UCLAOLPSclassnotes3

UCLAOLPSclassnotes3 - Partnership Tax Class 3 Notes: 1)...

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Partnership Tax Class 3 Notes: 1) Where we are a) We started talking last time about the four “big categories” of partnership taxation – these are the rules of “Subchapter K” i) Formation by Contributions – sections 721-724 ii) Operations – sections 701-709 (1) Determine income at PS level; then each P reports her “distributive share” iii) Transfers of partnership interests – sections 741-743 iv) Distributions – sections 731-736 b) In class 2 we talked about the formation regime of sections 721-724 in detail i) We talked about how transfers of property to a partnership in return for a partnership interest are generally tax-free nonrecognition transactions (1) We talked about the basis consequences to these transactions as well (2) And introduced the concept of a partnership interest, which is a separate asset held by the partners, and which has its own separate tax basis (“outside basis”) (a) We talked about how this outside basis is adjusted, to prevent double taxation of partnership earnings (b) We also mentioned that the partnership’s basis in its own assets is called “inside” basis (3) We also gave two examples where acquisition of a partnership interest does NOT get nonrecognition treatment (a) Investment partnerships (b) Partnership capital interest (and sometimes profits interest) in exchange for services ii) We also talked about capital accounts, both book and tax, and why we need them, and how the capital account balance is determined 2) For Week 3, we will talk about two broad categories a) Pre-trade/business expenses ; how do we deal with expenses incurred by partnership BEFORE the partnership business is up and running? i) “Organization and syndication” expenses are dealt with under sec. 709 ii) b) Then, transactions between partners and the partnership (“PS”) , which can be broken down further into two sub- categories: i) First, what happens upon the sale of property by a partner to the PS in which she is a partner? (1) As we’ll see, the sale is treated as any other sale under the tax law – gain to selling partner ii) Second, we must deal with the “Disguised sales” rules (1) The PURPOSE of these rules are to prevent partners from taking advantage of the general nonrecognition provision of section 721 (no gain or loss recognized on transfer of property to PS for a PS interest) when what is really happening is that the partner is SELLING property either to the PS or to the other partners in the PS (2) There are 3 major disguised sale rules : (a) Contribution by partner followed by distribution of CASH by PS to that contributing partner – section 707(a) (2)(B) (i) Sounds like a sale of the property to the PS by the partner – the partner got rid of the property, and ended up with cash not long after (b) Contribution by partner followed by distribution by PS of that contributed property to another partner Sec. 704(c)(1)(B)
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UCLAOLPSclassnotes3 - Partnership Tax Class 3 Notes: 1)...

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