ACCT6921 - Chapter 3 Homework Final.docx - CHAPTER 3 PARTNERSHIP INTERESTS FOR SERVICES WEEK OF Topics for Presentation IRC Section 721 and Regulation

ACCT6921 - Chapter 3 Homework Final.docx - CHAPTER 3...

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CHAPTER 3 PARTNERSHIP INTERESTS FOR SERVICES WEEK OF January 30, 2018 Topics for Presentation IRC Section 721 and Regulation 1.721-1(b) No gain or loss due to contribution of property for interest in partnership. 1.721-1(b) excludes the contribution of services from Section 721 and partners must recognize such contribution as income. IRC Section 83 and 61 Section 61 defines gross income to include any income realized in any form, whether in money, property, or services. Sol Diamond v. Comm. 492 F2d 286 (CA-7) Campbell v. Comm. 943 F2d 815 (CA-8) Revenue Procedure 93-27 Check Citator
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Katelyn Smith Ahmet Akbay Kelly Harrison Chapter 5 1.) What are the tax consequences of forming partnership D to its partners A, B, and C in the following situations? a. A and B will contribute cash of $200,000 each, while C will contribute a 30-year leasehold interest (in real property that C owns) valued at $200,000. Each partner receives a capital account of $200,000. Section 721 states that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. A & B have capital accounts of $200,000 and beginning basis of $200,000 each. Because partner C contributed real property and not services, Section 83 does not apply (the FMV or the amount paid for the property is included in the gross income of the person who performed services) and their basis of $200,000 is not taxable at the time of contribution. b. A and B have been partners in their law partnership for several years. Both A and B have capital accounts of $100,000. The partners propose to admit C to the partnership. C contributes $15,000, receives a capital account of $15,000 and is admitted as a 1/3 partner in future profits only. C’s interest is nontransferable and is subject to a redemption agreement under which he would be bound to sell his interest to the remaining partners for an amount equal to its book value. A&B have capital accounts that are not taxable at $100,000 each. Although Partner C’s interest has restrictions, it does not meet Section 83(c)(1)’s definition of substantial risk of forfeiture as there are no conditions placed on Partner C in retaining their interest in future profits. Because Partner C’s interest is free from substantial risk of forfeiture, their profits interest is considered vested in the first taxable year. However, under Revenue Procedure 93-27, Partner C’s profits interest is not considered taxable as it does not meet any of the three exceptions. Partner C would have a starting basis of $15,000.
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  • DanielL.Schisler
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