1. This includes loans, leases, sales and employment relationships 2. The recipient of the payment must include it in income 3. The tax treatment depends on the nature of the expense that it relates – ordinary and necessary expenses are deductible under the pshp’s method of accounting, capital expenditures must be capitalized 4. This allows a partner to be an employee of the partnership ii. KEY QUESTION: Is the partner engaging in the transaction in her capacity as a partner or in an independent, non-partner capacity. 1. Nonpartner status is more likely to be found if the partner performs limited consultant-type services as an independent contractor, i.e., performing services as a lawyer or an accountant. b. Section 707(a)(2)(A): Disguised Payments for Services of Property i. 707(a) payments and guaranteed payments are not deductible by the pshp if they are not in the nature of capital expenditure ii. Distributive shares under 704(b) are deducted by the pshp even if they are capital in nature iii. Section 707(a)(2)(A) provides that a direct or indirect allocation and distribution being received by a partner for services will be treated as a 707(a) payment if the performance of services and allocation and distribution, when viewed together, are properly characterized as a transaction between a partnership and a non-partner. c. 707(c) – Guaranteed Payments 12
SPRING 2016 – PSHP TAX OUTLINE i. Section 707(c) governs transactions in which a partner, acting in her capacity as a partner, receives fixed or “ guaranteed payments” 1. If she is acting as a partner, the payment will be a guaranteed payment if its amount is determining without respect to her income of the pshp, otherwise it will be apart of he distributive share. ii. Guaranteed payments are §61 ordinary income and includible by a partner in the taxable year in which the pshps taxable year ends. 1. In Gaines v. Commissioner, the court determined that the partner must include the partner’s distributive share of pshp income in the year in which the pshp takes the deduction, if the pshp is using an accrual based method of accounting. This means even if the partner does not receive in the income in that year, they will have to include it and pay taxes. iii. These are taxed in a hybrid way: 1. They are taxed like 707(a) payments for services or capital – a. They are ordinary income to the recipient and deductible to the pshp subject to §263 capitalization requirement 2. They are also taxed like distributive shares – a. They must be included in the income of the recipient under §706 on the last day of the pshps taxable year, whether or not actually received ( Gaines) iv. The recipient of the payment should increase his outside basis in the pshp interest when the guaranteed payment is included and decrease the basis when it is paid. v. If the partner is guaranteed a minimum distributive share, and the distributive share exceeds the minimum guaranteed payment, then no part of the share will be treated as a guaranteed payment.
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- Balance Sheet, Economic system, Taxation in the United States, Generally Accepted Accounting Principles, pshp