Partnerships Chapter 4-2

Partnerships Chapter 4-2 - PARTNERSHIP ALLOCATIONS CHAPTER...

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Click to edit Master subtitle style 1/21/11 PARTNERSHIP ALLOCATIONS CHAPTER 4.2
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1/21/11 CONTRIBUTED PROPERTY Section 704(c) allocations General principles: Allocate items to take into account pre-contribution gain or loss Income Gain Loss Deductions Tax allocation lacks substantial economic effect Capital accounts are not affected 22
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1/21/11 CONTRIBUTED PROPERTY Allocation may be disregarded For small disparity between book value and adjusted basis Small disparity: FMV and adjusted basis do not differ by more than 15% of adjusted basis Total disparity does not exceed $20,000 33
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1/21/11 CONTRIBUTED PROPERTY Traditional Method Ceiling rule applies Total gain or loss allocated to partners is limited to “ceiling” “Ceiling” cannot exceed gain or loss realized by partnership Example: A contributes property $12,000 basis 44 A B Tax basis 12,000 20,000 Capital account 20,000 20,000
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1/21/11 CONTRIBUTED PROPERTY Traditional Method AB sells property for $20,000 55 A B Tax basis 12,00 0 20,00 0 Allocated gain + 8,000 Adjusted tax basis 20,000 20,000 Capital account 20,000 20,000
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1/21/11 CONTRIBUTED PROPERTY Traditional Method AB sells property for $35,000 66 A B Tax basis 12,00 0 20,00 0 Allocated gain + 8,000 Adjusted tax basis 20,000 20,000 Capital account 20,00 0 20,00 0 Post- contribution + 7,500 + 7,500
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1/21/11 CONTRIBUTED PROPERTY Traditional Method AB sells property for $15,000 77 A B Tax basis 12,00 0 20,00 0 Allocated gain + 3,000 Adjusted tax basis 15,000 20,000 Capital account 20,00 0 20,00 0 Book loss (2,50 0) (2,50 0)
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1/21/11 CONTRIBUTED PROPERTY Traditional Method with Curative Allocations Permits reasonable curative allocations of other partnership tax items Income Gain Loss Deductions Cures disparities between tax and book accounts caused by ceiling rule Allocations only affect tax basis and not capital accounts No economic effect Allocations must be “reasonable” 88
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1/21/11 CONTRIBUTED PROPERTY Traditional Method with Curative Allocations Example: A contributes property $12,000 basis B contributes $20,000 cash 99 A B Tax basis 12,000 20,000 Capital account 20,000 20,000
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1/21/11 CONTRIBUTED PROPERTY Traditional Method with Curative Allocations AB sells property for $15,000 Additionally Partnership sells stock in completely unrelated transaction for $10,000 LTCG $5,000 of tax gain from stock to A Remaining gain is split 1010 A B Tax basis 12,00 0 20,00 0 Allocated gain + 3,000 LTCG + 7,500 + 2,500
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1/21/11 CONTRIBUTED PROPERTY Traditional Method with Curative Allocations AB sells property for $15,000 Additionally Partnership sells stock in completely unrelated transaction for $10,000 LTCG $5,000 of tax gain from stock to A Remaining gain is split 1111 A B Capital account 20,00 0 20,00 0 Book loss (2,50 0) (2,50 0) LTCG + 5,000 + 5,000
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1/21/11 CONTRIBUTED PROPERTY Remedial Method Allows partnership to create tax gain or loss to restore books to good health Same effect as: Allocating entire $8,000 pre-contribution gain to A Splitting post-allocation loss equally 1212
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1/21/11 CONTRIBUTED PROPERTY Gain or Loss Characterization – Section 724
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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 4-2 - PARTNERSHIP ALLOCATIONS CHAPTER...

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