Special Partnership Issues

1
Chapter 10

• Special Partnership Issues

2
Nonliquidating Distributions

• Normally, no gain or loss by either the partner
  or the partnership
• Money distributions in excess of the partners
  basis triggers capital gain recognition by the
  partner ..731(a)(1)
• Money includes cash, reduction of partners
  liabilities, FMV of securities distributed after
  December 8, 1994
• OR

3
Precontribution Gain

• Contributed property had a FMV greater than the
  tax basis at the date of transfer
• Gain must be recognized by the contributing
  partner if either of the following occurs within
  seven years of the contribution
• (1) Distribution of the contributed property to
  any OTHER partner .. 704(c)(1)(B)
• (2) Distributions of property to the contributing
  partner having a FMV greater than the partners
  basis in the partnership.. 737(a)(1)

4
Precontribution Gain

• Amount of Gain - Distribution to OTHER Partner
• Gain or loss is recognized by the contributing
  partner as would have been recognized if the
  property had been sold
• Amount of Gain - Distribution to Contributing
  Partner is the lesser of
• the remaining precontribution net gain
• excess net precontribution gains and losses of
  all property contributed to the partnership by
  the partner that has not been previously
  recognized
• the excess of the FMV of the distributed property
  over the adjusted basis of the partnership
  interest before the distribution (after reduction
  for any cash distribution)

5
Distributions Effects on Basis

• Partnerships basis in distributed property
  carries over to the partner
• limited to predistribution partership basis
• Partners partnership basis is
• reduced by 1)the amount of money received and
  2)
  basis of other property received, and
• increased by any gain recognized under 737

6
Sec. 751 Assets

• Assets covered by this section include
• unrealized receivables and
• substantially appreciated inventory.

7
Sec. 751 Assets

• Unrealized receivables include
• accounts receivables for a cash basis partnership
• ordinary income recapture items under
• Sec. 1245 or 1250 (depreciation)
• Sec. 617(d) (mining properties)
• Sec. 1252 (farmland)
• Sec. 1254 (oil, gas and geothermal)

8
Sec. 751 Assets

• Substantially appreciated inventory includes all
  assets EXCEPT
• cash
• capital assets
• Sec. 1231 assets .

9
Appreciation Test

• Exclude cash, Sec. 1231 and capital assets.
• Total the basis of the remaining assets.
• Multiply the sum by 1.20.
• Compare the product with the FMV of the assets.
• If the FMV is larger, appreciation exists.

10
The Significance of Sec. 751

• If Sec. 751 assets exist, certain distributions
  may be reclassified as a SALE between the
  partnership and the partner.
• What you thought would be a tax-free distribution
  has just become a taxable event.
• See Example C10-12 (page 10-10)

11
Liquidating Distributions

• Three situations are possible.
• Money plus the basis of other property 1) equals
  the partners basis, 2) exceeds the basis or 3)
  is less than the basis.
• The money reduces the partners basis and the
  remaining basis is allocated to the other assets,
  usually with NO gain or loss.

12
Liquidating Distributions

• If the money alone is greater than the partners
  basis, gain must be recognized.
• If money, unrealized receivables and inventory
  are the ONLY assets distributed, and if the
  partner has any basis remaining after the
  reduction for the money, a loss must be
  recognized.

13
Liquidating Distributions

• Under no condition is the basis of unrealized
  receivables and inventory to be increased when
  distributed from the partnership to the partner.
• After reducing the partners basis for the money
  received, if the remaining basis is less than the
  carryover basis of the inventory and receivables,
  the carryover basis is reduced.

14
Liquidating distribution Example

• Bill's basis in partnership interest 30,000
• Proportionate liquidating distributions
  (partnership also liquidates) ( independent fact
  situations)
• G H I
• Cash 50,000 10,000 10,000
• Unrealized rec. N/A -0- -0-
• (Fair mkt value) N/A 16,000 16,000
• Filing cabinet (1231) N/A N/A 300
• (Fair mkt value) N/A N/A 300

15
Liquidating Distribution Example

• G H I
• Basis in interest 30,000 30,000 30,000
• Cash distribution (50,000) (10,000) (10,000)
• Gain recognized 20,000 N/A N/A
• Basis after cash -0- 20,000 20,000
• A/R distrib. N/A -0- -0-
• Loss recognized N/A (20,000) N/A
• Basis after A/R -0- -0- 20,000
• Filing cabinet N/A N/A
  (20,000)
• Ending basis -0- -0- -0-

16
Liquidating Distribution Example

• G H I
• Basis in p'ship int. -0- -0- -0-
• Basis in cash 50,000 10,000 10,000
• Basis in A/R N/A -0- -0-
• Basis in filing cabinet N/A N/A 20,000
• Capital (Gain)/loss (20,000) 20,000 N/A
• Original basis 30,000 30,000 30,000

17
Liquidating Distributions

• The holding period used by the partnership
  carries over to the partner.
• Sec. 751 applies to liquidating distributions.

18
Sale of Partnership Interest

• Capital gain or loss is recognized.
• Sec. 751 applies and may require ordinary income
  treatment of the partners interest in unrealized
  receivables and/or substantially appreciated
  inventory.

19
Retirement or Death

• The sale of the partnership interest to an
  outside party is a sale.
• Surrender of the interest to partnership may
  involve payments for both property and other
  payments.
• Property payments are liquidations.
• Other payments are probably ordinary income.

20
Termination of the Partnership

• The tax code and state laws treat this issue
  differently.
• If a partner completely liquidates, the
  partnership tax year closes for that partner.
• Death closes the tax year for the partner
• Termination of the business or transfer of 50 of
  the ownership ends the partnership except for
  Electing Large Partnerships

21
Special forms of Partnership

• Tax shelters and limited partnerships
• Publicly traded partnerships
• Limited Liability Companies (LLC)
• Limited Liability Partnerships (LLP)

22
Electing Large Partnerships

• Non-service partnership
• Not engaged in commodity trading
• Have at least 100 partners
• File an election to be taxed as a large
  partnership

23
ELP Taxable Income

• Miscellaneous itemized deductions are combined
  and subject to a 70 deduction at the partnership
  level, the remaining deductions are combined with
  other income and passed through
• Charitable contributions are combined and are not
  separately stated by the partner subject to 10
  limit
• Section 179 deductions are combined

24
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.