1
Chapter 9,
Partnership Formation
and Operation
2
PARTNERSHIP FORMATION
& OPERATION (1 of 2)
?Partnership definitions
?Overview of partnership taxation
?Contributions of Property
?Partnership elections
?Ordinary income/loss vs,separately
stated items
?Partners’ distributive share of items
3
PARTNERSHIP FORMATION
& OPERATION (2 of 2)
?Special allocations
?Partner’s basis in partnership interest
?Special loss limitations
?Guaranteed payments
?Transactions between partner &
partnership
?Family partnerships
4
Partnership Definitions
(1 of 3)
?Tax definition of a partnership
–Syndicate,group,pool,joint venture or
other unincorporated organization that
carries on a business
5
Partnership Definitions
(2 of 3)
?General partnership
–Two or more partners
–All partners are general partners
?May participate in mgmt
?May make committments on behalf of
partnership
?Unlimited liability for partnership debts
6
Partnership Definitions
(3 of 3)
?Limited partnership
–One or more general partners and
–One of more limited partners
?Cannot participate in management
?Cannot make commitments for partnership
?Liability generally limited to amount invested
in partnership
?Electing large partnership (ELP)
–Non-service partnerships w/ ?100 ptrs
7
Overview of Partnership
Taxation
?Partnership profits and losses
?Partner’s Basis
?Partnership distributions
8
Partnership Profits and
Losses (1 of 2)
?Partnership files Form 1065
–Information return with no tax due
?Partners receive a Form K-1
–Reports partner’s share of income or
loss and separately reported items
9
Partnership Profits and
Losses (2 of 2)
?Partners include profit or loss and
separate items on their individual
return Form 1040
?Loss limitation
–Partner’s losses limited to his/her
basis in the partnership
10
Partner’s Basis
?Partner’s basis increased by share
of partnership earnings,additional
contributions,& additional
assumption of partnership debt
?Partner’s basis decreased by
losses,distributions,& reduction in
partnership debt
11
Partnership Distributions
?Payment of money to partner
usually tax-free because earnings
previously taxed
?If distributions exceed the partner’s
basis,gain may be recognized
12
Contributions of Property
?General rule
?Exceptions to nonrecogntion rule
?Contributions of services
?Basis
13
General Rule
?General rule for property contributions
in exchange for partnership interest
–No gain or loss
–§ 721 similar to § 351
14
Exceptions to
Nonrecognition Rule
?Gains recognition at time of property
contribution
–Partnership would be investment
company if it were incorporated
–Contribution followed by a distribution
resulting in a deemed sale
–Liabilities assumed by partnership in
excess of partner’s basis
15
Contributions of Services
?Contribution of services in
exchange for partnership interest
–Income is FMV of services
contributed
16
Basis
?Partner’s basis in partnership equal
to money contributed plus partner’s
basis in contributed property plus
gain recognized on contribution
?Partnership’s basis in property is
partner’s old basis before contribution
–Holding period also carries over
17
Partnership Elections
?Tax year
–Must be same as majority partner or
partners with a 50% or more interest
?Overall accounting method
?Inventory valuation method
?Depreciation method
18
Ordinary Income/Loss vs,
Separately Stated Items
?Separately stated items
–Net S-T capital gains and losses
–Net L-T capital gains and losses
–§ 1231 gains and losses
–Charitable contributions
–Dividends eligible for DRD
–Foreign or possession taxes
?Partnership ordinary income/loss
–All items not separately stated
19
Partners’ Distributive
Share of Items
?Normally determined by terms of
partnership agreement
–Portion of partnership taxable and
nontaxable income partner agreed to
report for tax purposes
–Amount not necessarily same as
actual amounts distributed to partner
in a particular year
20
Special Allocations
?Pre-contribution gains or losses must
be allocated to contributing partner for
contributions
?Allocations not related to contributed
property must have substantial
economic effect
21
Partner’s Basis in
Partnership Interest
?Beginning basis
–Amount paid for interest OR
–Basis of property and/or services
contributed
?Additions to basis
–Additional contributions,earnings or
assumption of liabilities
–Reductions result from withdrawals,
losses or transfer of liabilities
22
Special Loss Limitations
?Limitations on loss recognition
–Partner’s basis in partnership interest
–Portion of partner’s basis not,at risk”
–Designation of partnership interest as
a,passive activity”
23
Transactions Between
Partner & Partnership
?Loss sales
–No loss deducted on sale of property
between a partnership and a 50%
owner (direct or indirect)
?Gain sales
–Gains on sale of property involving a
50% owner produce ordinary income
unless property will be a capital asset
in hands of new owner
24
Guaranteed Payments
?Always ordinary income to recipient
?Deductible by the partnership from
ordinary income
?Losses due to guaranteed payments
allocated among partners
25
Family Partnerships
(1 of 2)
?Interest must be a capital interest
–Partner has right to receive assets if
partnership liquidates immediately
?Capital must be a material income
producing factor
?Family member must be true owner
26
Family Partnerships
(2 of 2)
?Donor-donee allocations of income
–Donor must be allocated reasonable
compensation for services rendered
to partnership
–Remaining partnership income must
be allocated based on relative capital
interest
27
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
Chapter 9,
Partnership Formation
and Operation
2
PARTNERSHIP FORMATION
& OPERATION (1 of 2)
?Partnership definitions
?Overview of partnership taxation
?Contributions of Property
?Partnership elections
?Ordinary income/loss vs,separately
stated items
?Partners’ distributive share of items
3
PARTNERSHIP FORMATION
& OPERATION (2 of 2)
?Special allocations
?Partner’s basis in partnership interest
?Special loss limitations
?Guaranteed payments
?Transactions between partner &
partnership
?Family partnerships
4
Partnership Definitions
(1 of 3)
?Tax definition of a partnership
–Syndicate,group,pool,joint venture or
other unincorporated organization that
carries on a business
5
Partnership Definitions
(2 of 3)
?General partnership
–Two or more partners
–All partners are general partners
?May participate in mgmt
?May make committments on behalf of
partnership
?Unlimited liability for partnership debts
6
Partnership Definitions
(3 of 3)
?Limited partnership
–One or more general partners and
–One of more limited partners
?Cannot participate in management
?Cannot make commitments for partnership
?Liability generally limited to amount invested
in partnership
?Electing large partnership (ELP)
–Non-service partnerships w/ ?100 ptrs
7
Overview of Partnership
Taxation
?Partnership profits and losses
?Partner’s Basis
?Partnership distributions
8
Partnership Profits and
Losses (1 of 2)
?Partnership files Form 1065
–Information return with no tax due
?Partners receive a Form K-1
–Reports partner’s share of income or
loss and separately reported items
9
Partnership Profits and
Losses (2 of 2)
?Partners include profit or loss and
separate items on their individual
return Form 1040
?Loss limitation
–Partner’s losses limited to his/her
basis in the partnership
10
Partner’s Basis
?Partner’s basis increased by share
of partnership earnings,additional
contributions,& additional
assumption of partnership debt
?Partner’s basis decreased by
losses,distributions,& reduction in
partnership debt
11
Partnership Distributions
?Payment of money to partner
usually tax-free because earnings
previously taxed
?If distributions exceed the partner’s
basis,gain may be recognized
12
Contributions of Property
?General rule
?Exceptions to nonrecogntion rule
?Contributions of services
?Basis
13
General Rule
?General rule for property contributions
in exchange for partnership interest
–No gain or loss
–§ 721 similar to § 351
14
Exceptions to
Nonrecognition Rule
?Gains recognition at time of property
contribution
–Partnership would be investment
company if it were incorporated
–Contribution followed by a distribution
resulting in a deemed sale
–Liabilities assumed by partnership in
excess of partner’s basis
15
Contributions of Services
?Contribution of services in
exchange for partnership interest
–Income is FMV of services
contributed
16
Basis
?Partner’s basis in partnership equal
to money contributed plus partner’s
basis in contributed property plus
gain recognized on contribution
?Partnership’s basis in property is
partner’s old basis before contribution
–Holding period also carries over
17
Partnership Elections
?Tax year
–Must be same as majority partner or
partners with a 50% or more interest
?Overall accounting method
?Inventory valuation method
?Depreciation method
18
Ordinary Income/Loss vs,
Separately Stated Items
?Separately stated items
–Net S-T capital gains and losses
–Net L-T capital gains and losses
–§ 1231 gains and losses
–Charitable contributions
–Dividends eligible for DRD
–Foreign or possession taxes
?Partnership ordinary income/loss
–All items not separately stated
19
Partners’ Distributive
Share of Items
?Normally determined by terms of
partnership agreement
–Portion of partnership taxable and
nontaxable income partner agreed to
report for tax purposes
–Amount not necessarily same as
actual amounts distributed to partner
in a particular year
20
Special Allocations
?Pre-contribution gains or losses must
be allocated to contributing partner for
contributions
?Allocations not related to contributed
property must have substantial
economic effect
21
Partner’s Basis in
Partnership Interest
?Beginning basis
–Amount paid for interest OR
–Basis of property and/or services
contributed
?Additions to basis
–Additional contributions,earnings or
assumption of liabilities
–Reductions result from withdrawals,
losses or transfer of liabilities
22
Special Loss Limitations
?Limitations on loss recognition
–Partner’s basis in partnership interest
–Portion of partner’s basis not,at risk”
–Designation of partnership interest as
a,passive activity”
23
Transactions Between
Partner & Partnership
?Loss sales
–No loss deducted on sale of property
between a partnership and a 50%
owner (direct or indirect)
?Gain sales
–Gains on sale of property involving a
50% owner produce ordinary income
unless property will be a capital asset
in hands of new owner
24
Guaranteed Payments
?Always ordinary income to recipient
?Deductible by the partnership from
ordinary income
?Losses due to guaranteed payments
allocated among partners
25
Family Partnerships
(1 of 2)
?Interest must be a capital interest
–Partner has right to receive assets if
partnership liquidates immediately
?Capital must be a material income
producing factor
?Family member must be true owner
26
Family Partnerships
(2 of 2)
?Donor-donee allocations of income
–Donor must be allocated reasonable
compensation for services rendered
to partnership
–Remaining partnership income must
be allocated based on relative capital
interest
27
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
