Partnership Taxation Formations

1. Partnership TaxationFormations • Chapter Objectives • To understand the acquisition of a partnership interest in exchange for a contribution of property • To understand the acquisition of a partnership interest in exchange for a contribution of services • To understand the basis of a partners interest in the partnership after contribution of property • To understand the partnerships basis in the property received.

2. General Rules • What it the general rule in Code Sec. 721(a)? • What is partners tax basis of partnership interest? (Sec. 722) • What is partnerships interest in basis of property received? (Sec. 723) • What holding period does the partnership take in the assets contributed (Sec. 1223) • Do not lose sight of the FMV aspect of partnership formations - Why is this important

3. Rationale Behind Partnership Formation Rules • Are the gain/loss rules of Sec. 721 permanent or deferred? • What tax doctrine best summarizes why Sec. 721 exists? • What is meant by inside basis v. outside basis. How might these numbers differ? Can we balance the playing field if there is a difference? • Why is it necessary to monitor built in gain/losses? Character of income etc.

4. What is property? • Money – how valued? • Tangible Real Property (if title transferred) • Tangible Personal Property (if title transferred) • Partner’s personal notes – no basis until note paid • Intangible Assets • What value is assigned to personal use property that is contributed to a partnership as business use property? • Accounts Receivable – how is basis different based on method of accounting?

5. Other General Rules • Excess of any money distributed over a partners adjusted basis will result in a taxable gain (Sec. 731) - may be triggered by contributing an encumbered asset. - Give a common example of this. Does a negative tax capital account suggest there will be gain recognition? • Partner’s are allocated their pro-rata share of partnership liabilities (Sec. 752) - cash contribution. Different types of liabilities. • Transfer of a liability to the partnership is deemed to be a cash distribution (Sec. 752(b)

6. Special Considerations • Depreciation methods – typically carryover basis and method – special rule for Sec 704 (b) allocations. • Depreciation recapture / Sec. 1245 gain on contribution • Investment Partnerships – see rules on page 69. • Supsended lossses under Sec. 465/469 on contributed property remain with contributing partner, not transferred to partnership.

7. Partnership Interest for Services • Partnership interests acquired in exchange for services rendered or promised - may be taxable – holding period starts day after receipt of interest. • Partnership interest - share in the profit/losses, risk of loss, and a capital interest. • FMV (Sec. 83) of an interest in partnership capital transferred to a partner as compensation is taxable (Reg. Sec. 1.721-1(b)1, Sec. 61. • Generally amount is taxable when the capital interest in received unless substantial restrictions exist

8. Receipt of Interests for Services (Continued) • Taxable amount to partner: FMV of the interest received – not necessarily the amount credited to the tax capital account due to valuation discounts. • Partnership takes a deduction / Partner recognizes income. • Prior partners may recognize built-in-gains/losses though because the assets are deemed sold so that they can be transferred to the new partner

9. Formations (cont) • What is the relevance of the Sec 83(b) election? • Is the receipt of a profits interest in a partnership taxable to the recipient? If not, why not? • If a partner receives the interest as compensation for services, does the partnership get a deduction? • When a partner receives a property interest as compensation, is there any gain or loss recognized to the partnership? • Special rules for Profits Interest only.