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Problem Area 4 -Partner Basis

Problem Area 4 -Partner Basis. Partners initial basis is determine under Sec. 722. What is the general rule for determining basis? Partner bases change as the partnership operates. Sec 705 discusses the general rules What amounts increase partner bases? What amounts decrease partner bases?

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Problem Area 4 -Partner Basis

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  1. Problem Area 4 -Partner Basis • Partners initial basis is determine under Sec. 722. What is the general rule for determining basis? • Partner bases change as the partnership operates. Sec 705 discusses the general rules • What amounts increase partner bases? • What amounts decrease partner bases? • Can a partner have a negative basis? What is the Sec. 704(d) limitation? How does Sec. 465 interact

  2. Basis Adjustments - Sec. 705 • Bases is increased by • distributive share of taxable income of the partnership • distributive share of TEI of the partnership • additional contributions of capital • Bases are decreased, but not below zero by • distributions • distributive share of ptshp losses • distributive share of non-deductible expenditures. • How does Sec. 731 interrelate with Sec 705

  3. Other Basis Adjustments • Sec 752(a) - Increases in liabilities are treated as contributions: increase basis • Sec 752(b) - Decreases in liabilities are treated as distributions: decrease basis • How are recourse liabilities allocated? (Reg 1.752-1) • How are non-recourse liabilities allocated? (Reg 1.752-2)

  4. Allocation of Recourse Liabilities • Allocated based on economic risk of loss • How is economic risk of loss determined? • What is a constructive liquidation? • All liabilities payable in full • Partnership disposes of all property for no consideration • All items of income, gain, loss, or deduction are allocated to the partners • The partnership liquidates. • See Reg 1.752-2

  5. Non-recourse Liability Allocation - 1.752-3 • Partners share of non-recourse debt: • First calculate book minimum gain - See reg 1.704-2(b)(4)(d) • Minimum gain - compute any gain the partnership would realize if it disposed of property subject to that liability only for the value of the liability • Allocate book minimum in the manner in which book depreciation was allocated (usually loss sharing ratios) • Calculate tax/Sec. 704(c) minimum gain = same as above but subtract book minimum gain since it is already allocated. • Allocate tier three Sec. 704(c) gain • Residual of Non-recourse debt is allocated using profit sharing ratios.

  6. Problem Area 5Partnership Operations • Partnerships are not a taxable entity for Federal purposes • Some states do tax partnerships (e.g., Michigan), take care to investigate the rule for each state. • Partnerships calculate their income in the same manner as individual taxpayers but are not allowed personal exemptions. • After the partnership tax return is completed a partner receives a form K-1 that is used to prepare their respective tax returns. • Form K-1 provides a capital reconciliation along with each partners distributive share of partnership items.

  7. Separately Stated Items • Sec 702(a)requires separate statement of • Long & Short term capital gains and losses • Sec. 1231 G&L / Charitable contributions • Dividends -domestic corporations • Foreign taxes paid • Interest and Tax exempt interest • Net Income/loss of the partnership • The character set at the partnership level • What is the rationale behind Sec 702?

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