Accounting 7360 – Partnership Taxation October 18, 2017 Chapter 9- Transactions between a partnership and its partners Guaranteed payments or distributive Share? Receipt of Interest in Exchange for Services
Transactions between Partner and Partnership • 704(b) payments are a distributive share of partnership income • Amount is determined by reference to partnership income • Section 707(a)(1)- A partner not acting in Capacity as a partner- • adopts the entity approach- • treats the transaction as if it were between unrelated parties • Section 707(b)- Sales or exchanges of property with respect to controlled partnerships • 707(c)- Guaranteed payments • Partner receives a fixed or “guaranteed payment”
Distributive share of partnership Income or loss- 704(b) payments Determined with reference to partnership income Character determined by partnership and flows – through to partner Recognized on schedule K-1 based upon partnerships fiscal year Not subject to capitalization requirements
Transactions between Partner and Partnership • A partner can engage in a transaction with the partnership not in his capacity as a partner- Code section 707(a)(1) • Examples- • Sale or exchange of property • Loans to partnership- contribution of capital v Loan to partnership • Provide services not in the capacity as a partner- not in exchange for a share of partnership profits • Rental of property Is the partner acting as a partner or as a stranger? • General or managerial services ( partner capacity) • Services involving a partner’s technical expertise ( non partner capacity)
Transactions between partner and partnership Code Section 267 provides a “matching rule” for payments of expenses between related parties if the payor uses the accrual method and the payee reports on the cash method Section 267(e) Sec. 267. Losses, expenses, and interest with respect to transactions between related taxpayers (a) In general (1) Deduction for losses disallowed No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation. (2) Matching of deduction and payee income item in the case of expenses and interest If-- (A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and (B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made……………………..
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