other non-cash items, no gain is recognized and no taxable income is created.

Receipt of a vested partnership capital interest in exchange for services rendered to the partnership is...

taxable to the partner as compensation income, which is equal to the FMV of the services provided. The initial outside basis is equal to the value of the services provided. Partnership may claim a deduction is the services are of a deductible nature, otherwise this amount is capitalized.

Adjustments for partnership liabilities are treated as what?

Cash distributions or cash contributions

When will the gain on the disposition of certain contributed assets be treated as ordinary income irrespective whether the partnership held the assets as capital assets?

If the contributed assets are: - Unrealized receivables - property that was inventory in the contributor's hands, that is disposed of by the partnership IMPORTANT within 5 years of the contribution date

What is the holding period for the partner's interest in partnership?

If the partner contributes capital assets or section 1231 assets, the holding period of the partnership interest includes the holding period of the assets contributed (doesn't change) For other ordinary assets (including cash) the holding period begins with the date the partnership interest is acquired. If multiple assets are contributed, the partnership interest is apportioned and seperate holding periods will apply to each portion

How are partners liable for debts in a Limited Partnership?

In this kind of partnership there is a general partner and one or more limited partners. Only the general partner(s) are personally liable to creditors for partnership debts The limited partners' loss is limited to equity investment in the partnership

How is outside basis increased? What is outside basis adjusted for?

Outside basis is increased by the contributions of assets to the partnership and is measured by the partner's initial basis in the assets (not the FMV) A partner's outside basis is adjusted for income and losses that flow through from partnership - ensures that partnership income is only taxed once.

How is the treatment of partnership liabilities different between a partners outside basis and their capital account?

Partnership liabilities ARE included in the partners outside basis Partnership liabilities ARE NOT included in the partners capital account

What are the two categories for the allocation of partnership liabilities?

There is: Recourse debt Nonrecourse debt Both have different rules for allocation

How are partners liable for debts in a general partnership?

They are jointly and sperately liable for partnership debts. Creditors can collect from both partnership assets and partners' personal assets

What is a disguised sale?

This occurs when a partner contributes assets at or around a time when the partnership distributes cash or other assets to a partner. Treated similiar to the receipt of boot. The contribution is treated as a partial contribution and a partial sale based on the relative fair market values received. The portion treated as a sale results in a RECOGNIZED GAIN

Is the partnership interest received for services provided to the partnership recognized?

Yes, just as it is with corporations