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Partnership Tax Fall 2015 Unit 1: Choice of Entity?
What is a partnership?
o SS761 (**232): joint venture by means of which any business or financial operating is carried on, other than a corporation, trust or estate. o Culbertson: Must have joined together for the purpose of carrying on business and sharing profits/losses. Question of fact.
? Must be a bona fide business purpose other than saving taxes.
? BUT SEE Moline Properties: For corp, "intended to conduct or actually conducted business" Either/or.
? YALE: Regulations may have replaced Culbertson standard with Moline. o Partnership interest may come through capital, service, or gift (SS704(e) (1)). o Interests
? Capital interest: partner gets something at liquidation
? Anyone with a capital interest is a partner regardless of whether they supplied the capital (so long is the partnership is sufficiently capital intensive to require that capital)
? Profits/losses interest: only a share in future profit or loss Partnerships vs. Other Entities/Forms of Taxation o Check the Box (**71)
? (1) Separate entity from the partners for fed tax purposes? IF YES
? (2) Is it a trust, or a business entity? IF BIZ
? (3) Is it a per se corp (publicly traded partnership, joint stock, insurance, bank, anything with "inc", state-owned business orgs)? IF NO
? (4) Is there more than one member?
? If 1: disregarded entity or corporation by election
? If >1: Partnership (or C Corporation by election) o BUT: Still must meet Culbertson to be a partnership. If you only meet Moline and don't elect C, confusion. o Corporations
? SS7704: Publicly traded partnership (stakes traded on securities market) is per se a corporation
? C Corporations (default): no pass-through, double tax, separate entity
? S Corporations (elected once you've established a C corp)
? Benefits: simple, lower overhead, pass-thru, fewer payroll taxes
Cons: Less profit-sharing flexibility, doesn't allow for as much depreciation because you can't bump up basis with debt.
SS761(a): Election out of Subchapter K (must meet all 3 requirements)
? Unanimous Election
? Adequate determination of income
? Qualifying activity (**233)
? (1) Investment Club, no actual business
? (2)Joint production/extraction, no resale
? (3) Syndication of securities (must be brief holding period)
SS761(f): Spouses: generally can't form partnership because marital unit is 1 person
? Qualified joint venture: (1) only H+W; (2) both materially participate; (3) both elect into partnership. Partnership Agreements & Logistics
? 1.704-1(h): includes all oral understandings, side agreements, etc.
? SECA: Parrtnership payroll tax that follows FICA. Also either a
3.8% hospital tax, or an equal investment income tax from Obamacare.
? Partners may change agreement.
? SS706(a): partnership year ends on default 12/31, but can be changed. Use this hierarcy.
? (1) Valid business purpose
? (2) Majority interest's (50%+) tax year
? (3) Principal partners' tax years
? (4) Least Aggregate Default Rule: 1.706-1(b)(3) (**375): partnership uses tax year that results in least aggregate tax deferral for all partners.
UNIT 2: Formation?
SS721 (**217): Transfer to a partnership is a nonrecognition event. Neither gain nor loss. o See Cottage Savings, not a recognition event. o Exception: SS721(b), SS351: If it's an investment company (>80% of noncash assets are securities), then contribution is recognition. Basis, Tax Capital Account, and Book Capital Account o Outside Basis, SS722 (**218): The basis of the partner's share in the partnership
? Original partners: Their basis in the property they contributed (not FMV if the asset has built-in gain or loss. Always FMV for cash.)
? Partners who buy shares: Price they paid for share.
? SS704(d): (**209). Losses, depreciation, other deductions limited to the outside basis. All further deductions suspended when OB hits 0.
SS752: Increase or decrease in partner's share of liabilities is considered a contribution or distribution of money.
? When partners contribute debts to the partnership: o First divide the debt among all partners and increase each of their OB's according to their share (assuming debt=contribution) o Then subtract the debt each partner contributed from their OB (partnership taking on debt=distribution) o See 9/10 slides; Unit 2 Question 3. o Inside Basis, SS723 (**218): Partnership's basis in its assets. Equal to the basis the contributing partner had in the asset.
? Tacking of Holding Period: Partnership assumes partner's holding period. o Tax Capital Account: For original partners, equal to their outside basis(?)
? Tax capital account + 704(c) gain = Book capital account (after book-up) o Book Capital Account: The value the partner would receive at liquidation if all assets were sold for book value.
? The total assets of the partnership times that partner's % share
? Booking up: bring assets up to FMV, subtract liabilities, divide by shares to find new book capital account.
? Not required to do so at arrival of new partner, but only way to balance the sheet.
SS709 (**216): Must capitalize organization and syndication expenses that are greater than de minimis. Character of Gains o SS702(b) (**206): Quality of sale fixed at partnership level. Partner generally takes gains/losses as the partnership would. This is the entity theory.
? SS724 (**218): Sticky character rule.
? Unrealized receiveable: perpetual taint. Always use partner's character.
? Inventory, pre-contribution capital losses: 5 year taint. Service Partnerships o If service partner receives a capital stake in exchange for their services: treat like capital partners. They have income in the amount of their capital account, per SS83 (property rec'd for services).
? Use FMV of their share in partnership to find income. o If service partner only gets profits/losses stake: No income until profits/losses. o Notice 2005, **110: Safe harbor for service partner does not exist if he transfers his interest within 2 years (rebuttable presumption). o Circle of Cash Theory: If capital partners supply built-in gain property at the same time a service partner joins, no recognition. If??
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