ch10 - H Chapter Ten H PARTNERSHIP DISTRIBUTIONS,...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
H Chapter Ten H PARTNERSHIP DISTRIBUTIONS, DISPOSITIONS OF PARTNERSHIP INTERESTS, AND PARTNERSHIP TERMINATIONS SOLUTIONS TO RESEARCH PROBLEMS RESEARCH PROBLEMS 10-54 Family partnerships are attractive for both tax and nontax reasons. The income-shifting potential of a family partnership depends on the spread between the lowest and highest marginal tax rates of the partners. The income-shifting potential is limited by the kiddie tax under which the unearned income of certain dependents is taxed at the higher of their marginal tax rate or their parents’ marginal tax rate. The kiddie tax applies to children who are 18 and under and children between 19 and 23 who are full-time students. However, children between 18 and 23 are only included if their earned income does not exceed 50% of their total support for the year. 5- The income from a partnership could constitute unearned income, particularly if the daughter is a limited partner. The kiddie tax will continue to apply until she is at least 18, and perhaps longer depending on her college plans. Family partnerships also provide an incentive for a family member to enter the family business. 5- Because family partnerships may transfer income from a member active in the business to an inactive member, and thereby reduce the tax liability of the family unit, they are closely scrutinized to ensure that the effect is not merely an assignment of income but rather a transfer of a capital interest. 5- In order to achieve the tax advantages inherent in family partnerships, the validity of the partnership must be established. In assessing its validity, the IRS and the courts determine whether the parties actually intend to join together to carry on a business and to share the profits and losses of this business [Comm. v. Culbertson 49-1 USTC { 9112, 10 AFTR2d 6068, 310 F2d 412 (CA-7, 1962)]. This decision is based on a number of factors. Some of the more important ones are the capital contributions, rendition of vital services, participation in management, and control of the assets necessary to the partnership business. 5- Difficulties often arise with family partnerships where one or more of the partners is a minor who contributes no services and whose interest was acquired by gift. Such is the case with B and his daughter. They, therefore, must prove that the daughter owns a capital interest in a partnership in which capital is a material income-producing factor [§ 704(e)]. 5- Capital (including goodwill) is a material income-producing factor if a substantial part of the gross income of the business was earned by its use. [Bateman v. U.S. 74-1 USTC { 9176, 33 AFTR2d 74-483, 490 F2d 549 (CA-9 1973)]. Because the business manufactures and sells utility tables, it requires a substantial investment in plant, equipment, and inventory and should have amassed at least some unrecorded goodwill. Furthermore, net ordinary income for the proprietorship is relatively small in relation to net assets (27%) when you consider the fact that no proprietor’s salary is deductible in arriving at net income. Thus, capital undoubtedly is a material income-producing factor.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 22

ch10 - H Chapter Ten H PARTNERSHIP DISTRIBUTIONS,...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online