C9-14 As a limited partner in the JRS Partnership, Jeff is almost certainly subject to the passive loss limitation rules on losses from this partnership. Accordingly, income from a general partnership in which Jeff does materially participate (and thus earns active income) cannot be used to offset the passive losses. Losses from the JRS Partnership can only be used to offset passive income or can be claimed when Jeff sells the entire interest in the JRS Partnership or the partnership terminates. pp. C13-25 and C13-26. C9-15 ABC Partnership will hold the land as inventory for resale to customers and not as a capital asset. Since Helen owns more than a 50% interest in the ABC Partnership, the sale of the land to the partnership will generate ordinary income instead of capital gain for Helen. If Helen instead contributes the land to the partnership, no gain will be recognized until the partnership sells the lots. Then, when each lot is sold, Helen will recognize the pre-contribution gain as well as her share of any post-contribution appreciation and all of the gain will be ordinary income taxable at a marginal rate(s) of up to 313.6%. In total, the ordinary income under this alternative will be the same as if Helen had sold the land to the partnership. A contribution will allow her to delay the gain recognition. Even better results occur if Helen can dispose of 5% or more of her partnership interest so then she owns, directly and indirectly, 50% or less of the ABC Partnership. If she owns 50% or less, she can recognize capital gain on the sale of the land to the partnership and use these gains to offset any capital losses she may have already recognized or that she may desire to recognize. The capital gains are taxed to most taxpayers at a maximum marginal tax rate of 20% or up to 113.6 percentage points below the rate applicable to ordinary income. Alternatively, she could sell the land to a third party who would then contribute the land to the ABC Partnership. Her gain on the sale of the land would then be capital gain, and the contributing partner would recognize no gain when the land was transferred to the partnership. pp. C13-26 and C13-27. C9-16 A guaranteed amount is stated as a fixed dollar amount regardless of the partnership's income or loss. A guaranteed minimum can only be determined after the profitability of the partnership's operations has been determined. A guaranteed minimum may be paid partly out of the partner's distributive share and partly as a guaranteed payment which total to the amount of the guaranteed minimum. pp. C13-27 and C13-28. C9-17 Regulation Sec. 1.707-1(c) provides that a partner reports guaranteed payments as ordinary income in the partner's tax year which includes the last day of the partnership's tax year in which the partnership deducted the payments under its method of accounting. A partner's distributive share of partnership items (determined under Sec. 702(a)) is reported in the tax year which includes the last day of the partnership's tax year. Thus, to report the two payments is the same to Tracy. pp. C13-27 and C13-28.
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- Spring '08