UCLAOLPSclassnotes8

UCLAOLPSclassnotes8 - Partnership Tax Week 8 Notes: 1)...

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Week 8 Notes: 1) Where we are a) We have finished up our first three topics i) Partnership formation ii) Partnership operation iii) Sale of a partnership interest b) Only the last topic remains – what happens when a partnership makes a distribution of cash or property to its partners? 2) Distribution – Overview a) As we know, a partnership (PS) is a “flowthrough” – income is taxed once, and taxed to the partners i) Thus, when property or money is later distributed by the PS to the partners, it is generally not taxed again to partners, in order to avoid double tax ii) Also, Congress intended to defer gain on property put into (sec. 721) and property taken out of a partnership (731) (1) Property movement should be for business and not tax reasons b) Accordingly, we have a general rule i) Generally, NONRECOGNITION - neither P nor PS recognize any gain or loss on distributions of property (including cash) by PS to P c) But there are exceptions, and we’ll go over them in detail later 3) Distributions – definition a) Tax definition of a distribution i) Transfer of cash or property by PS to P, not otherwise treated under the Code (1) E.g., not a guaranteed payment or 707(a) payment (2) not a loan from PS to P (a) only a loan if P has an unconditional and legally enforceable obligation to repay b) Some exceptions to distribution treatment (most of these we already know) i) 707(a)(2)(B) – contribution of property followed by distribution to contributor (1) treated as disguised sale of property, as we know ii) 704(c)(1)(B) – contribution of property followed by distribution to another partner (1) also treated as disguised sale iii) 737 – contribution of property followed by distribution of other property to contributor (1) gain to contributing partner iv) 736 – part of distribution treated as a guaranteed payment to partner (1) and treated as such – remember rules of section 707(c) (2) how do we determine how much is a guaranteed payment? We’ll take this up in week 10 v) 751(b) – disproportionate distributions (1) recharacterized as sale/exchange (2) will take up next week c) Types of distributions i) Current – a distribution to a partner whose interest in PS continues after distribution ii) Liquidating – one or more distributions that terminate a P’s interest in the PS (and may actually terminate the entire PS) 4) Tax consequences of distribution – any gain or loss? a) Sec. 731 – no gain or loss to PS or P, on either liquidating or current distributions i) To PS? - Never any gain to PS, unless distribution recharacterized as a disguised sale (see above) ii) GAIN to P - P has gain only if “money” received in excess of his/her basis in his/her PS interest, on either liquidating or current distribution (1) First, distribution is treated as a return of basis – P’s basis reduced by amount of cash distributed (2) if both property and cash are distributed, cash is deemed to come out first iii) LOSS to P - P can never recognize
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UCLAOLPSclassnotes8 - Partnership Tax Week 8 Notes: 1)...

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