an interest in a partnership, gain/loss is capital, except as provided in §751. i. $0 – $10k = $10k capital loss 99
viii. (h) What result to Nupartner in (g), above, if the partnership had made a § 754 election? 1. STEP ONE: Determine total gain/loss to selling partner a. $40k AR – $40k AB = $0 2. STEP TWO: Determine portion of gain (loss) that is ordinary under § 751. a. STEP 2(A): Determine partner’s capital gain (loss) in absence of § 751. i. This is $0 b. STEP 2(B): Determine partner’s share of ordinary income under § 751 by doing a hypothetical sale. i. Because of the § 754 election, Nupartner realizes no income on the sale of the A/R. Nupartner has 10k new basis, 10k gain-10k basis = 0, Gets to use basis allocation. ii. Ordinary income = $0 c. Capital Gain = STEP 2(A) – STEP 2(B). In the case of a sale/exchange of an interest in a partnership, gain/loss is capital, except as provided in §751. i. $0 – $0 = $0 capital gain/loss §741 ix. (i) What is Buyer’s inside basis in (h), above? 1. Reg. § 1.743-1(f): a transferee’s basis adjustment is determined w/o regard to any prior transferee’s basis adjustment 2. Thus, Buyer would go through the same analysis in part (b). All the numbers are the same, so it will be the same inside basis. x. (j) If the partnership properly maintained capital accounts and the selling partner’s capital account prior to the sale of his interest was $20,000, what is Nupartner’s capital account upon purchase of his one-third interest for $40,000 if: 1. (i) a § 754 election were in effect; (ii) a § 754 election were not in effect. 2. The answer is the same under either scenario 3. Reg. § 1.704-1(b)(2)(iv)( l ), (m): book capital account of the transferor carries over to the transferee a. Thus, Nupartner’s capital account is the same as the selling partner’s: $20k b. 754 election only relates to the basis, it does not affect the capital account. (Capital account: ledger of how much money the PNS owes to the PR). xi. (k) If a § 754 election is in effect, will each new purchasing partner create havoc for the partnership’s accountant? 1. Yes. It will be burdensome if the p’ship has a lot of assets or a lot of transfers in p’ship interests. 2. Reg. § 1.754-1(c)(1): may permit revocation of a § 754 election when it becomes an administrative burden 100
PART 7: OPERATING DISTRIBUTIONS I. Introduction a. Operating (“Current”) Distributions are distributions to someone who continues to be a partner after distribution. Cf. liquidating distributions. II. Consequences to the Distributee Partner a. Nonrecognition Rules on the Distribution i. Nonrecognition by Partner. Generally, in distributions by a p’ship to a partner, gain/loss is not recognized. § 731(a)(1). 1. Exception: Distribution of Money. Gain or loss is recognized to the extent that any money distributed exceeds the AB of the partner’s interest in the p’ship immediately before distribution. § 731(a)(1). a. Marketable Securities Treated as Money. “Money” in § 731(a)(1) includes marketable securities. § 731(c). b. Advances and Draws. Advances or drawings of money or property are treated as current distributions made on the last day of the p’ship taxable year for the distributee partner. Reg. § 1.731-1(a)(1)(i). 2. Capital Gain.
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