Investment Partnerships • Problem • Nonrecognition allows diversification without sale • Gain recognized on contributions to a pshp if it is an investment company • Investment company • > 80% of value of assets including cash is held for investment and consists of stocks, securities, etc. 101
Disguised Sale • Issue • Partner contributes property to pshp and receives an interest in the pshp and cash • Compare with boot in corporate formation • In pshp, generally nontaxable distribution but much like a sale • Otey transaction: • Transfer followed by cash distribution was treated as nontaxable transfer & nontaxable return of basis • Example 102
Disguised Sale • Example • C is a 1/3 partner in a pshp. Her basis in her interest is $25,000. She owns a machine which the pshp would like to use (value $15,000, basis $10,000). C would like to be paid for it yet she does not want to recognize gain. C contributes the machine and at the same time the pshp distributes $15,000 cash (the FMV) to her. Since C has a basis for her interest of $25,000 is the cash a nontaxable distribution to her? • §707(a)(2)(B): if a partner transfers property to a pshp and there is a "related" transfer of money (or other property) to the partner by partnership and such transfers when viewed together are properly characterized as a sale, then treated as such 103
Chapter 9 • End of slides • Part 1 of 2 • 2019 Edition 104
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