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– If gain is realized when partnership property is involuntarily converted, the partnership itself (rather than the partners) must reinvest in similar or related property to be able to usethe nonrecognition provision of Code Sec. 1033. – If an individual suffering an involuntary conversion purchases an interest in a partnership which owns qualifying property, the purchase fails to qualify for Code Sec. 1033 treatment. • CodeSec.1244Stock – Code Sec. 1244 allows the owner of qualifying stock a limited amount of ordinary loss when the stock is worthless or is sold at a loss. – If the partnership distributes the stock to its partners, they do not qualify for an ordinary loss because Code Sec. 1244 treatment applies only to original holders of the stock. • The partnership, not the partners themselves, is viewed as the original owner. • Prepaid Expenses – Prepaid expenses are deductible only if, after taking the deduction into account, income is clearly reflected. Calculation of the Amount of the Partnership’s Taxable Income Partnerships generally take into account the same income, loss, deductions, and credit as an individual. Code Sec. 703(a) contains exceptions.
Partnerships are not allowed deductions for: 1.Personal exemptions 2.Taxes paid or accrued to foreign countries 3.Charitable contributions 4.Net operating loss carryovers 5.Additional itemized deduction in Code Secs. 211 and following 6.Depletion with respect to oil and gas wells\ 7. The general rule is that income is reported by the partnership if it is reasonably associated with the partnership’s business activity. 8. The partner must report outside service income to himself even if the income is from services similar to services rendered by the partnership. 9. If a partner is personally responsible for an expense and not entitled to reimbursement, the partner (not the partnership) is entitled to the deduction. Payments to a Partner If payments are made to a partner acting in a nonpartner capacity, it’s governed by Code Sec. 707(a). If payments are made to a partner acting like a partner, but without regard to partnership profits, they are governed by Code Sec. 707(c).
CodeSec.707(a)and(c)paymentsarepartofthe partnership’s aggregated nonseparately stated taxableincome calculation unless they are specially allocated. A partnership generally classifies its payments to a partner in 1 of 3 categories: 1.Code Sec. 707(a) payments Tends to treat the payment as if it’s made to a nonpartner2. Code Sec. 707(c) “guaranteed” payments Treated as distributive shares for some purposes and a payment to a nonpartner for other purposes 3. A distributive share of the partnership’s income Payments to Partners as Compensation for Services or Property Not Required as a Condition of Partner Status o Payments made to partners for the use of the partner’s money or property, or for “support services, are normally deductible by the partnership. These are generally known as Code Sec. 707 (a) payments.