PRS’s Basis
FMV
Interim Basis
A’s Basis
½ Land #1
$90
$60
$90
$95
½ Land #2
$45
$60
$60
$65
$135
$150
$160
§ 731(a)(2): if partner has outside basis in excess of distributed cash and inventory or
unrealized receivables, and has no property to apply basis to – forced to recognize loss.
Never increase basis of ordinary income assets.
o
Ex. A gets liquidating distribution of one-third of both inventory and accounts
receivable and $120 of cash. Assume A’s outside basis is $200. His cash
distributed is $120 plus $50 of liability relief, leaving reduced outside basis of
$30. He will get $0 carryover basis in receivables, and $10 carryover basis in
inventory, leaving no other property to allocate remaining $20 outside basis. A
will recognize loss of $20.
A’s initial basis
$200
Cash dist.
$(170)
Red. Outside basis
$30
Property distributed: § 732(b)
§ 751(c)
$0
§ 751(d)
$10
Other
Gain or Loss
$(20)
Ending outside basis
$0
Anytime basis of property changes, because of limitations under § 732(a)(2) (current
distributions) or § 732(b) (liquidating distributions) – forced to step up/down basis of
distributed asset – creates inside/outside disparity, trigger adjustment under § 734(b), if
PS makes § 754 election.
With liquidating distributions of appreciated property, can book-up all assets and allocate
gain among partners for capital accounting purposes
Week 7: Transactions Btwn Partnership and Partners
At 22:00 on week 7 class
1.
707 – Transactions between partnership and partners
a.
Partner acting in non-partner capacity – 707(a)
i.
Generally, payments are taken into account by partner as income of an independent
contractor as ordinary income
ii.
Disguised Payments for Services – 707(a)(2)(A)
1.
Transactions that may not look like payment for services on their face, but under
facts and circumstances are payments for services
2.
Examples
a.
Fee Waiver Transactions – when opt for a capital interest that would
entitle recipient to an allocation is substantially guaranteed – reclassified
as ordinary income
b.
Guaranteed Payment – 707(c)
i.
Payments that are NOT dependent on partnership income or profits or anything.
ii.
Generally, recognized by recipient partner as ordinary income
2.
199A – Qualified Business Income (QBI)
a.
Generally
i.
Intended to reduce the overall tax burden on flow-through entity owners in a manner
proportionate to the reduction in tax rates for C Corporations
ii.
Provides for a deduction of up to 20% of domestic qualified business income (QBI) from
a sole proprietorship, partnership, or S-Corp
iii.
A taxpayer’s QBI deduction will generally equal the total of 20% of the QBI from each
qualified trade or business–
Various limitations apply in calculating the available
deduction
iv.
The deduction is available to individuals, estates, and trust
v.
Effective for taxable years beginning after 12/31/17
b.
Comparison – pass thru or C-corp
i.
Intent is to preserve some advantage to pass throughs
ii.
Corp may be better when profits don’t need to be distributed
iii.
Don’t know if corporate rate will remain at 21
c.
Definitions
i.
QBI
ii.
Qualified Trade or Business
iii.
Specified service trade or business
iv.
