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iii.705(a): requires that adjustment be made to the partner’s OB to reflect the tax results from partnership operations.1.Partner’s OB is increased by his share of the partnership’s:a.Taxable incomeb.Tax-exempt income2.Partner’s OB is decreased by:a.Distributions from the partnership as provided in §733,b.The partner’s share of partnership’s loss, andc.His share of partnership expenditures, which are not deductible in arriving at taxable income and are not properly capitalized.g.How Partnerships are taxi.Income and loss of partnership are taxed directly to partners under §702 informational returns aka K-1sii.Reason why items in 702 are separately state is to preserve characteristics24
1.Might be treated differently depending on individual partner’s tax situationh.Problem – pg. 113 9/7i.A and B, both calendar year non-corporate taxpayers, are equal partners in the AB Partnership, which had the following income and expenses during its (business purpose) taxable year that ended on July 31 of the current year: Gross receipts from inventory sales$100,000Cost of goods sold30,000Salaries paid to nonpartners10,000Depreciation12,000Advertising expenses8,000Interest expense paid on investment margin account maintained by AB (see § 163(d))6,000Gain from the sale of machine held for two years:§ 1245 gain8,000§ 1231 gain2,000Dividends7,000Charitable contributions800Tax-exempt interest500STCG on a sale of stock6,000LTCG on a sale of stock held for two years4,000LTCL on a sale of stock held for two years2,000§1231 gain on casualty to machine held for two years1,0001.How and when will AB, A and B report the income and who will be liable for the taxes?Separately StatedNot Separately StatedInterest Expense Paid: ($6k)[702(a)(7)]Gross Receipts: $100k§ 1231 Gain from Sale: $2k[702(a)(3)]Cost of Goods Sold: ($30k)§ 1231 Gain on Casualty: $1k [702(a)(3)]Salaries :($10k)STCG: $6k[702(a)(1)]Depreciation: ($12k)Dividends: $7k[702(a)(5)]Advertising Expense: ($8k)LTCG: $4k[702(a)(2)]§ 1245 Gain: $8kLTCL: ($2k)[702(a)(2)]Charitable Contribution: $800[702(a)(4)]Tax-exempt interest: $500$48k bottom line incomea.AB’s taxable income is $48k combined incomeand the listed separately stated items. b.A and B would include their distributive share of the Combined Net Income which is $24k each. 25
2.Assume this is the first year of the partnership operations. A’s basis in his partnership interest is $70k and B’s basis in her partnership interest is $40k. What will be the tax consequences of AB’s first year of operations to A and B? [705(a)]a.Step 1: Increase Basis i.Each Partner must increase his OB by his distributive share of partnership taxable income and tax-exempt income.1.$24k Taxable income each [705(a)(1)(A)]2.$250 Half of the Tax Exempt interest each [705(a)(1)(B)]b.Step 2: Decrease Basis by Distributions [705(a)(1)(A)]i.Charitable Contribution $400 eachc.Step 3: Decrease Basis by Losses i.Interest Expense paid on Investment Margin Acct maintained by AB $3k Each [Regs say 705(a)(2)(B) first, then decrease 705(a)(2)(A)]ABInitial Basis70k40kBottom line income24k24kSeparately Stated income9k9kTax exempt income250250Charitable contribution(400)(400)Investment interest(3k)(3k)