Partnerships Chapter 4-1

Partnerships Chapter 4-1 - 1/21/11 PartnershipAllocations

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Click to edit Master subtitle style 1/21/11 Partnership Allocations CHAPTER 4.1
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1/21/11 Introduction Advantage of partnerships over corporations:  Greater flexibility to custom tailor economic arrangements Partnership abilities: Allocate profits and losses Determine the timing and amount of distributions Determine the compensation paid to partners Most allocations are not tax driven 22
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1/21/11 Pertinent Code Sections Section 704(a) Partnership agreement (PA) determines partners’ distributive share of: Income Gain Loss Deduction Other tax items Section 761(c) PA includes modifications up to time of filing return 33
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1/21/11 Special Allocations: Section 704(b) “Substantial Economic Effect” concept If PA:  Does not state the distributive share  Has allocations with no “substantial economic effect” Partner’s distributive share of gain or loss: Determined  in accordance with partners’ respective interests Takes into account all facts and circumstances 44
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1/21/11 Orrisch v. Commissioner (case) FACTS The Crisafis and the Orrisches form a partnership They orally agree to share profits and losses equally The partnership only realized losses from 1963 to 1965 Used by the Orrisches to offset other income The Crisafis did not have any income to offset In 1966, the partners amended the partnership agreement: All depreciation would be allocated to Orrisches 55
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1/21/11 Orrisch v. Commissioner (case) QUESTION IRS says principal purpose of allocation is to avoid income tax Should this special allocation therefore be disregarded? FINDING YES – the allocation should be disregarded Partners failed to put statement in PA Should have required Orrisches to make up negative capital accounts: Upon liquidation of the partnership Upon sale of property at a loss Case is important look at interpretation of Section 704(b) 66
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1/21/11 Section 704(b) Basic Rules Regulations apply to specific items of:  Income Gain Loss Deductions Net taxable income and loss Tests applied annually to determine allocation validity each year 2-part test to determine “Substantial Economic Effect” Economic effect 77
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1/21/11 Economic Effect For an allocation to have economic effect:  PA must provide throughout partnership life: Capital accounts must be determined and maintained In accordance with rules of  Section 1.704-1(b)(2)(iv) Satisfied if PA contains following statement:  “The capital account of any partner Shall mean the capital account of that partner From the inception of the partnership  In accordance with  §1.704-1(b)(2)(iv)   of Treasury Regulations 88
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This note was uploaded on 01/20/2011 for the course ACC 617 taught by Professor Staff during the Fall '08 term at Kentucky.

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Partnerships Chapter 4-1 - 1/21/11 PartnershipAllocations

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