UCLAOLPSclassnotes4 - Partnership Tax Class 4 Notes 1 Where...

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Partnership Tax Class 4 Notes: 1) Where we are a) We have just finished Week 3, where we talked about “disguised sales” of property to partnerships (“PS”) by partners (“P”) i) Recall that generally transfers of property by partners to a partnership, in exchange for a partnership interest, are tax-free (or at least tax-deferred) under section 721 ii) The “disguised sale” rules in sections 707, 704, and 737 prevent partners from taking advantage of tax-deferred treatment when what is really happening is a sale of property by the partnership to the partner (or the exchange of properties between partners) b) So we are making our way through the 4 major categories of partnership taxation i) Formation by Contributions – 721-724 – We’re now done with Formation ii) Operations – 701-709 – we’ll start this in Week 4, now (1) As we’ll see, these rules relate to computation of income at PS level; then each P reports her “distributive share” iii) Transfers of PS interest – 741-743 iv) Distributions – 731-736 2) Agenda for Week 4 a) Last class, we talked about transactions between partners and partnerships i) Sale of property to a partnership ii) “disguised sales” iii) This week, we’ll finish up the topic of transactions between partners and partnerships by discussing issues related to PAYMENTS by PS to partners (1) Classification and tax treatment of such payments b) Then we will move onto the PS Taxable Income Calculation 3) Payments to Partners by Partnership a) Classified in one of three ways i) 707(a) payment – payment to partner in nonpartner capacity ii) 707(c) payment – “guaranteed payment” – payment in partner capacity, made WITHOUT regard to PS income iii) “distributive share” payment – a “payment” in partner capacity, reflecting partner’s share of PS income (really just a partnership distribution, which we’ll learn about later) b) Section 707(a) payment i) Definition of a sec. 707(a) payment - made for a transaction in which P is not acting as a P (1) examples – PS pays P interest on a loan P makes to PS, or PS pays rent on property P provided to PS (2) or, commonly, P provides services to PS (a) generally a payment by PS to P for services will be a section 707(a) payment only if service is NOT called for by PS agreement, in general (i) e.g. – PS agreement calls for partner S to manage the real estate in the partnership 1. payment to S would probably NOT be a 707(a) payment, since called for by PS agreement 2. would be a sec. 707(c) payment instead – see below (ii) e.g. – partner L provides some minimal accounting services to the partnership, and the partnership agreement is silent on the topic 1. probably would be a section a 707(a) payment (3) a section 707(a) payment is one whose AMOUNT is determined by reference to VALUE of service or property provided to the PS, not PS income (a) e.g. – accounting service – L charges an hourly rate (b) e.g. – loan of property to partnership – partner charges a normal interest rate ii) income tax treatment of sec. 707(a) payment – included in income by partner, potentially deductible to PS in determining
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