Partnerships

Check-the-box: Choose to be taxed as corp or partnership

Tax-year: Calendar year or fiscal year ending in Sep, Oct, Nov, Dec
ONLY!

Depreciation = any method allowed by IRS is o.k.

Organizational Costs = may expense up to $5K & amortize rest over

15 years
• Legal fees, drafting the charter, etc… (NOT FEES TO RAISE $$$$)

Start-up Costs = raising cash = MUST CAPITALIZE these costs

DISTRIBUTIONS
CURRENT (non-liquidating)
• No loss can be recognized for current distributions
• Gain to PTR = cash received in excess of outside tax-basis
• Basis of non-cash Property Received = Adj basis to PTP
○ Limited to PTR’s outside basis (-) cash received in same
distribution
○ Effect: Adjusted basis may be reduced/lost
• Inside basis = actual interest = interest in profits/losses

LIQUIDATING
• Losses: can be recognized to extent PTR’s basis exceeds Cash &
basis of sec. 751 property received (ordinary income assets)
• Adjusted Basis of Property Received from PTP in
liquidation
○ = PTR’s basis (-) cash received
Order of Allocation if PTR’s basis insufficient than property’s
inside basis
1. Reduce PTR basis by cash received
2. Hot Assets (new basis = inside basis is < PTR’s remaining
basis)
a. If insufficient, allocate first to avoid built-in losses
b. Then according to FMV
c. Unrealized A/R and Inventory = ‘hot asset’
3. Other Assets
a. Same steps as above
Example:
A partnership distributes both its assets, Parcel 1 and Parcel 2 in
liquidation of partner T whose basis in her interest is $55. Neither asset
consists of inventory or unrealized receivables (step 1). Parcel 1 has a
basis to the partnership of $5 and a fair market value of $40, and
Parcel 2 has a basis to the partnership of $10 and a fair market value
of $10. Basis is first allocated $5 to Parcel 1 and $10 to Parcel 2 (their
adjusted basis to the partnership under step 2). The $40 basis increase
(the partner's $55 basis minus the partnership's total basis in
distributed assets of $15) is first allocated to Parcel 1 in the amount of
Partnerships
$35, its unrealized appreciation (step 3), and the remaining basis
adjustment of $5 is allocated according to the assets' fair market
values (step 4). Thus, $4 is allocated to Parcel 1 (for a total basis of
$44) and $1 to Parcel 2 (for a total basis of $1).

SPECIAL ISSUES
Mixing Bowl-> attempt to avoid tax by shifting assets among
partners
• Ex: PTR ‘A’ transfers land w/NBV = $5K and FMV = $20K to ABC
partnership, which distributes to PTR ‘C’ two years later, when
FMV = $22K
○ Must be made w/in 7 years of contribution to be taxed
○ If contributing partner receives property back -> Tax-free
○ Like-kind-prop transferred to ‘C’ w/in 180 days also
counts
○ PTR ‘A’ -> recognize $15K gain (increases outside basis)
○ PTR ‘C’ -> basis in land = $20K (assuming sufficient basis
to cover)

Disproportional Distribution = unequal distribution of capital vs.

ordinary assets to different partners

Guaranteed Payments: Income to recipient, but DO NOT increase

outside basis
• Reduces Distributable PTP income (offsets ordinary income)
• Cannot be indexed based on partnership income (e.g. 25% of
profits)
• Self-Employment tax applies

50.1%+ Partner sells property to PTP = No losses allowed

• Gains taxed as ORDINARY INCOME to contributing PTR (no
capital gain treatment allowed)
50% of less partner selling prop to PTP = Treat as a regular sale
(realize G/L)

Holding Period of PTP interest, in exchange for contributed property:

• Capital: @ date PTR acquired the asset (retains original
HP)
• Non-capital & not used in PTR’s T/B: @ date PTP
interest is acquired

Sells PTP interest & Unrealized receivables/Inventory exists (no

basis to PTP, but high FMV)
• PTR selling the interest must recognize as ordinary income
General Rule for sale of PTP interest = taxed as capital gain
• Gain = Cash + debt relief – outside basis