IG_C21 - CHAPTER 21 PARTNERSHIPS LECTURE NOTES OVERVIEW OF...

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CHAPTER 21 PARTNERSHIPS LECTURE NOTES OVERVIEW OF PARTNERSHIP TAXATION 1. Partnerships are not treated as separate tax entities for Federal income tax purposes. a. All items of income, gain, loss, deduction, or credit pass through to the partners according to the partnership agreement. b. These pass through items are reported to each partner on a Schedule K-1. c. The partners report their share of partnership items on their separate tax returns. 2. Partnership tax return (Form 1065) is only an information return. a. However, the partnership makes numerous tax accounting elections on its tax return (e.g., cost recovery methods, whether to amortize business start-up costs, tax year selection, and adopting the cash or accrual method of tax accounting). b. Such elections are important because they affect the timing and amount of items reported by the partner. ADDITIONAL LECTURE RESOURCE Early in 2002, the IRS began to match the amounts reported on each Schedule K-1 to the amounts reported on the individual partner’s return. Taxpayers not properly reporting K-1 items on the Form 1040 are sent a notice from the IRS indicating this failure and assessing additional tax, if applicable. The IRS also wants to reduce the number of individual taxpayers erroneously receiving notices on matching issues. To this end, all partnerships issuing amended K-1s should clearly identify the K-1 as amended. The IRS also asks Form 1040 preparers to avoid netting data from various K-1s on a return unless adequate schedules or explanations are attached. 21-1
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21-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes 3. Partner’s ownership interest consists of a capital interest and a profits interest. a. Capital interest represents the partner’s contribution plus a cumulative share of undistributed partnership profits. It is also the equal to the partner’s share of the proceeds from liquidating the partnership. b. Profits interest represents the partner’s share of current and future income earned by the partnership. c. Profits and capital interests do not have to be equal, and the profits interest may not be the same over time. In fact, a profits interest may vary for different types of income, deduction, etc., during a single tax year. 4. Two conflicting concepts govern partnerships; the entity and the aggregate concepts. a. Under the entity concept, partnerships are treated as independent entities, separate and apart from the aggregate of its partners. b. Under the aggregate or conduit concept, a partnership is a “common pool” to which each partner contributes capital or services in the pursuit of profit. ADDITIONAL LECTURE RESOURCE Many pro sports teams are operated as partnerships, most solely for tax reasons. For example, the Boston Celtics was reorganized in the late 1980s as a Master Limited Partnership, and their shares trade on a national stock exchange. Transactions under §§ 721 and 731 (as well as § 751), now occur for the team almost daily. The major pro sports leagues all currently prohibit
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