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PRS’s BasisFMVInterim BasisA’s Basis½ Land #1$90$60$90$95½ 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.oEx. 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$200Cash dist.$(170)Red. Outside basis$30Property distributed: § 732(b)§ 751(c)$0§ 751(d)$10OtherGain or Loss$(20)Ending outside basis$0Anytime 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 PartnersAt 22:00 on week 7 class1.707 – Transactions between partnership and partnersa.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 incomeii.Disguised Payments for Services – 707(a)(2)(A)1.Transactions that may not look like payment for services on their face, but underfacts and circumstances are payments for services2.Examplesa.Fee Waiver Transactions – when opt for a capital interest that would entitle recipient to an allocation is substantially guaranteed – reclassifiedas ordinary incomeb.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 income2.199A – Qualified Business Income (QBI)a.Generallyi.Intended to reduce the overall tax burden on flow-through entity owners in a manner proportionate to the reduction in tax rates for C Corporationsii.Provides for a deduction of up to 20% of domestic qualified business income (QBI) from a sole proprietorship, partnership, or S-Corpiii.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 deductioniv.The deduction is available to individuals, estates, and trustv.Effective for taxable years beginning after 12/31/17b.Comparison – pass thru or C-corpi.Intent is to preserve some advantage to pass throughsii.Corp may be better when profits don’t need to be distributediii.Don’t know if corporate rate will remain at 21c.Definitionsi.QBIii.Qualified Trade or Businessiii.Specified service trade or businessiv.