Partnerships


 * Partnership Tax **

Tax 2


 * Lesson 3 **
 * § 704(e); 761(a); 7701(a)(2) **
 * 301.7701-2; 301.7701-2 **

1.704-1 Outline of 704 Regs P 1350

Separate from owners for tax purposes? Partnership Definitions - 761 - 7701

Reg 301.7701-1 - Dividing the profits is key - Merely sharing expenses is not sufficient.

Number 2 in small book - taxi cabs - merely cost sharing - eligible entity? - not a partnership because only sharing expenses not sharing income.

3 Gates to being eligible 1) Entity [entity separate from owners] 301.7701-1 - Main test is whether profits are shared [divided between members]  - Revenue [less] expenses  2) Business Entity? [not a hobby] – Very easy to satisfy 3) Eligible for tax purposes [federal]

-[Entity separate from the corporation for tax purposes]

Eligible entity is a Business entity - [what is a business entity] 301.7701-2(a) [What is an entity?] Eligible for tax purposes 301.7701-1(a)(2) [cautionary is not good enough]

Filing a partnership return does not necessarily determine that they are actually a partnership - the IRS does not have to obey simple because of that.

50% owner of record; split the cost of the car? - 704(e)

Bundle of rights for partnerships [Default is each partner gets both:] - Income Interest - Capital Interest

- Income Interests Get allocated profits and losses

- Capital Interest [different from capital account] Assets of the partnership [if the partnership liquidates the partners get some]


 * BUT Must pass all 3 gates before 704(e) may apply. **

Two guys are depositing their earnings in a joint bank account - Carrying on trade or business [not a hobby] and dividing assets.

Gate 1 - Entity separate from owners [truly an entity separate from owner?] - To see how to tax the entity Gate 2 - Business entity? [Yes, not a trust, Otherwise subject to special treatment? no] - Gate 3 - Eligible entity? [Per se corporation - then not an eligible entity] - Per se corporation: Not an eligible entity because you have chosen what to be

1 Owner defaults to sole proprietor OR File Incorporation Papers to be a corp. 2 + Owners defaults to partnership OR elect to be a corporation

Define: per se corporation - File the articles of incorporation - Pick to be a corp, then you're a corp

LLC can be sole prop or corp

LLC owned by Corporation = division

Check the box crap - Case talks about it - move on - Check the box to get out of the default rules

--- Purchaser-Seller relationship - Seller have skin in the game? Basis in the game? No. - Risk
 * 1) 3 Contract

Critical Factors Seller is exposed to the risk of cost and revenue - After expenses

Creditor-Debtor?

If note is paid off from the profits - then its a partnership

Creditor/Debtor? Seller/Financer?

Third party creditor or seller extending credit - any difference? - Probably no difference under partnership - but maybe under 453 there is a difference.

Employment type relationship? Participate in management? General partner? Limited Partner?
 * 1) 5 Mechanic

1st gate satisfied 2nd gate satisfied 3rd? No, no capital interest. - No Management - No Capital Interest - Gets 10% off of top -

Lesson 3 Entity recognition = 3.03 MN&W Definition of "member" = 3.04 MN&W Check-a-box Regulation

3.06: If not a trust AND not subject to special treatment then it is a business entity - Some businesses entities are "per se corporations" - Any business entity with 2 + members that is NOT a per se corporation is an "eligible entity"

- §761(a) - 1.761-1 - 3.08 MN&W
 * Election out of Subchapter K **

Definition of partnership: 761(a) 7701(a)(2) Commissioner v. Tower Commissioner v. Culbertson

Definition of partner - for tax purposes 761(a)(2) 704(e) - Need to have facts that support him satisfying the two elements of a partner.

Definition of Corporation Morrissey v. Commissioner Moline Properties, Inc. v. Commissioner

704(e) is captioned "Family Partnerships" but it applies to all owners of capital interests in partnerships. Is a person a member, a shareholder, or nothing? - Intent test from SCOTUS //Tower// and //Culbertson// - 704(e)(1) trumps the intent test

Intent test: - Intent was found lacking in 1 objective situations: 1) Where the person contributed nothing of value for his interest in profits 2) The relationship of the person to other participates was classified as some other tax-recognized relationship [employee, lessor, etc.]

_ A partner's note evidencing its obligation to make a future contribution to the partnership has no basis, the transfer of the note tot eh partnership does not increase the partners interest. P 6-5
 * Basis Issues **

Basis Adjustments – Generally

Tax Exempt Income P 6-9 Depletion Deductions {oil etc} P 6-12 Nondeductible expenditures p 6-13 Dealings in stock of a partner P 6-14 Potential Abuses P 6-14
 * Basis Adjustments – Less Common **

If a partner's basis cannot be determined in his interest, then a partner with 1/3 share in partnership assets has a 705(b) basis in his interest of 1/3 of partnership's basis in its assets.
 * Alternative Rule for Determining basis 705(b) **

P 6-26
 * Capital Account **

_ Arthur looks more like an employee than a partner. Gets share of Net Profits or Gross Profits
 * Lesson 3; Question 5 **


 * Lesson 3; Q6: **

Co-Owners a: 301.7701-1 not an entity therefore not passed gate 1 b: still foggy in -1(a)(2)
 * Q7: **

a: Separate? Yes; Business entity? [not a trust, etc.] Yes; Eligible? Yes, not a per se corporation. If PG&S was incorporated, then it would not be Eligible as they chose to be a corporation. However, it is a 3-member-LLC. - By default, taxed as a 3-member partnership
 * Q8: **

B: Before the check-the-box regs. - OUTMODED by check the box -

D: 301.7701-2(b)(8) therefore not an eligible entity - not taxed as a corporation.

E: GmBH is not on the list - therefore they are eligible. 301.7701-3(b)(C) Disregarded sometimes If one member has unlimited liability then it is taxed as a partnership - if all the members have limited liability then taxed like corporation

301.7701-1(a)(2) CoOwner question
 * Q9: **

Madison Gas case 3 utility companies are partners - Not clear -


 * Lesson 4 - do a balance sheet **
 * Code: 351(e); 704; 709; 721; 722; 723; 724 **
 * Reg: 1.453-99c) **

§721 Non Recognition

4 Principal Exceptions to §721 1) 721 - 723 apply only if property is contributed to the partnership - If interest in the partnership is exchanged for services - then not eligible  2) 721(a) Does not apply to contributions made to a partnership investment company 3) 707(a) Contribution is taxable if it is part of a "Disguised Sale" 4) 721, 731, 752 may result in gain recognition [but not loss recognition] when a partner contributes property and the partnership takes the property subject to or assumes the contributing partner's liabilities [ assumption of liability ]

722 provides that a basis in the partner's partnership interest received in §721 is equal to the sum of 1) The amount of any money contributed  2) The contributor's adjusted basis (determined at the time of contribution) of any property contributed AND 3) the amount of gain (if any) recognized by the contributor under §721(b) -[investment partnerships]
 * Basis for a partner's partnership interest. **

Partnership interest acquired in exchange for property that is **CAPITAL ASSET** or **DEPRECIABLE** used in trade or business [1231(b), 1223(1)] – then ( Transferred holding period.
 * Holding Period 4.01[2] MN&W **

If a partner contributes Cash or Noncapital [non-1231(b)] assets for a partnership interest, then the holding period starts on the date of transfer.

723 - Partnership's basis - Inside basis

Merger of corporation into partnership or LLC 721 & 4.01[7]

- Not firmly defined; however, 351 may provide guidance, however, not fully analogous.
 * 4.02[1]MN&W **
 * Definition of Property **
 * Definition of Exchange **

1.721-1(a): installment obligations are property

Services are not property

US v. Frazell Stafford v. US - each vaguely help in defining what is property and what is a service

108(e)(8)(B)
 * Cancellation of Partnership Indebtedness **

2 Classes of Partnership Property 1) Section 751 Property [Gain from 751 Property is ordinary income] 2) “Other Property” under 751(b) - Does not apply to new partner; only applies to preexisting partners.

735(a) 724
 * Prohibition of turning Ordinary Income Property into Capital Gain Property. **

Bruce, Bob and Laura form a General Partnership - Plumbing business; agree to share all profits and losses equally
 * Lesson 4 Questions: **

Assets $10,000 [from Bruce - Cash] $5,000 [From Bob - 0 basis] $5,000 [From Bob - installment notes - $1,000 basis] Equipment from Laura - Equipment and Trucks $2,000 Basis - FMV 9,000 - Inventory: - Basis 4,000 - $1,000 FMV


 * Each at least prima facie contributed equal amounts, however, must be suspicious if there is a difference from one person's contribution. **
 * 10,000 each **

1.a Tax Consequences to: Bruce

Bob

Laura

The Partnership - Non recognized


 * Name || Book || Tax ||
 * Bruce || 10,000 || 10,000 ||
 * Bob A/R || 5,000 || 0 ||
 * Bob Notes || 5,000 || 1,000 ||
 * Laura EQPT || 9,000 || 2,000 ||
 * Laura Inventory || 1,000 || 4,000 ||

Bob Realized 1/3 partnership interest worth 10,000 Basis 1,000 Gain realized 9,000 - 721 Nonrecognizition - From 1001(c) exception

Partnership received 10,000 A/R and Notes - 0 Basis, 10,000 gain. Gain Recognized 0 721(a) Property; not services. 722 the partner's interest in the partnership - basis - Outside Basis

Bruce, Bob and Laura have an outside basis in their partnership interest

721 Bruce's outside basis = 10,000 Bob's outside basis = 1,000 [his capital account] Laura's outside basis = 6,000

Outside basis can never go below 0

Buying out any 1 partner: 10,000 Whole partnership buyout would be 30,000 ~any more would be considered goodwill

733: [if there was a 5,000 loss then bruce would have a Capital Account of 5,000; bob's (4,000); Laura's 1,000] - Can only take a loss as far as he has basis - Excess loss is suspended - Ordinary Loss Thus: Capital Account can go below 0; outside basis cannot.

- Lesson 4

Basis in interest = 10,000 0 Recognized 1001(c) --> 721 ish Bruce's outside Basis =10,000
 * Q1 Tax Consequences **
 * Bruce ** – Realize 10,000 interest in the partnership

Basis in interest = 1,000 9,000 Gain – Recognized Bob's outside basis = 1,000
 * Bob ** – 10,000 Realized in 1/3 interest in the partnership

Accounts receivable: Assignment of Income Issue - Revenue Rulings 84-115

Notes 453B Issue? Maybe - But it might not be recognized under 721

Installment obligations and recognition notes payable 1.453-9 Gain or loss on disposition of installment obligations 1.721-1(a)

Note = right to receive payments with interest - Property Right

6000 Basis 4,000 gain recognized Laura's outside basis = 6,000 1231 - 1245 - Punishment: Might be trumping 721 1245 gain does not get installment sale treatment 1245 Trumps 1231 sometimes under 1.1245-6(a)
 * Laura ** – Realized 10,000 interest in the partnership

Laura's Equipment 1245 or 1231 Laura's Inventory is straightforward

4-41 MN&W 4.05 Depreciable Recapture

Partnership Q1.a: No recognition for any - for various reasons The partnership itself has the Tax Basis in the property of the partners' Tax Bases

Q1.b: No recognition as its in exchange for interest. Bringing in Bob 2 years later - The installment Notes and Accounts Receivable for a 1/3 interest. - 721 - doesn't care about amount of interest being transferred - merely property for interest is non-recognized

-- If bob sold the 5,000 A/R, then he would pick up all of that as income. - But since bob sold his AR for Partnership

Built in Gain or Built In Loss - if an asset goes into a partnership and there is built-in gain - Then the partner that contributes that property has to pick up that built in gain as income. - Thus bob gets all 5,000 as income
 * - 704(c) Contributed Property **

If Bob's contributed AR appreciates to 11,000 - then Bob would instantly pick up the 5,000 as income - Then all three partners would each pick up 2,000 as income

--

Q1.c: 723 [gives permission] transferred basis - therefore 1223 transferees the holding period - 1223; assets with Carryover [transferree uses the basis of transferor] basis get tacked holding period -


 * Bruce's Holding Period of his 1/3 interest ** : Date of Formation
 * Bob's Holding Period of his 1/3 interest: ** Date of Formation; Notes Receivable may not be trade or business

Therefore AR 5,000 has a transferred holding period Notes Recievable 5,000 has a tacked holding period - Need more facts Notes may be Capital Assets Half of his Basis is Tacked and Half of his basis is not tacked - Take the portion of the basis in the interest that is tacked and that is not tacked - Only matters for the first year while the non-tacked portion is a STCAsset; once its held over a year, then they're both LTCAssets

Laura EQPT = 9,000 FMV; 2,000 Basis Inv = 1,000 FMV; 4,000 Basis

Inventory = 9/10 Equipment = 1/10
 * Laura's Holding period of her 1/3 interest ** : Fragmented Holding period 1.1223-3; inventory is not capital

Membership Interest = 6000 5400 = long term holding period 600 = short term holding period

When is the formation date of the partnership? Signed?

FMV = Book Basis = Tax

When there is a Tax/Book difference, a problem is coming.

Q1.d: The 9,000 gain would be Larua's income - Larua's basis was 2,000 - Partnership sells it for 9,000 - Partnership's basis is 2,000 - Gain realized of 7,000

Built In Gain when contributed: 7,000 All 7,000 is attributed to

Built in Gain or Loss: The gain or loss that might have been recognized at time of contribution - but wasn't because of 721 -

Built in Loss of the Inventory 4-54 - 3,000 loss when partnership sells gets picked up by Laura.

Q2: Under US v. Frazell – creation of the faucets and knobs are not 'services' per se – instead they are property like the Maps. Thus they are non-recognized 721 contribution. - Tax consequences to Laura: 500 basis in the property; 1,000 gain of partnership interest

- Service or property? - more of a personal service element or property element

Assumption: its not property - Next step is characterization - not a capital asset 1221(a)(3)(A) Basis after contribution would be 1,000 -

Q3: Stafford v. US = Letter of Commitment; Letter of Intent? Is Property and falls under 721

Inventory isn't crazy - goes in tax free

Rev Rule 84-115 Partnership Rev. Rule 80-158 Corp

- Partnership Liaiblities 752 liabilities 1.752-1 She shed
 * Q4 Assumption of Recourse Liability --> 4.03/4-30 **

Any increase in a partner's share of liabilities of a partnership OR Partner's Liability - important phrase in 752

752(b) Inverse

752(a): P's Share of PShip's Liability goes up = Cash Contribution to Partnership [Triggers 722] 752(b): P's Share of PShip's Liability goes down = Cash Distribution of Cash to Partner [Triggers 733]

Someone assuming all the liabilities - basis cannot go below 0 - treated like a sale or exchange of partnership interest

741 Recogniition and Character - Sale or exchange of Cpaital Asset

9,000 Recourse liability 9,000 FMV 2,000 Basis
 * Answer to Q4: **

Partnership assumes the 9,000 recourse liability - 1/3 of the liability is assumed by Laura - 6,000 basis

gain would be allocated ratio would be long term [1,000] ratio would be STCG [Ordinary Income] [2,000]

Must proportion everything by basis/gain? basis/fmv?

- Bruce assuming his 1/3 of the liability - gets 3,000 increase in liability which triggers 752(a) which triggers 722 and Bruce's outside bassi after assuming one-third of the liability becomes 13,000
 * Bruce's outside basis **

Bob's outside basis was 1,000 - it goes up to 4,000

Partnership's basis stays the same as in 1a
 * Partnership''s basis in each of those assets **

Owner's Equity - Capital Account Bruce 10,000 Bob 1000 Laura (3,000)

Outside Basis: After modification of facts 752 trigger Bruce: 13,000 Bob: 4,000 Laura: 0

Laura's Split Holding period in her partnership interest outside basis is 6000 - Under 752 - Assumption of Liability

Start in Gross - 752(b) Her liabilities go down by 9,000 Her share is 3,000 752(a)

Next Class 4.a If her basis was 2,000 then Laura's liabilities allocated to the other partners exceeds her adjusted basis thus the excess is taxable. - 731(a)(1), 741 - assumption of liability compared to basis - p 4-31

Interaction of Liabilities and the Partners P 4-31

Basis of their partnership interest is a. Increased by his share of the contributing partner's liabilities - 752(a); 721 - If Laura's basis in everything she gave was 4,000 total, then cannot have negative outside basis - thus CANNOT HAVE A NEGATIVE OUTSIDE BASIS
 * The Other Partners **

Thus, if laura was selling her partnership interest it would have a split holding period thus some LTCG some STCG

b. Decreased [but not below zero] by the portion of his share of preexisting partnership liabilities that is reallocated to the ctontributing partner

Capital Account plus Share of Liabilities -- it should equal the outside basis

Depreciation and partnership - Starts over when contributed to the partnership

Determine and argue which asset you're selling when the

Disguised Sale Rule 707(a)(2)(B)

752(b) cash

Built In Losses p 4-54

Lesson 4 Number 5 Marilyn the promoter incurs costs - setting up a partnership - 20,000 fees - other costs 80,000 Not deductible 709(a)

709(b) elect to deduct 5,000

Lesson 4 Number 6 Marty dealer in Phone Systems 724 Appreciated property going into the partnership Once a depreciated or appreciated property gets into the partnership - there are a ton of pieces of property

1231 gain? --> LTCG

724 says the telephones being sold is a 100,000 ordinary gain to the partnership - basis 50,000; sale for 150,000 - Built in Gain? 50,000 - Gain to Part to 724(b) 5 year waiting period - ordinary income 75,000 to Marty[50,000 built in gain]; 25,000 to other partner [half of the remainder]

704(c) Built In Gain

Step 1 Partnership sells the phone system for 150,000; basis of 50,000 724 is characterization section 704 Pre Contribution gain - Thus, of the 100,000; Marty gets the first 50,000 (704(c)) and then the 50,000 gets split 50/50 - 724 gives it the character of Ordinary Income

704(a) Says look at the partnership document; then 704(c) talks about pre-contribution gain

Marty gets 75,000 increase in outside basis Tracey gets 25,000 increase in outside basis

======== If only a 25,000 gain - marty gets it all, he gets the first 50,000

1016 Adjustments to Basis

Paintin: 724(c) Capital Loss Property Time of Contribution 500,000 Basis 200,000 FMV

Sold 4 years later for 100,000

300,000 Built In Loss

Loss first or Character First - doesn't matter Tracey gets the first 300,000 Loss Partners share the remaining 100,000 Loss

300,000 is a LTCL Other 100,000 is inventory - Ordinary Loss

Tracey: 300,000 Capital Losses against Capital Loss 28% 50,000 ordinary loss Deduction

Marty: 50,000 ordinary loss

Ordinary Losses reduces the outside basis ===== Number 7 Investment Company? 721(b) don't recognize loss - only recgonnize gain More than 80% stocks and securities then its an investment company Recognize gain going into the partnership - Recognize the gain

===== Number 8

Start on 8 getting into Lesson 6

SKIP LESSON 5

LESSON 6&7 FOR AUG 30


 * Lesson 6 - Outside Basis 705; 722; 731; 752 **

Partnership Taxation has two basic concepts: 1) The adjusted basis of a partnership interest held by a parnter (generally referred to as outside basis) and 2) The adjusted basis of assets held by the partnership's inside basis in its assets are considered elsewhere - 723 - 4.01[1][C]

A partner's outside basis for his partnership interest is significant whenever the interest is trasnferred or liquidated.

Lesson 6 Question 1 1a) Cash for partnership interest is straight forward 722 first then 705 after

Increases in outside basis by

Inside capital accounts and outside basis increased to 40,000 Each Plus 300 tax exempt - Still increases basis

Outside basis [most of the time] Capital account plus share of liabilities

1c) 30,300 distributed to each partner - would trigger a gain  - 1.731-1(a)(1)(ii) Decrease basis at end of year  What is gotcha?  - That distribution in the middle of the year - can only be from the distributive share for that year  if its more than the distributive share  - 752(b) Distributions fall under 1.731-1(a)(1)(ii)

Answer to C Basis at end of year: 10,000 outside basis

D: Rev Ruling 84-53 - P 6-3?

E: Each person takes a 3,000 loss - Decreases outside basis - Each take 2,000 reduction of outside basis

5,000 each partner = net equity

F: 11,000 distribution but partnership is breaking even - Laura realized 11,000 - Laura Basis = 10,000 - Recognized 1,000

G: Outside basis doesn't get scrambled - tax exempt visavis tax deferred? - True 1031

Basis is not reduced

2: Jack has 25% interest in JM  Marty has 75% interest in JM

Marty is also a partner in MD 60% partner in MD  David is 40% partner in MD

2a) JM Sells Land to MD for FMV of 80,000 Jack gets 5,000 reduction in basis [705(a)(2)(b)]  Marty gets 15,000 reduction in outside basis

Loss is Dissallowed - outside basis is reduced - the MD's inside basis is

Cannot recognize losses between related party - if capital gain then 1239 then ordinary income - purchase price 1012 is the basis

2b) partnership has 10,000 income - 6,000 increase outside basis for Marty  - 4,000 increase in outside basis for David

Section 267 (d) - Nonrecognized until exceeds disallowed loss - Recognized if exceeds disallowed loss

Related parties losses

3: Lynn and Norm 90,000 cash reserves

Lynn's probably outside basis = 75,000 Norm's probable outside basis = 75,000 705(b) Reg

Distributive Share = How much you get of profits/losses gains/losses - Not a distribution under 731

Special Allocation

--- 4. Neal and Jeanne each contribute 60,000 cash to form a partnership Partnership borrows 150,000 recourse basis 722 outside basis [need to get to 705? Not yet] Cash has no holding period - start holding period at time of contribution

Partnership books the liability

Each partner has an increase in each partner's share of the liability

Each partner [after] have an outside basis of 135,000 752 causes 722 to increasej

Betsy enters the partnership with 60,000 Outside basis of 60,000 under 722 Does she share in the liabilities? Yes So each of the first two partner's liabilities goes down by 25,000 triggers 733 which lowers outside basis

Each partners's outside basis = 110,000

C. The partnership earns 90,000 net income - they use the 90,000 to pay down the 150,000 recourse loan Each partner has a 705(a)(1)(A) increase in outside basis [it hits the capital account first] [each partner's outside basis goes up to 150,000] Then they pay down the recourse debt [each partner has a 30,000 decrease in outside basis] [back down to 110,000]

D. when Betsy is admitted, she contributes Computer Terminals Computers basis = 20,000;FMV 120,000; subject to 60,000 recourse liability

Built in Gain 100,000 704(c) if you have built in gain or loss - before you put the property into the partnership - the contributing partner is stuck with the gain or loss; cannot use a parntership as a mixing bowl. When a partner contributes property with a built in gain or loss - that partner gets allocated the first X amount of the gain or loss when that property is sold [X = built in gain or loss]

Computers are 1231 property - 1223 tact holding period 20,000 basis starting on her capital account

As betsy comes in she picks up 1/3 of the loan and Neal and Jean each shed 25,000 each - Betsy picks up 50,000

Betsy decreases liabilities by 60,000 and then picks up 20,000 [do it step by step] Neal and Jean go up by 20,000

Neal and Jean outside basis = 130,000 Betsy outside basis = 30,000

Partnership sells the computers - Betsy's capital account goes up by 100,000; built in gain is all income for Betsy; Betsy's outside basis increases by 100,000

\\\\\\\ If the partnership sold the computers [within 7 years] for 150,000 [instead of 120,000] Betsy gets the first 100,000 - as ordinary income everything over 100,000 becomes 1231? somehow? Depreciation recapture 1245 is an unreleased receivable. The remaining 30,000 gets split 3 ways- the

Charactarization - 724 leads to 751(c) for unrealized receivable leads to 1245 724(a)(2) Taints the property

D?? E??: She is not liquidating - but she wants the computers back - Maintains 1/3 of the losses but not capital interest

Treated as if she picks up the 60,000 [she maintains 50,000 liability; losses 20,000 liabilities; gains 60,000 liabilities] Her basis is now 50,000 because she picks up the computer's basis Each of the other partner's shed the 20,000 liability from the computers [they're back at 110,000]

After she gets her equipment back her capital account is 0 [as it should be]

Holly and Jenny Each owns 50% interest in a partnership Each have 50,000 outside basis in their partnership
 * Question 5: **

2 advanced concepts 1) Corporation doesn't have to recognize gain 1032 2) 754 Election

Corp A buys Holly out - Corp A buys 50% interest in the partnership 741 Transfer of Interests in Partnership Corp A's outside basis is 100,000 1012 Cost Basis

[721, 722, 723 has to do with contributions]

assuming this is a LTCG for Holly

Does not look like its an unrealized receivable or an Inventory Item - Doesn't look like the corporation is a securities dealer

Liquidation under 732(b) Hypothetical

Jenny 50,000 Basis 100,000 realized Corp A 50,000 inside basis? [1012 basis]; 100,000 gain - 754 election not in place; operant
 * The Partnership sells the stock in Corp A for 200,000 ** [Partnership has basis of 100,000]

50,000 income increases basis [flow through of income] Corp A's basis becomes 150,000

Corp A's basis when they purchased their 50% interest becomes 100,000 - 705 If income is excluded it increases basis - 1032 says a corp that sells own stock - non-taxable income

Treated as if the election was taken P 6-16 754 election serves as a proxy - Corporation A then has a 100,000 basis and 100,000 FMV - 0 Gain Recognized
 * The Partnership steps up its inside basis to 150,000 **

If I debt an asset i have to credit something - Credit Corp A's Capital Account

Bifurcate the asset - Jenny FMV 100,000; Basis 50,000 [doesn't hit her share] - Corp A 100,000 basis; FMV 100,000 Alll allocated to Jenny

Effects: Jenny's Outside basis goes to 100,000 705

6.04 Partner's Basis and Capital Account

--- Normally under 1032 1.705-2 ---

754 Election is operant

Basis is higher than liability = upside down

assets = liabilities plus owner's equity


 * Liquidation 732(b) **

752 1.752-1  [1.752-1(f) Liability Increases and decreases are netted] - P 7-4
 * Lesson 7 **

1.752-7

7701(g) In determining the amount of gain or loss, with respect to any property, the FMV of such property shall be treated as being not less than the amount of any NONRECOURSE indebtedess to which the property is subject.
 * 7701(g) Clarification of FMV in the case of Nonrecourse Indebtedness **

Helmer v. Commissioner

7.02[1] Changes in the manner in which partners share liabilities - 7.02[3] - Contribution of property encumbered by a liability Partnership takes on that liability only to the extent that the liability is not in excess of the FMV - Up to that amount - it triggers 752 - Assumption of such liability 1.752-1(e)

Contributing Partner's interest is: 1) increased by his entire basis in the contributed property p705(a) and 722 2) Increaesd by any resulting increase in his share of partnership liabilities [705(a), 722, 752(a) and 752(c)] 3) Decreased by the entire amount of the liability that the partnership is treated as assuming
 * Contribution Encumbered Propetry typically triggers 3 different basis adjustments **

[stated another way, 752 is an extension of 705, 722, 731 – 733]

7.03[1] Definition of Liability

1.752-1 - defines Liability - if not described in this reg, then its not a liability and it does not change basis Definition of Recourse Liability 1.752-1 Definition of Nonrecourse Liability 1.752-1

J G  E  Form a Partnership; Contribute 60,000 in cash - Agree to share profits and losses equally
 * Lesson 7 Question 1 **

Partnership purchased outdated computers with 210,000 nonrecourse loan proceeds - Appraiser Grossly Overvalued the computers Actual FMV is 25,000

4.a) Obligation to Remediate past environmental damage Its a promise to pay - its not a liability [but it is an obligation]  does not change outside basis
 * Lesson 7 Question 4 **

Defintiion of Liability - An Obligation is a Liability if it meets (A) and (B) and (C) of 1.752-1(a)(4)

1.752-1(4) Not included in the definitions therefore its not a liability Didn't add to basis Didn't give to immediate deduction

But, the partnership then assumes the obligation and satisfies it - Then 1.752-7 Such an Obligation --> Treat like 704(c) and Sam gets the first 2,000 goes to sam, the remaining 1,000 gets split up 250,250 and 500

4.c: Sams outside basis is 4,000 Sophie buys for 3,000 Sams outside basis is going to go from 4 to 3,000 - 1.752-7(a) Sam gets a basis reduction; does not recognize a gain or loss when he sells his partnership interest - Basis gets reduced just before sale Built in Loss is 4,000 - 2,000 =2,000 - Gotten Rid of 1,000 of that built in loss - Sells it for 3000 with a basis of 3,000 so 0 gain or loss
 * Recap ** : Basis is 4,000; Obligation is 2,000

Obligation was 2,000 when it came in - Shave off 1,000 - 1,000 left Partnership Satisfied Obligation for 3,000. - Sam gets the deduction [even though he is no longer in the partnership] - part of the regulation we don't have

Don't get too hung up on -7 regs

===== Liability changes happen constantly, thus, the 752 regs require only that a partner's share be determined whenever "necessary under 1.705-1(a) in order to determine the tax liability of the partner"
 * When to determine the change in liabilities? **

Generally only at 1) End of the partnership taxable year;  2) in the event of a complete or partial sale of a partnership interest; 3) upon an actual or constructive distribution by the partnership.

==== 6 General Categories of transactions that impact a partner's share of partnership liabilities: 1) Cahnges in the manner in which partners share partnership liabilities 2) increases or decreases in partnership liabilities unrelated to any transaction between the parntership and its partners 3) contributions of encumbered property from a partner to a partnership 4) Current distributions of encumbered property 5) Distributions of encumbered property in liquidation of a partner's interest 6) Sales or exchanges of a partner's interest.

======= Reg 1.752-2: Partnership **RECOURSE** liabilities are allocated among the partners in the proportions that they bear the economic risk of loss
 * Manner in which partners share partnership liabilities **

Reg 1.752-3: [Illustrated in Lesson 7, question 3] Partnership **NONRECOURSE** liabilities are allocated - FIRST: in proportion to, and to the extent of, the partners' shares of partnership minimum gain and 704(c) minimum gain - SECOND: Generally according to the partners' interests in PARTNERSHIP PROFITS.

======= Examples of when the partners' share of liabilities changes without any transaction between partnership and its partners. - Partnership purchases 50,000 raw materials on Credit - Partnership borrows 50,000 for working capital purposes. - Acquisition of capital equipment subject to a liability.

All trigger 752(a) and is treated as making a cash contribution to the partnership.

=== Contribution of property encumbered is different than assuming a debt ===

========= Contribution of Encumbered Property Triggers: 1) 705(a) and 722 to Increase Contributing Partner's Interest in his partnership interest 2) Further increase by any resulting increase in his share of partnership liabilities 705(a), 722, 752(a), 752(c) 3) Decreased by the entire amount of the liability that the partnership is treated as assuming under 705(a)(2), 733(1), 752(b), and 752(c)

In applying these adjustments, the increase for the basis of the contributed property is taken into account first - Then two basis adjustments related to the liabilities are treated as occurring simultaneously and are netted in determining the overall tax effect of the contribution.

============= Lesson 7 Question 3 Outside Basis: Trey = 60,000 Jon = 60,000 Mike = 60,000

Each contribute 60,000 cash ; This partnership incurs a 120,000 recourse liability

Increase in outside basis Trey from 60,000 to 100,000 Jon from 60,000 to 100,000 Mike from 60,000 to 100,000 -- Page is admitted into the partnership; she contributes 60,000 in cash and computers Computers Basis = 40,000 FMV = 40,000 Nonrecourse Liability = 60,000

Page's contribution of property gets a liability haircut 752(c)

Page's interest's basis goes down by 40,000; then goes up by 10,000 Each other partner's basis goes up by 10,000; then goes down by 10,000

Page then gets a basis increase of the FMV of the Computers

After smoke clears: Trey = 100,000 Jon =100,000 Mike = 100,000 Page = 100,000

For Tax Purposes - the partnership took on only 40,000; if the partnership pays the whole 60,000 - Liability decreases the outside basis 1.752-1 Assumption of Liability The partnership pays off Page's 20,000 over the Partnership's taking the property subject to

Page gets 752(b) 20,000 Rest of Partners get 752(a)

Everyone has 90,000 Page has 70,000 outside basis

-- Question 3.D

Troy Jon Mike Page 60,000 60,000 60,000 120,000 [Computers] FMV/Basis 60,000 Liability, subject to

Partnership has 120,000 Liability; Computers depreciate by 64,000 [from 120,000 to 56,000]

What is outside basis at time of sale? - 89,000; Page has a 4,000 loss Character of the Loss? 741 --> 751 --> 1245 [its a loss not a gain]
 * Page's sale of 25% interest in Partnership for 40,000 cash **

7701(g) FMV calculation

Her decrease in Liabilities 1.752-1(h)

[Since there is outside basis, they can take the depreciation deduction /// if there is no outside basis - they cannot take the deduction]

======= Lesson 7, Question 2 Bart and Lisa Each contribute 60,000 cash

Partnership's sale of the computers - 453 installment sale?

for 752, does this become debt? Pia: Nothing happens The partnership stays liable on the 60,000 liability and has a 90,000 note.

"All-inclusive" seems to be a Recourse note

====== Lesson 7 Question 1 J G  E

Each have basis of 60,000 210,000 Nonrecourse Loan Each gets 70,000 increase in basis

Partnership purchasing computers with FMV 25,000 Is this really a liability? 752(c) only deals with contribution of property

Partnership purchasing the computers is different than contribution of property

Is this really purchase of property subject to liability? Maybe, maybe not.

======== Question 1.b  Outside basis increase for share of 30,000 Not going to get credit for the 30,000 being a liability [until it satisfies 1.752-1 definition section]

======== Question 1.c  Partnership liability if incurs 12,000 account payable for electricity? Cash-Basis not an accounts payable; don't have liabilities; just pay when you pay - not a liability under 752 - didn't satisfy definotion section

Cash-Method Taxpayer taking out a loan is taking on a liability under 1.752-1 because its increasing the basis [in whatever]

if Accrual-Method then everyone's basis goes up by 4,000 - it is a deduction [therefore it satisfies definition section]

======== Question 1.d  Jerry Lending money to the partnership - Is it a liability? - Who gets outside basis increase?

Partner acting in his capacity other than as a partner? as a partner? 1.707-1(a) Further capital contribution? - 7.05[1] Repayment Period? Security Interest or not? Interest in partnership in exchange for the "loan"? Interest bearing or not? - Fact based

========= 1.e Tiered Partnership Instant partnership is a 50% partner in another partnership

Lower Tiered Partnership has a 60,000 liability 1.752-4 Each of J, G, E get 10,000 increase - 1/2 * 60,000 = 30,000 each gets 30%
 * 7-37 Tiered Partnership **

-- Selling Short is a liability 1.752-1(a)(4) creates a liability because it creates basis in the cash 20,000 basis when the close xaction out


 * Lesson 8 **
 * Sharing of Partnership Liabilities **
 * Sharing of Partnership Liabilities **

The Old Regulations, the Temporary Regulations and the New Regulations P 8-3

Constructive liquidation is used to determine the economic risk of loss a certain partner bears. He bears the economic risk of loss for a partnership liability only to the extent he would be obligated to satisfy the obligation out of his NONPARTNERSHIP assets if the partnership was wholly unable to pay the liability. Steps are outlined on page 8-7 to 8-8
 * Constructive Liquidation P 8-7 **

[It hypothetically strips the partnership of all of its assets and nonrecourse liabilities and establishes the effects that these transactions would have on the partners' capital accounts].

Determine how the partners would be required to satisfy the remaining recourse liabilities out of their separate assets per Reg 1.752-2(b)(1).
 * THEN **

-

Nonstandard Obligations 8-11 - for example, foreign obligation; if it is unlikely that the obligee will be able to enforce its right against the obligor-partner, then the obligor-partner may disregard the obligation.

If a partner acts as guarantor, it affects the liability calculus 1.752-2(j)(2)
 * The effect of Guarantee guaranty guarantees **

- Obligations limited to the value of property: Direct and Indirect pledges Direct Pledges


 * Question 1 **

Capital Account: S 10,000 K 10,000 D 10,000 E 10,000 Each starts out with a 10,000 outside basis in their 1/4 partnership interest

After taking on the 960,000 recourse liability - each takes on the basis in the amount that each person bears a risk of loss

After taking, Each has a 250,000

===FOLLOW THE REG'S STEPS=== Constructive Liquidation; 8-7; - Hypothetical sale for $0

--Recourse debt its all about how losses are shared [not all losses are shared equally]

All assets become worthless - - - follow the steps

Capital Account, each has 10,000 loss of 250,000 remaining capital account is (240,000) [240,00 negative balance (capital account)] Constructively sold building for nothing. Loan for 960,000 -

- Capital accounts are important because it shows the economic status of each partner.

Joint and severally liable on the recourse debt. - Everyone is on the hook for the whole amount ====== 1.b.  S 700,000 K 200,000 D 50,000 E 50,000

Loss is 1M

S Gets 690,000 so his outside basis is 700,000 [share of debt, plus capital contiburtion of 10,000] K gets 190,000 so outside basis is 200,000 [share of debt, plus capital contiburtion of 10,000] D gets 40,000 so outside basis is 50,000 [share of debt, plus capital contiburtion of 10,000] E gets 40,000 so outside basis is 50,000 [share of debt, plus capital contiburtion of 10,000]

============= 1.c  Same loss-sharing Steve has a right for reimbursement against Ellen

Steve can get 730,000 from Ellen The 2 tens are absorbing each other

Ellen gets outside basis of 740,000 10,000; 40,000; 690,000

Steve's outside basis is then 10,000 [Steve gets a loss of 700,000; his risk of loss is 690,000 ]

Steve can go after ellen or the corporation

[Digging into related party rule]

-- 1.d 1.752-2(k) Net Value of Ellen's LLC is 0 She has no economic risk of loss Disregarded Entity

0 outside basis in her partnership 10,000 in her partnership basis in the higher partnership

70% of 95% 20% of 95% 5% of 95%

=========== 1.d) Steve is stepping into the shoes of a bank  - same as above

-Alternative Non Recourse 1.752-2(c) Non Recourse and Related party

=========== 8-31
 * NonRecourse **
 * 1.752-3 **
 * 3 Tiers[ third tier is default ] **

8-31 through 8-40 Explains the 3 tiers

1) Partner's share of Minimum Gain 704(b) plus regs [1.704-2(d) 0 Gain [Basis of 1M and basis of 960,000 = 40,000 loss; since no gain]  [Gains]

2) built in gain 704(c) in this case - its 0  [Gains]

3) How profits are allocated [Profits]

-- Profits visavis gains --

1.e)

- Non-Recourse debt visavis Recourse debt - How profits are allocated; how losses are allocated

============= David's otuside basis becomes 970,000 He essentially made the loan recourse - Guarantor issues - Related Person's Issues
 * 1.f Effects of Guarantee guarantor guaranty **

1.752(2)(c) Partner or Related Person as Lender 1.752-4(b) Related Person Definition 1.752-4(d)(2) Partner as Guarantor Pushes you back to 267 but the reg modifies 267

If the guarantor is the sister then she is removed by 1.752-4(b)(ii) - He doesn't get basis because sister is removed, therefore his basis is 10,000 - Sister's guarantee does not give increase in basis - Because its now non-recourse, we look at the 3 tier above to get have to look at 3rd branch so 240,000 plus 10,000 [1/4th equal partner]

============ 2  steve would get the 960,000 liability plus his 10,000

2.b Economic Risk of Loss 240,000

Steve has the remaining 720,000

Outside Basis K = 250,000 S = 730,000 X = 10,000 Y = 10,000 _ 1M

2.c Ellen is a Limited Partner - But she guarantees 240,000 of the 960,000 - If there are subrogation rights then [Ellen's rights to go after steve in the shoes of the Lender] If there are subrogation rights, then Ellen doesn't have the economic risk of loss and she can go after someone eelse.

If there are NO subrogation rights, then the Ellen gets 100% of her guaranteed amount. If there are subrogation rights, then she can go after the other people on the hook, and she gets no basis increase.

2.d) Karen Guarantees the repayment - what are the partners' outside bases? Karen has entire 960,000 plus 10,000  Everyone else is just their 10,000


 * Lesson 3**

MN&W 3.01 – 3.08 Generally

Code 704(e) 761(a) 7701(a)(2)

1.761-1(a) 301.7701-1 301.7701-3

Definitions

Eligible Entity

Members

1) Entity separate from Owners 2) Business Entity? 3) Eligible Entity?
 * 3 Gates before 704(e) may apply:**

Check the Box to get out of default rules? Check a box regulations 3.06 MN&W

761(a) 1.761-1 3.08 MN&W
 * Election out of Subchapter K**

761(a) 7701(a)(2) Commissioner v. Tower Commissioner v. Culbertson - Intent Test - 704(e)(1) Trumps the Intent Test
 * Definition of a Partnership:**

Intent test: - Intent was found lacking in 1 objective situations: 1) Where the person contributed nothing of value for his interest in profits 2) The relationship of the person to other participates was classified as some other tax-recognized relationship [employee, lessor, etc.]

761(a)(2) 704(e) - Need to have facts that support him satisfying the two elements of a partner.
 * Definition of partner - for tax purposes**

Morrissey v. Commissioner Moline Properties, Inc. v. Commissioner
 * Definition of Corporation**


 * Lesson 4**

Tax 2 Notes 100% allocation Outside basis at formation - Don 50; Paul 50 Recourse Liability; Allocating the liability as they allocate losses Losses are equal until capital accounts are 0, then all losses go to Don After its all allocated, Don has an outside basis of 900 and Paul has outside basis of 100 Yes, there is economic effect in year 1 3 Trap Doors Are they at risk? 1) 704(d) [We have enough basis to take the loss] 2) Individually are they at risk in this entity? Yes, its recourse debt. 3) Is it passive or not? Fact based question. View Don's activity; material contribution or passive activity? § 469 If they pass these trap doors they can take the losses Year 2 Negative Equity Don gets allocated the $100 loss This allocation of 100 loss to Don, because he has the deficit restoration allocation, so it has economic effect Ultimate Risk of Loss - Even if this was a joint and severally liable loan, Paul could go after Don so Don has the ultimate risk of loss.
 * Lesson 10 Question 4**

Paul serving as the General Partner Don is a Limited Partner Differences in year 1 Don does not have obligation to restore negative capital account Year 1 allocation does not change because he does not go into negative Outside Basis $50 / $50 for their contribution Paul gets $900 additionally Outside Basis because he is General Partner After year 1, Paul has 900 O/B Don has 0 outside basis. Year 2 allocation, however, the allocation will not have economic effect so look at PIP to determine - This is a tax allocation, its not an economics situation - If partner would agree to a limited deficit restoration, then there is economic effect. - [Still not talking about substantiality] After the 3 Steps to determine Economic Effect Go to Economic Effect Equivalence [1.704-1(b)(2)(i) P 1355 Got to look at the future deductions when starting out; Reasonably Expected 1.704-1(b)(2)(ii)(d)(5) P 1353 - Tax Allocation - Got to go as far into the future as we can Year 1 has economic effect Year 2 Does not have economic effect so what do we use? Partner's Interest in the Partnership PIP Look to PIP P 1362 1) Contributions [in this case 50/50] 2) Losses [50/50 until Capital Accounts are 0, then Don gets 100%] [If different than that of taxable income and loss] 3) Interests of partners in cash flow and other non-liquidating distributions. and 4) Rights of the partners to distributions of capital upon liquidation. - General Partner get special anything? Facts and Circumstances!!!! Generally Speaking: Really hard to take a loss Got Basis to take loss? At risk to take loss? Passive activity? [if so, then no loss can be taken] \\\\\ Depreciation is not an economic item \\\\\\ LESSON 10 QUESTION 5 Is a Shifting Tax Consequences Economic Allocation with a Tax Component - Interest is a tax item Push the income to the guy with the lowest tax bracket. - Does this have SUBSTANTIAL economic effect - got to do both tests now P 1355 1.704-1(b)(2)(iii)(a) General Rules Overall Substantiality 1.704-1(b)(2)(iii)(b) Shifting Tax Consequences 1.704-1(b)(2)(iii)(c) Transitory Next Tuesday Assignment - Go back into Partnership Book book 11-32 through 11-53 Stop @ (vi) Substantiality Stop at (vi) Flow Through Partners Do Problems 6, 7, and 8a - 8i Written out
 * Question 4.b.**
 * Think about deficit restoration and Limited Partner**
 * SUBSTANTIALITY**

Partnership and Basis:
 * Misc Digestion __**

The outside basis

Partnership and Elections

Partnerships and Nonrecognition 721(a) Contribution by partner of property to partnership during formation and after = nonrecognition 4 Principal Exceptions to §721 1) 721 - 723 apply only if property is contributed to the partnership - If interest in the partnership is exchanged for services - then not eligible 2) 721(a) Does not apply to contributions made to a partnership investment company 3) 707(a) Contribution is taxable if it is part of a "Disguised Sale" 4) 721, 731, 752 may result in gain recognition [but not loss recognition] when a partner contributes property and the partnership takes the property subject to or assumes the contributing partner's liabilities [ assumption of liability ]

Boot and Contributions - Partner receives boot from Partnership à 707(a)(2)(B)


 * Name || Book || Tax ||
 * Bruce || 10,000 || 10,000 ||
 * Bob A/R || 5,000 || 0 ||
 * Bob Notes || 5,000 || 1,000 ||
 * Laura EQPT || 9,000 || 2,000 ||
 * LauraInventory || 1,000 || 4,000 ||


 * Partnership**

Tuesday November 1 2011 11-32 through 11-53 Stop @ (vi) Substantiality Stop at (vi) Flow Through Partners Do Problems 6, 7, and 8a - 8i Two special Rules that invalidate specific types of allocations. 5) **Shifting Allocations:** Prohibits intrayear allocations that are intended to shift tax consequences but not significant economic consequences 6) **Transitory Allocations:** Prohibits transitory allocations - those that will be largely offset by other allocations at some later time. [If the allocations occurred in different years, they would be invalid "transitory allocations" M, N & W 11-35] [The economic effect of an allocation that will be offset by an allocation in a later year is transitory.] - For either of these two to apply the total tax liability of the partners must be reduced as a result of the allocations. 5 year rule 1.704-1(b)(2)(iii)(//c//) - 1.704(b)(2)(iii)(//b)// 1.704-1(b)(5) Examples 6, 7, and 10 illustrate shifting allocations. 6) K and L form a general partnership to acquire and operate 1231 property; - L expects to have 1231 gains; K does not - The partnership agreement is amended to allocate all 1231 losses to K; and an equal amount of other partnership losses or deductions to L. Deductions and losses that exceed these allocations are allocated equally to K and L. The Economic Effect Test is satisfied; however, does the allocation actually have substantial effect? - that is, when the allocation was made, there was a strong likelihood that the capital account adjustments would be the same had the allocations not been made. AlSO, There was a strong likelihood at the time the allocations were made that as a result of the allocations, the total taxes of the PARTNERS would be reduced. Rebuttable presumption The economic effect of an allocation that will be offset by an allocation in a later year is transitory. If the allocations, viewed together, reduce the total tax liability of the partners, their economic effect is not substantial. 1.704-1(b)(3)(iii)(//c//) Leads to a rebuttable presumption that there was a strong likelihood at the outset that they would occur. 1.704-1(b)(5) Example (1)(xi) Partnership Income is Different ?? 11-40 1.704(b)(5) Example (3) 1.704-1(b)(5) Example (19)(ii) Cost Recovery or other similar deductions of property. OTER is the sole exception to 1.704-1(b)(2)(iii)(//a//) An allocation may pass the Shifting and Transitory rules; it may still run-afoul of the Overall Tax Effect Rule. The Overall Tax Effect Rule invalidates allocations schemes that, on a present value basis, make some partners better off after taxes and leave no partners worse off after taxes. - Including the partners' nonpartnership tax attributes. For this rule to apply - The partners must have significantly different nonpartnership tax attributes that the allocation scheme seeks to exploit. When applying the Overall Tax Effect Rule, Apply the Value Equals Basis rule but do not apply Five Year Rule. After Tax Economics No substantial Economic Effect if Everyone is better off because then you're using the partnership as a tax shelter. Strong Likelihood at the time the allocation is put into the partnership agreement. If you cannot establish a baseline - it probably has Substantial Economic Effect; how can it be used as a tax shelter if you don't know whats going to happen?
 * Chapter 11**
 * Substantiality**; Allocations must substantially affect capital accounts.
 * 5-Year Rule** generally provides a safe harbor for loss allocations that will arise AFTER the 5th year [the offset is not expected to occur until after the fifth year].
 * Shifting Allocations**; allocations within a taxable year that reduce the partners' total tax liability but have no significant economic effect are generally invalid
 * Transitory Allocations**
 * Value-equals-basis rule**
 * value equals basis rule**
 * Overall Tax effect rule [1.704-1(b)(5) Example (5) ]**

Ceiling Rule of 704(c) 11.04[2] MW & E

The principle ambiguity created by the overall tax effect rule lies in the consequences of income chargebacks. - clear tension between regulatory assumption that value = basis and the reality that zero=basis leased property produces income.

Determining the baseline - To apply the previous rules, one must first determine a baseline - P 11-49 MW&E To Determine the baseline: Ignore the allocation supplied by the agreement [partnership agreement is silent] [The baseline should have a strong likelihood of producing the same pre-tax economic results to the partners as the allocation system prescribed by the partnership agreement.] capital accounts John Paul John 0 0 100 0 200 400 300 400 With and without allocation each has 400 outside basis within 5 years; Strong Likelihood that this is going to happen at the time of the allocation a) No; because they are both getting the same dollar amount in under 5 years but their tax consequences are greatly changed. Violates the Transitory Allocation Rule ---> therefore go to PIP 6b) Yes, Under the Transitory Rule, because it would take longer than 5 years for Paul to be fulfilled. Without Allocation With Allocation John Paul John Paul Before question 6 is done: not substantial? It is not substantial because it satisfies the conditions of Overall Tax Effect. The first sentence of (iii)(a) is the general rule The second part is the Overall Tax Effect Rule Value = Basis rule Yes, Has substantial economic effect Assuming they each put 500 in Ringo Beginning Capital Account is 500 Capital account after 5 years is -500 All depreciations deductions are allocated to ringo George started with 500 Capital Account - after 5 years had 500 Capital Account Substantial Economic Effect? Yes, Transitory Allocations Rule; **Value = Book Basis Rule** --> Assumption at the time of the allocation; perspective is from the time of allocation. Overall Tax Allocation Rule? Yes, its substantially affects Georges position after tax effects - it has substantial economic effect George is a Tax-Exempt Entity Satisfies the Overall Tax Allocation Rule and therefore does NOT have substantial effect
 * Lesson 10 Question 6**
 * Overall tax Effect Rule test too**
 * Lesson 10 Question 7**
 * Hypothetical**

Overall Tax Effect Rule No, not substantial because Ringo is in a better tax position and George is not made worse off by the allocation. Equipment Y1 200 deduction Y2 200 Y3 200 Y4 200 Y5 200 Exploiting the fact that Ringo is in a higher tax bracket than George. Therefore Ringo is getting the deduction that will benefit him; George is not harmed by the allocation therefore it violates the overall tax effect rule and it is not substantial. Ignore the 5 year rule Reba contributes 180; Jimmy contributes 20 Reba 90% Jimmy 10% Partnership indebtedness: Nonrecourse $800 Purchases depreciable building for $1,000 Agreement: Share losses 90/10 Allocate Income: First restore previously allocated losses and then evenly. Distributions are made first to return initial capital to the partners then evenly. Building Depreciation: [Allocated like Losses] Y1 1000 - 100 = 900 Y2 900 - 100 = 800 Y3 800 - 100 = 700 Y4 700 - 100 = 600 Y5 600 - 100 = 500 Y6 500 - 100 = 400 Y7 400 - 100 = 300 Y8 300 - 100 = 200 Y9 200 - 100 = 100 Y10 100 - 100 = 000 Reba: 720 + 180 = 900 Jimmy: 80 + 20 = 100 Tier 1 Min Gain Tier 2 Not Applicable Tier 3 As profits are allocated The profits are allocated 50/50 in the long run - However, argument can be made that it is allocated: Between 50 to 90 for Reba and Between 10 to 50 for Jimmy - Argue it both ways In Class: End of Third year book basis in building is 700 - Basis is 700, Nonrecourse debt of 800 = Min Gain of 100. Capital Account? Reba Jim 180 20 1.704-2(b) p 1375 Allocations in year 3 do not have economic effect--> therefore we go to PIP. What is the PIP Regulation. Once they have losses the profits go 90/10. Minimum Gain was $100; split 90/10 under tier 1; do the remaining 700 90/10. Outside Basis: Reba = 180+90+630-270 (losses) = 630 Jim = 70 Capital Account at end of year 3 Reba = (90) Jim = (10)
 * My Guesses: (Might be wrong)**
 * Lesson 10 Question 8**
 * Q8a) Outside Basis?**
 * Q8b**:

My Guesses Third Year: Reba 900 -180 = 720; 720 - 50 = 770 Jimmy 100 - 20 = 80; 80 - 50 = 130 The first 200 of the 300 depreciation is allocated 90/10; then the last 100 is allocated 50/50 Minimum Gain 800-600 [First Mortgage] 200 Minimum Gain 100 - 0 (basis used up on first mortgage)
 * Q8c)**

300 total Minimum Gain 1.704-2(g)(1) p 1379 Tier's calculation for non-recourse debt She gets 180 from first mortgage and 90 from second mortgage Reba's outside basis = 180 - 360 total loss - 90 Cash + 540 = 540 Jimmy's Capital Account after year 4: Reba (270) [Cash Distribution of 90 from the recourse debt] Jimmy (30) [Cash Distribution from the recourse debt] [Liability in Year 4 800 + 100; allocated per 1.752 (i)]

Outside basis year 4 goes up by 90/10 = 860 / 140 100 more depreciation 860-50 = 810 140-50 = 90 4th year $200 partnership income (100 income, 100 cash flow) 860 / 140 + 50/50 (income 50/50 because no losses) - 100/100 (for the debt pay down) 600 in losses 600 in deductions FMV = 800 in year 11 Outstanding non-recourse debt is 800 4th year, Adjusted Basis of building = 600 Outside Basis In the 4th year Deed in lieu of foreclosure = 800 $700 losses First 700 in income is allocated 90/10 (630/70) Last 100 is allocated 50/50 Total Income Distributed from Cancellation of Debt (680 / 120) Jimmy guarantees the $800 1.752-2(d)(2) De minimis Exception It is arguable that he is a de minimus? Its 90/10 plus 50/50 after so that equals more than 10% Reba 770 Jimmy 130 Becomes Reba has 180 basis reduced Reba 900 -180 = 720; 720 - 50 = 770 Jimmy 100 - 20 = 80; 80 - 50 = 130 \
 * My Guess**
 * Q8d)**
 * Q8e)**
 * Q8f)**
 * Q8g**
 * Q8h**
 * Q8i)**
 * Q8e)**