When a partnership is divided into two or more partnerships, any of the new partnerships whose partners own collectively more than 50% of the profits and capital interest in the old partnership are considered a continuation of the old partnership. The new partnership(s) are bound by the accounting method and tax year elections of the continuing partnership.
9. Understand the effect of optional and mandatory basis adjustments.
Optional & Mandatory Basis Adjustments Partnership can adjust basis of its property when a: 1.partner sells or exchanges his or her interest in the partnership, 2.partner transfers upon the partner’s death, or 3.partnership makes a property distribution to a partner.
Basis Adjustments on Transfers . If an incoming partner buys a partnership interest from an existing partner, the new partner’s basis in the partnership interest equals the purchase price plus the new partner’s share of partnership debt. The new partner’s basis in the partnership is likely to be different from his or her share of basis of the underlying assets in the partnership. With an election under Sec. 754, Sec 743 mandates a basis adjustment equal to the difference between the transferee partner’s basis in the partnership and the transferee partner’s share of basis of partnership assets. This adjustment belongs only to transferee partner & eliminates inequities of different inside & outside basis.
ABC Ptshp Basis FMV Cash 30,000 $ 30,000 $ Inventory 30,000 60,000 Total Assets 60,000 $ 90,000 $ A, Capital 20,000 $ 30,000 $ B, Capital 20,000 30,000 C, Capital 20,000 30,000 Total Capital 60,000 $ 90,000 $ What happens if C withdraws cash of $10,000 and inventory with FMV of $20,000, and sells the inventory to D who invests the inventory and cash of $20,000 into new ABD partnership?
ABC Ptshp Basis FMV Cash 30,000 $ 30,000 $ Inventory 30,000 60,000 Total Assets 60,000 $ 90,000 $ A, Capital 20,000 $ 30,000 $ B, Capital 20,000 30,000 C, Capital 20,000 30,000 Total Capital 60,000 $ 90,000 $ D buys C's capital interest for $30,000. What is C's Gain? What happens later when the inventory is sold? What is the optional basis adjustment? Sec. 743(b)
See Previous Slide Partners A, B & C, each have potential income of $10,000 when the inventory is sold at FMV. However, when C sells her partnership interest to D at FMV, C will report her $10,000 gain. Then, when the new partnership sells the inventory at FMV, the partnership will report total profit of $30,000. That adds up to a total of $40,000 profit. The basis adjustment fixes that problem. Sec. 734, 743(b), 754
Optional and Mandatory Basis Adjustments Adjustments on Transfers . For sales or exchanges of partnership interests occurring after October 22, 2004, the 2004 Jobs Act impose a mandatory basis adjustment if the partnership has a substantial built-in loss and has no Sec. 754 optional basis adjustment election in effect. A substantial built-in loss exists if the partnership’s adjusted basis in its property exceeds the FMV of the property be more than $250,000.
You've reached the end of your free preview.
Want to read all 90 pages?
- Spring '08
- Accounting, Corporation, Types of business entity, partner, Limited liability partnership, Partnership X Partnership