“substantial” – essentially ensures the allocation is not done primarily for purposes of tax reduction. Chapter 19, Exhibit 24
50 of 59 Partner-Partnership Transactions Attribution From entities (proportionate attribution) From family members (siblings, spouse, ancestors, lineal descendants) Transactions Is transaction in capacity as a partner? Denial of loss deduction Sales between a partner and a >50% owned partnership (or two > 50% owned partnerships). Chapter 19, Exhibit 25a
51 of 59 Transactions (Cont.) Disallowed loss can reduce later gain, if any on sale by purchaser Sale of capital assets to or from controlled partnerships Ordinary gain unless the property is a capital asset in the hands of the transferee Ordinary gain if the property is depreciable by the transfee Chapter 19, Exhibit 25b Partner-Partnership Transactions
52 of 59 Transactions (Cont.) Installment sales Sale of the property within two years of purchase will accelerate unpaid installments and associated gain Payee on cash basis and payer on accrual basis Expense of payer is not deductible until income is recognized by payee Chapter 19, Exhibit 25c Partner-Partnership Transactions
53 of 59 Guaranteed Payments Can be for services or use of capital Ordinary income to partner, ordinary deduction to partnership Income to the partner in partner’s tax year containing the end of partnership year in which guaranteed payment is deducted Deducted by partnership on page one of Form 1065, income reported to partner on Sch. K-1. Chapter 19, Exhibit 26
54 of 59 Losses in Excess of Partner’s Basis Partner’s share of loss is deductible only up to the amount of the partner’s basis in the partnership Excess can be carried over indefinitely Carryover can be used when more basis is acquired (upon a contribution, recognition of partnership income, etc.) Carryover is lost if interest sold Chapter 19, Exhibit 27a
55 of 59 Classification of deferred losses Proportionate to the losses incurred in year carryovers were generated. Allocation of recourse liabilities Partner’s share is amount partner would have to pay in a hypothetical liquidation Allocation of nonrecourse liabilities Partner’s share of minimum gain, remaining precontribution gain, and excess nonrecourse liabilities Chapter 19, Exhibit 27b Losses in Excess of Partner’s Basis
56 of 59 Limitation on Losses—At-Risk Rules A partner’s distributive share of partnership losses and deductions from both business and investment activities are “at-risk.” Code Sec. 465(b) (1) and (2). Such losses are allowed only to the extent of the partner’s at-risk amount at the end of the partnership’s tax year. (a) The at-risk amount is generally the partner’s outside basis defined at Code Sec. 704(d). (i) Nonrecourse loans from “non-qualified” lenders are generally excluded from the at-risk basis amount but included in the Code Sec. 704(d) outside basis.
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