1
Chapter 10,
Special Partnership
Issues
2
SPECIAL PARTNERSHIP
ISSUES (1 of 2)
?Nonliquidating distributions
?§ 751 assets
?Liquidating distributions
?Sale of partnership interest
?Retirement or death of a partner
?Termination of a partnership
3
SPECIAL PARTNERSHIP
ISSUES (2 of 2)
?Optional basis adjustments
?Special forms of partnerships
?Electing large partnerships
4
Nonliquidating
Distributions
?General rules
?Precontribution gain
?Basis effects of distributions
?Holding period and character of
distributed property
5
General Rules
?No gain or loss by either partner or
partnership
?“Money” distributions in excess of
partner’s basis triggers capital gain
recognition by partner
?“Money” includes cash,reduction of
partner’s liabilities,FMV of securities
6
Precontribution Gain
?Precontribution gain definition
–Contributed property w/FMV > tax basis
on date transferred to partnership
?Gain recognized by contributing
partner w/in seven years if
–Distribution of contributed property to
any OTHER partner
–Distributions w/ FMV > partner’s basis
7
Basis Effects of Distributions
?General rule
–Partnership’s basis in distributed
property carries over to partner
?Partner’s basis in partnership
reduced by
–Money received and
–Basis of other property received
8
Holding Period and Character
of Distributed Property
?Partner’s holding period includes
partnership’s holding period
?Character of gain/loss when
property sold
–Generally same as for partnership
–Ordinary income/loss treatment for
?Unrealized receivables
?Inventory sold w/in 5 years of distribution
? After,character determined at partner level
9
§ 751 Assets
?§ 751 assets
–Property likely to produce ordinary
income when sold or collected
?Unrealized receivables
?Substantially appreciated inventory
?Significance of § 751
10
Unrealized Receivables
?Unrealized receivables include
–Accounts receivable for cash basis
partnership
–Ordinary income recapture items
?§§ 1245 or 1250 (depreciation)
?§§ 617(d) (mining properties)
?§§ 1252 (farmland)
?§§ 1254 (oil,gas and geothermal)
11
Substantially Appreciated
Inventory (1 of 2)
?Substantially appreciated inventory
includes all assets EXCEPT
–Cash
–Capital assets
–§ 1231 assets
12
Substantially Appreciated
Inventory (2 of 2)
?Appreciation test
–Exclude cash,§ 1231 & capital
assets
–Total basis of remaining assets
–Multiply sum by 1.20
–Compare product w/FMV of assets
–If FMV larger,appreciation exists
13
Significance of § 751
?If § 751 assets exist,certain
distributions reclassified as a SALE
between partnership & partner
?What appears to be a tax-free
distribution could be a taxable event
?See Example C10-12 and Table
C10-1
14
Liquidating Distributions
?Gain or loss recognition by partner
?Basis of assets received
?Holding period carries over to partner
?§ 751 applies to liquidating
distributions
?Effects of distribution on partnership
–No gain or loss unless § 751 deemed
sale occurs
15
Gain or Loss Recognition by
Partner (1 of 2)
?Gain recognized if money received
(and deemed received) exceeds
partner’s basis in partnership
16
Gain or Loss Recognition by
Partner (2 of 2)
?Loss recognized if
–Only money,unrealized receivables &
inventory are only assets received AND
–Basis in partnership > sum of money
plus partnership’s basis in unrealized
receivables and inventory received
17
Basis of Assets Received
(1 of 2)
?Basis of unrealized receivables and
inventory same as for partnership
–Never increased when distributed from
partnership partner
?After reducing partner’s basis for
money received,if remaining basis <
carryover basis of inventory &
receivables,carryover basis reduced
18
Basis of Assets Received
(2 of 2)
?After reducing partner’s basis for
money received,if remaining basis <
carryover basis of inventory &
receivables,carryover basis reduced
?Any basis remaining after reduction
for money,receivables and inventory
is allocated to other property
19
Sale of Partnership Interest
?General rule
–Capital gain or loss recognized
?§ 751 property
–All inventory and unrealized receivables
are considered § 751 property
–Hypothetical asset sale approach used
by Treasury Regs,Under § 751 to
determine ordinary income or loss
20
Retirement or Death of a
Partner
?Sale of partnership interest to
outside party is a,sale”
?Surrender of interest to partnership
–Payments for property taxed as
liquidating distributions
–Other payments treated as either
guaranteed payment (ordinary income)
or distributive share (retain character)
21
Termination of a
Partnership
?Tax code & state laws treat
terminations differently
?Termination events
–No business operated as a partnership
–Sale or exchange of ? 50% interest
–A partner completely liquidates,the
partnership tax year closes for that
partner
22
Optional Basis
Adjustments (1 of 2)
?New partner’s outside basis
–Purchase price plus new partner’s
share of partnership liabilities
?New partner’s inside basis likely
different than outside basis
23
Optional Basis
Adjustments (2 of 2)
?§ 754 adjustment allows
partnership to adjust basis of
partnership assets for new
partner’s share of partnership
assets
–Basis adjustment belongs only to new
partner
24
Special Forms of
Partnerships
?Tax shelters and limited partnerships
?Publicly traded partnerships
?Limited Liability Companies (LLC)
?Limited Liability Partnerships (LLP)
25
Electing Large
Partnerships
?ELP Qualifications
?ELP taxable income
?ELP,Termination of partnership
?ELP,Audit rules
26
ELP Qualifications
?Non-service partnership
?Not engaged in commodity trading
?Have at least 100 partners
?File an election to be taxed as a
large partnership
27
ELP Taxable Income
?Misc,itemized deductions combined
& subject to a 70% deduction at
partner level
?Charitable contributions combined
and not separately stated by partners
?§ 179 deductions combined
28
ELP,Termination of
Partnership
?Termination occurs only upon
cessation of any business,financial
operation or venture
?Termination does not occur upon
transfer of 50% ownership
29
ELP,Audit Rules
?Partners must report all items in same
manner as partnership
?Audit findings & agreements reached
at partnership level binding on all
partners
?Audit decisions binding on partners
who own interest in year of decision,
not year of contested transaction
30
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
Chapter 10,
Special Partnership
Issues
2
SPECIAL PARTNERSHIP
ISSUES (1 of 2)
?Nonliquidating distributions
?§ 751 assets
?Liquidating distributions
?Sale of partnership interest
?Retirement or death of a partner
?Termination of a partnership
3
SPECIAL PARTNERSHIP
ISSUES (2 of 2)
?Optional basis adjustments
?Special forms of partnerships
?Electing large partnerships
4
Nonliquidating
Distributions
?General rules
?Precontribution gain
?Basis effects of distributions
?Holding period and character of
distributed property
5
General Rules
?No gain or loss by either partner or
partnership
?“Money” distributions in excess of
partner’s basis triggers capital gain
recognition by partner
?“Money” includes cash,reduction of
partner’s liabilities,FMV of securities
6
Precontribution Gain
?Precontribution gain definition
–Contributed property w/FMV > tax basis
on date transferred to partnership
?Gain recognized by contributing
partner w/in seven years if
–Distribution of contributed property to
any OTHER partner
–Distributions w/ FMV > partner’s basis
7
Basis Effects of Distributions
?General rule
–Partnership’s basis in distributed
property carries over to partner
?Partner’s basis in partnership
reduced by
–Money received and
–Basis of other property received
8
Holding Period and Character
of Distributed Property
?Partner’s holding period includes
partnership’s holding period
?Character of gain/loss when
property sold
–Generally same as for partnership
–Ordinary income/loss treatment for
?Unrealized receivables
?Inventory sold w/in 5 years of distribution
? After,character determined at partner level
9
§ 751 Assets
?§ 751 assets
–Property likely to produce ordinary
income when sold or collected
?Unrealized receivables
?Substantially appreciated inventory
?Significance of § 751
10
Unrealized Receivables
?Unrealized receivables include
–Accounts receivable for cash basis
partnership
–Ordinary income recapture items
?§§ 1245 or 1250 (depreciation)
?§§ 617(d) (mining properties)
?§§ 1252 (farmland)
?§§ 1254 (oil,gas and geothermal)
11
Substantially Appreciated
Inventory (1 of 2)
?Substantially appreciated inventory
includes all assets EXCEPT
–Cash
–Capital assets
–§ 1231 assets
12
Substantially Appreciated
Inventory (2 of 2)
?Appreciation test
–Exclude cash,§ 1231 & capital
assets
–Total basis of remaining assets
–Multiply sum by 1.20
–Compare product w/FMV of assets
–If FMV larger,appreciation exists
13
Significance of § 751
?If § 751 assets exist,certain
distributions reclassified as a SALE
between partnership & partner
?What appears to be a tax-free
distribution could be a taxable event
?See Example C10-12 and Table
C10-1
14
Liquidating Distributions
?Gain or loss recognition by partner
?Basis of assets received
?Holding period carries over to partner
?§ 751 applies to liquidating
distributions
?Effects of distribution on partnership
–No gain or loss unless § 751 deemed
sale occurs
15
Gain or Loss Recognition by
Partner (1 of 2)
?Gain recognized if money received
(and deemed received) exceeds
partner’s basis in partnership
16
Gain or Loss Recognition by
Partner (2 of 2)
?Loss recognized if
–Only money,unrealized receivables &
inventory are only assets received AND
–Basis in partnership > sum of money
plus partnership’s basis in unrealized
receivables and inventory received
17
Basis of Assets Received
(1 of 2)
?Basis of unrealized receivables and
inventory same as for partnership
–Never increased when distributed from
partnership partner
?After reducing partner’s basis for
money received,if remaining basis <
carryover basis of inventory &
receivables,carryover basis reduced
18
Basis of Assets Received
(2 of 2)
?After reducing partner’s basis for
money received,if remaining basis <
carryover basis of inventory &
receivables,carryover basis reduced
?Any basis remaining after reduction
for money,receivables and inventory
is allocated to other property
19
Sale of Partnership Interest
?General rule
–Capital gain or loss recognized
?§ 751 property
–All inventory and unrealized receivables
are considered § 751 property
–Hypothetical asset sale approach used
by Treasury Regs,Under § 751 to
determine ordinary income or loss
20
Retirement or Death of a
Partner
?Sale of partnership interest to
outside party is a,sale”
?Surrender of interest to partnership
–Payments for property taxed as
liquidating distributions
–Other payments treated as either
guaranteed payment (ordinary income)
or distributive share (retain character)
21
Termination of a
Partnership
?Tax code & state laws treat
terminations differently
?Termination events
–No business operated as a partnership
–Sale or exchange of ? 50% interest
–A partner completely liquidates,the
partnership tax year closes for that
partner
22
Optional Basis
Adjustments (1 of 2)
?New partner’s outside basis
–Purchase price plus new partner’s
share of partnership liabilities
?New partner’s inside basis likely
different than outside basis
23
Optional Basis
Adjustments (2 of 2)
?§ 754 adjustment allows
partnership to adjust basis of
partnership assets for new
partner’s share of partnership
assets
–Basis adjustment belongs only to new
partner
24
Special Forms of
Partnerships
?Tax shelters and limited partnerships
?Publicly traded partnerships
?Limited Liability Companies (LLC)
?Limited Liability Partnerships (LLP)
25
Electing Large
Partnerships
?ELP Qualifications
?ELP taxable income
?ELP,Termination of partnership
?ELP,Audit rules
26
ELP Qualifications
?Non-service partnership
?Not engaged in commodity trading
?Have at least 100 partners
?File an election to be taxed as a
large partnership
27
ELP Taxable Income
?Misc,itemized deductions combined
& subject to a 70% deduction at
partner level
?Charitable contributions combined
and not separately stated by partners
?§ 179 deductions combined
28
ELP,Termination of
Partnership
?Termination occurs only upon
cessation of any business,financial
operation or venture
?Termination does not occur upon
transfer of 50% ownership
29
ELP,Audit Rules
?Partners must report all items in same
manner as partnership
?Audit findings & agreements reached
at partnership level binding on all
partners
?Audit decisions binding on partners
who own interest in year of decision,
not year of contested transaction
30
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
