A real estate limited partnership in which LP has a positive outside basis and his share of partnership income is $30K for the year.d.A R&D limited partnership in which LP has an outside basis of $60K attributable to his $60K cash contribution to the partnership. LP’s share of the partnership’s loss for the year is $40K.(3)Consider to what extent LP may deduct his share of losses from these partnerships for the current year, assuming he has no carryovers under sections 704(d), 465, or 469. 20
Partnership Allocations Introduction Relevant Code Provisions § 702: partner puts down his share of distributive share on his personal tax return. § 704(a): a partner’s distributive share of income, gain, loss, deduction or other tax items shall be determined by the partnership agreement. (b): if there is no allocation agreement, distributive shares are determined “ in accordance with the partner’s interest in the partnership ,” taking into account “ all facts and circumstances .” a. Use this if there is no partnership agreement, or the allocation under the agreement does not have substantial economic effect. i. Substantial economic effect requires (1) maintaining capital accounts in a certain way, (2) honor the capital accounts upon liquidation, and (3) negative capital accounts must be paid back on liquidation. § 761(c): defines the partnership agreement as including any modifications up to the time for filing the partnership’s tax return. This allows “special allocations,” which differ from the partners’ respective interests in partnership capital. Special Allocations under § 704(b) The Substantial Economic Effect Concept Orrisch v. Commissioner – under the old rule, a special allocation would be disregarded if its primary purpose is tax- avoidance rather than a usual business purpose. In this case, the court found that the special allocation of depreciation deductions to one of two partners was adopted for tax-avoidance and therefore disregarded. If there is a “substantial economic effect,” the primary purpose is not tax-avoidance. When determining allocation, the court just looks to the usual allocation of profits and losses. The court required the deduction for depreciation to be allocated between the parties in the same manner as other deductions. 1. Everything must even out in the end (focused on what would happen if the partnership liquidated). This is still a focus of the IRS. Now, we look at the partners’ capital accounts b/c it can tell you what will happen in the end. 2. Now you can allocate all depreciation to one partner, but they must be the one to feel it if the property declines in value. The § 704(b) Regulations: Basic Rules 3 Ways to have an Allocation be Respected. Reg. 1-704(b)(1)(i) : (1) The allocation can satisfy the standards for having substantial economic effect . Reg. 1-704(b)(2) . (b)(2)(ii). “Economic effect” means the allocation must be consistent with the economic business deal of the partners – an objective test. The partner to whom the allocation is made must receive such economic benefit or bear such economic burden. a.
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- Spring '14
- Corporation, basis, partner