What are the different types of interest that can be obtained in a partnership?
General interest: a percentage of ownership in the partnership that has value and can be sold
Profit interest: a right to share in future profits, but is not ownership in the partnership and has no current value at time awarded
Capital interest: A right to receive a share of capital in the partnership if it liquidates. The value at time awarded is equal to the current liquidation value (FMV).
An individual provides services to a partnership. In exchange for the services the partnership awards him 20% profit interest. How is this interest taxed to the individual at time of award?
There is no current value to a profit interest and therefore nothing to tax.
An individual provides services to a partnership. In exchange for the services the partnership awards him 20% capital interest. How is this interest taxed to the individual at time of award?
The current value is 20% of the liquidation value (FMV) of the partnership’s assets and is taxed as ordinary income to the individual receiving the interest.
An individual donates property in exchange for a partnership interest. How is this donation taxed to the (1) partnership, and (2) the donator. What is the holding period of partnership interest for the new partner?
Neither is taxed, it is considered a tax-free exchange, EXCEPT
If the property has a liability and the liability is more than the FMV of the property, the excess liability assumed by the other partners is considered boot to the donator and taxed as a taxable gain to the new partner
Holding Period: If the property donated is a capital or Section 1231 asset, the holding period of the partnership interest includes the holding period of the asset. For all other assets (such as donated inventory), the holding period begins on the date of donation.
What is the initial basis for a partnership interest acquired by the following contributions: (1) cash, (2) property (3) liabilities of a partner assumed by the partnership
(1) Cash: amount contributed
(2) Property: the adjusted basis
(3) Liability: Any liability assumed by the other partners reduces that partner’s basis in the partnership
NOTE: If a liability assumed by the partnership reduces that partner’s basis to less than $0, the excess is treated as boot with taxable gain to the partner. REMEMBER TO REDUCE THE BASIS ONLY BY THE AMOUNT ASSUMED BY THE OTHER PARTNERS. Example; 3 partners; 1 donates a building with excess mortgage, only 2/3 of that mortgage is assumed by the other partners (1/3 is still the responsibility of the donating partner); reduce the buildings basis by 2/3 of the mortgage assumed to determine boot.
What is the initial basis for a partnership interest acquired by the following contributions: (1) services, (2) liabilities of a partnership assumed by a partner, (3) loan made by partner to the partnership, (4) loan guaranteed by a partner
(1) Services: the fair market value. If a capital interest is awarded rather than a general partnership interest, the value is treated as taxable income to the new partner; else, this is a tax-free exchange
(2) Liabilities: the amount of the loan assumed becomes the partner’s basis
(3) Loan: the amount of the loan becomes the partner’s basis
(4) Guarantee: the amount of the loan guarantee becomes the partner’s basis
Mike & Mark admit Tim as a 1/3 partner. Tim contributes a building with $100,000 basis, $500,000 FMV, and $225,000 mortgage. What is Tim’s partnership basis, and is there any taxable boot to Tim? What happens when this property is sold?
$100,000 rollover basis
(150,000) mortgage assumed by the other 2 partners (2/3 of $225,000)
(50,000) boot recognized and taxable gain to Tim
50,000 recognized gain by Tim
$ 0 basis of partner Tim’s interest
WHEN SOLD: There is a built-in gain of $400,000 ($500,000 FMV - $100,000 basis) that will be specifically allocated to Tim.
What events subsequent to formation will increase / (decrease) a partner’s basis in the partnership?
INCREASE
The partner donates more property
Assumes a liability from the partnership
Receives a pro rata share of the partnership’s income OR increase in partnership liabilities
DECREASE
Withdrawals from the partnership
Pro rata share of losses OR a decrease in partnership liabilities
A property is contributed where the FMV is more than the adjusted basis on the date of contribution. What occurs if the property is later sold for a gain?
The “built-in” gain is specifically attributed to the contributing partner
The gain developed after contribution is attributed to the partners on a pro rata basis
A property is contributed where the FMV is less than the adjusted basis on the date of contribution. What occurs if the property is later sold for a loss?
The “built-in” loss is specifically attributed to the contributing partner
The loss (or gain) developed after contribution is attributed to the partners on a pro rata basis
What is the partnership’s basis and holding period for contributed property?
Basis: The adjusted basis at the time of contribution plus any gain recognized by the contributing partner
Holding Period: Depreciable property (capital or Section 1231 asset) includes the contributing partner’s holding period. All other contributed property (including inventory) is the date of contribution.
Define “outside basis” and “inside basis”.
Outside Basis: The basis the partner has in the ownership interest in the partnership.
Inside Basis: The basis the partnership itself has in the assets it owns. This includes contributed property, and property the partnership has purchased for itself.
True / False: A building is donated to a partnership with a mortgage also assumed by the partnership. The mortgage reduces the partnership’s inside basis in the building.
FALSE
The basis is the adjusted basis when received. This is not reduced by assumed liabilities.
True / False: Net income of a partnership increases the partnerships Inside Basis.
False
What is the formula for determining the partner’s basis (outside basis)?
Beginning basis account (cash, FMV of services provided, NBV of assets)
Add pro rata of all income (ordinary, capital, tax-free)
Less pro rate of all losses
Less withdrawals
Add % liabilities (your share of liabilities assumed by the partnership)
Year-end Outside Basis
For which of the following entities does an addition to liabilities increase a shareholder’s basis? (1) S-Corp, (2) Partnership
(2) Partnership
True / False: A partner is liable for the taxes due on his distributive share of partnership income, regardless of whether the distribution is actually made.
True
When is a partnership tax return due for filing for a calendar year-end?
March 15
What are the 3 reasons that terminate a partnership?
(1) Operations cease
(2) There are fewer than 2 partners (it becomes a sole proprietorship)
(3) 50% or more of the total partnership interest in both capital and profits is sold or exchanged within any 12-month period (technical termination).
A partnership experiences a technical termination, but did not intend to terminate. How can the partnership re-establish itself.
The old partnership must deem a distribution to the remaining partners, and any new purchaser AND
A hypothetical recontribution of assets is made to a “new” partnership.
The distribution and recontribution are performed using NBV and thus are NON-TAXABLE EVENTS
This tends to occur when a single partner owns 50% or more of the partnership interest and sells this interest to a new person.
What is the difference between the capital account and the partner's outside basis?
The outside basis includes the partner's share of liabilities
The capital account does not.
(In reality the capital acct uses FMV of assets, but according to Becker they are using the partner's basis, not the real capital acct).