Partnerships Chapter 5

Partnerships Chapter 5 - Partnerships Chapter5...

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    Partnerships Chapter 5 TRANSACTIONS BETWEEN  PARTNERS AND  PARTNERSHIPS
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    A.  PAYMENTS FOR  SERVICES AND THE USE  OF PROPERTY 1.  Introduction Sec. 707(a)(1)and(c) - Transactions between a partner and a  partnership are to be treated as occurring between the  partnership and one who is not a partner.  The "Entity Theory"  of partnership taxation. Guaranteed payments to a partner for services or use of capital  and that are determined without reference to the income of the  partnership are treated as though made to someone not a  member of the partnership.
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    Treas. Reg. 1.707-1(a) and (c) - Payments for services and the use of property  Raises issue of aggregate vs. entity approach to  partnership taxation.   There are three categories of payments under Sec.  707: 1.Partner not acting as a partner; Sec. 707(a)(1) 2.Guaranteed payment; Sec. 707(c).  Partner is paid  whether or not the partnership has sufficient profits. 3.Payment is based on percentage of profits and hence is  treated as a distributive share.  Sec. 731.
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    Partner Acting In A  Nonpartner Capacity Pratt v. Commissioner 1975 Facts:  General partners of two limited partnerships attempt to  defer income by having management fees deducted by the  partnership in the year accrued (accrual basis taxpayer) and  declaring compensation income for services on their personal  returns in the year paid (cash basis taxpayers).   Question:  The I.R.S. argued that this was not a management  fee but rather payment for services rendered in their capacity as  partners rather than as employees.   If the payments are distributive shares rather than management  fees then they are not deductible to the   partnership.  
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    Pratt v. Commissioner 1975 cont. Finding The Court looked at the substance of the transaction  over the form and determined that these partners were  performing basic duties of the partnership business pursuant  to the partnership agreement.
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    Armstrong v. Phinney 1968 Facts:  P had 5 percent interest in ranch partnership and also  was paid a salary as manager of the ranch, plus "lodging on the 
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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 5 - Partnerships Chapter5...

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