Example partner r contributes a capital asset to rst

Info icon This preview shows pages 19–21. Sign up to view the full content.

Example Partner R contributes a capital asset to RST Partnership, which will be used by the partnership as inventory . The asset has a FMV of $10,000 and adjusted basis of $15,000. The built-in loss is $5,000 and, when this asset is sold, the first $5,000 of recognized loss will be allocated to R. If RST sells the asset three years later for $8,000, the recognized loss is $7,000. The first $5,000 of loss is allocated to R and the other $2,000 of loss is allocated to R and the other partners based on their loss- sharing ratios. The $5,000 loss allocated to R is a capital loss (since this was sold within five years), but the remaining $2,000 loss will be characterized based on how the partnership used the asset (Inventory = Ordinary loss ). Note, that only the built-in loss is recharacterized as a capital loss. Related Party Rules If a person engages in a transaction with a partnership other than as a member of such partnership, any resulting gain or loss is generally recognized. However, if the transaction involves a more than 50% owned partnership, one of three special rules may apply. Constructive ownership rules apply in determining whether a transaction involves a more than 50% owned partnership. For this purpose, an individual's family includes brothers and sisters, spouse, ancestors, and lineal descendants.
Image of page 19

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

No losses are deductible from sales or exchanges of property between a partnership and a person owning (directly or indirectly) more than 50% of the capital or profits interests in such partnership, or between two partnerships in which the same persons own (directly or indirectly) more than 50% of the capital or profits interests. A gain later realized on a subsequent sale by the transferee will not be recognized to the extent of the disallowed loss. Examples Partnership X is owned by three equal partners, A, B, and C, who are brothers. Partnership X sells property at a loss of $5,000 to C. Since C owns a more than 50% interest in the partnership (i.e., C constructively owns his brothers' partnership interests), the $5,000 loss is disallowed to Partnership X. Assume the same facts as in the above example #1. C later resells the property to Z, an unrelated taxpayer, at a gain of $6,000. C's realized gain of $6,000 will not be recognized to the extent of the $5,000 disallowed loss to the Partnership X . Thus, C will recognize $1,000 gain. A gain recognized on a sale or exchange of property between a partnership and a person owning (directly or indirectly) more than 50% of the capital or profits interests in such partnership, or between two partnerships in which the same persons own (directly or indirectly) more than 50% of the capital or profits interests, will be treated as ordinary income if the property is not a capital asset in the hands of the transferee. No deduction for a payment to a partner can be claimed by an accrual partnership until the cash basis partner includes the payment in income. Note that this applies to all partners (not just those owning more than 50%).
Image of page 20
Image of page 21
This is the end of the preview. Sign up to access the rest of the document.
  • Spring '17
  • Wendy Achiles
  • partner

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern