P Tax Outline (short)

P Tax Outline (short) - I. Basics

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Basics How do you calculate the Taxable Income of a Partnership? Under § 701, partnerships do not pay income tax, partners pay income tax. In determining their income tax, partners must take into account separately their distributive share of the partnership’s items of gain or loss to the partnership under § 702(a). Additionally, § 703 requires that items in § 702(a) are stated separately for each partner and certain deductions shall not be allowed to the partnership. Character is determined at the partnership level in accordance with § 702(b). However, the character of certain items, such as receivables, inventory and capital loss property, is determined under § 724. How is the basis of a Partner’s Interest in the Partnership determined? Generally, § 705(a) requires that the adjusted basis of a partner’s interest in the partnership shall, except as provided in § 705(b), be the basis of the such interest as determined under § 722 or § 742, increased by: (1) taxable income of the partnership as determined under § 703(a); (2) income of the partnership exempt from tax; (3) excess of deductions for depletion over the basis of property subject to depletion, and decreased, but not below zero, by distributions by the partnership as provided in § 733 the sum of the partner’s distributive share for the taxable year and prior taxable years of: (1) losses of the partnership and (2) expenditures of the partnership not deductible in computing the partnership’s taxable income and not properly chargeable to the partner’s capital accounts. Treas. Reg. § 1.705-1(a)(1) requires adjustment to basis only when necessary for taxability. Under Rev. Rul 66-94, an ordering rule was established for adjustments to the basis of a partner’s interest in the partnership. The basis shall be: (1) Decreased for distributions in chronological order, unless the distribution is an advance or draw; (2) Increased by items of income (non separately stated); (3) Decreased by distributions treated as occurring on the last day of the year, such as advances, draws or debt decreases; and (4) Decreased by loss items that are non separately stated. The taking of losses is proportional to the each type of loss, such as short term capital loss or long term capital loss. See 1.704-1(d)(2) and ex. 3, where: Amount of Loss Taken By Type = Adjusted Basis PIP x Loss Amount Tested Total Loss II. Formation What if a partner contributes property to a partnership? Under § 721, no gain or loss is recognized by the partnership or partners on a contribution of property to a partnership in exchange for a partnership interest. Non recognition under § 721 is accorded only to contributions of property in exchange for a partnership interest. If a partnership interest is received in exchange for services rendered to the partnership or to a partner, § 721 does not apply, see Reg. § 1.721-1(b)(2)). 1
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This note was uploaded on 05/25/2011 for the course LAW P Tax taught by Professor Lucas during the Spring '11 term at FSU.

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P Tax Outline (short) - I. Basics

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