UCLAOLPSclassnotes2 - Partnership Tax Class 2 Lecture Notes...

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Partnership Tax Class 2 Lecture Notes: 1) Where are we? a) We covered in Week 1 two major categories i) First, we defined what we mean by a tax partnership (1) Distinguished a tax partnership from other forms of activity that are classified differently for tax purposes (a) As you have probably noted in your study of tax to this point, CLASSIFICATION of transactions and relationships is very important in tax (b) In class 1, we discussed the classification of a tax partnership versus other forms of activity (i) Partnership versus mere joint ownership in property (ii) Partnership versus mere sharing of expenses (iii) Partnership versus loan, or employment situation (2) We also distinguished between a partnership and a corporation for US tax purposes (3) One point I didn’t emphasize – what happens if you are a tax partnership, but either don’t know it, or you fail to file the returns? (a) Recall that if you are a tax partnership, you must (i) Keep accounts at the partnership level for tax purposes, and then allocate all results out to partners (ii) File a partnership tax return (iii) Make most tax elections at the partnership level (b) So if you are a tax partnership and don’t fulfill these requirements, at least 3 bad things happen (maybe more!) (i) You may get hit with penalties for failure to file a tax return (Form 1065) (ii) Also, any tax elections you make for the joint venture may be invalid (iii) And IRS will still tax the “partners” on their share of the joint venture’s income; now, however, IRS will have great leeway in determining how much income goes to each partner (we’ll discuss this in detail in later classes) (c) And IRS can find out by auditing you, the partner – if they discover that you have entered into a tax partnership without filing the appropriate forms, the above consequences will result ii) Then, we talked about the required tax year of a partnership (1) The objective of these rules is to minimize the deferral of income available to partners by choosing a particular tax year for the partnership (a) Priority rules are set forth in section 706 for determining the tax year of the partnership 2) Where are we going? An overview of sorts a) Now we know what is a partnership – what are we going to discuss next? b) The partnership tax rules take a transactional approach c) There are 4 big categories of partnership tax rules , often called the rules of “Subchapter K” (a reference to Subchapter K of the Internal Revenue Code, which includes all the partnership tax rules (the section 700s): i) Partnership Formation by contribution of property to a partnership (1) Sections 721-724 , and our topic for Weeks 2-3 ii) Partnership Operations (1) Sections 701-709 (2) These rules basically state that the partnership (“PS” for short) must determine income at PS level (3) then each partner (“P” for short) reports her “distributive share” of PS income on her own individual US federal income tax return (4) we’ll cover these in the middle Weeks of our term
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This note was uploaded on 02/24/2010 for the course ACCOUNTING 578844 taught by Professor Mctosh during the Spring '10 term at UCLA.

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UCLAOLPSclassnotes2 - Partnership Tax Class 2 Lecture Notes...

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