Understanding partnership and LLC taxation / Jerold Friedland.
2017
KF6452 .F362 2017 (Map It)
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Author
Title
Understanding partnership and LLC taxation / Jerold Friedland.
Published
Durham, North Carolina : Carolina Academic Press, [2017]
Call Number
KF6452 .F362 2017
Edition
Fourth edition.
ISBN
9781531000813 (alk. paper)
1531000819 (alk. paper)
9781531000820 (e-ISBN)
1531000819 (alk. paper)
9781531000820 (e-ISBN)
Description
xxvii, 583 pages ; 26 cm.
System Control No.
(OCoLC)989726698
Summary
"The fourth edition updates the text to discuss important recent legislation, regulations and cases affecting partnerships. The new partnership audit, assessment and collection rules enacted by the Bipartisan Budget Act of 2015 are discussed as well as the associated tax planning. The update describes recent regulations governing bottom dollar payment obligations, disguised sales of property to or by a partnership, and new rules relating to taxation of foreign partners and partnerships."-- Provided by publisher.
Note
Includes index.
Bibliography, etc. Note
Includes bibliographical references and index.
Other Editions
Revision of: Friedland, Jerold A. Understanding partnership and LLC taxation. 3rd ed. (OCoLC)758973708
Record Appears in
Gift
Purchased from the income of the Edith L. Fisch Fund
Gift
The Arthur W. Diamond Law Library
Purchased from the income of the Edith L. Fisch Fund
Table of Contents
Table of Cases
xxi
ch. 1
Introduction to Taxation of Partnerships and Limited Liability Companies
3
1.01.
Overview of Rules Governing Taxation of Partnerships and Limited Liability Companies
3
A.
Aggregate and Entity Principles of Subchapter K
3
B.
Computing and Reporting Income from Partnership or LLC Operations
5
C.
Determining Distributive Shares
6
D.
Contributions to Partnership or LLC
6
E.
Basis of Interest in Partnership or LLC
7
F.
Owner-Entity Transactions
8
G.
Distributions to Partners or Members
9
H.
Payments to Retiree or Deceased Owner's Estate
10
I.
Sale or Exchange of Partnership or LLC Interest
10
J.
Adjustments to Basis of Partnership or LLC Assets
11
K.
Termination of a Partnership or LLC
11
1.02.
Determining the Form of Business to Adopt
12
A.
Prevalent Business Forms
12
1.
C Corporation
12
2.
S Corporation
12
3.
Partnership
13
4.
Limited Partnership
13
5.
Limited Liability Partnership
13
6.
Limited Liability Company
14
7.
Co-ownership
14
B.
Factors to Consider in Choosing Business Form
15
1.
Nontax Factors
15
a.
Limited Liability
15
b.
Management and Control Arrangements
16
c.
Capital Structure
17
d.
Transferability of Interests
18
e.
Death or Other Withdrawal of Owner
18
2.
Tax Factors
19
a.
Tax Consequences of Capital Contributions
19
b.
Ownership Restrictions
20
c.
Taxability of Income and Loss
21
d.
Allocations of Income or Loss Items
22
e.
Basis Limitation on Deductibility of Losses
22
f.
Loss Limitations Under the At-Risk and Passive Activity Rules
23
g.
Distributions
23
ch. 2
Tax Classification of Economic Relationships
25
2.01.
Overview of Tax Classification Issues
25
2.02.
Determining Tax Classification under the Regulations
26
A.
Overview of the Classification Regulations
26
1.
Domestic Ventures
27
2.
Foreign Ventures
28
B.
Definition of Entity
28
C.
Definition of Business Entity
29
D.
Classification of a Domestic Business Entity
30
1.
Per Se Corporations
30
2.
Single-Owner Entities
31
3.
Entities with Two or More Owners
32
4.
Grandfather Rule for Domestic Entities
32
E.
Classification of a Foreign Business Entity
32
1.
Limited Liability Defined
33
2.
Per Se Foreign Corporations
33
3.
Grandfather Rule for Foreign Entities
33
4.
Single-Member Foreign Entities
34
5.
Foreign Entities with Two or More Owners
34
6.
Classification of Partnership That Terminates or Divides
34
F.
Election Procedures
35
G.
Change in Classification or Number of Members
35
1.
Elective Change in Classification
35
2.
Change in Number of Members
37
2.03.
Determining Whether a Partnership Exists
38
A.
Determining Whether an "Entity" Exists
38
B.
Sham Partnerships
40
2.04.
Publicly Traded Partnerships Taxed as Corporations
42
A.
Effective Date of Final Regulations
43
B.
Publicly Traded Partnership Defined
43
C.
Publicly Traded Partnership with Qualifying Passive-Type Income Not Taxed as a Corporation
43
D.
Publicly Traded Foreign Partnerships
44
2.05.
Anti-Abuse Regulations
45
A.
Transactions Inconsistent with Intent of Subchapter K
46
B.
Facts and Circumstances Analysis
47
C.
Abuse of Entity Rule
48
2.06.
Electing to Be Excluded from Partnership Tax Rules
48
A.
Overview
48
B.
Entities Eligible for the Election
49
1.
Investment Partnerships
50
2.
Partnerships for Production, Extraction, or Use of Property
50
3.
Organizations of Securities Dealers
51
C.
Effect of Election
51
D.
Procedure for Making the Election
52
E.
Election by Showing Intent
53
F.
Election for Partial Exclusion
53
G.
Effective Date and Revocation
54
2.07.
Classifying Unincorporated Associations-Pre-1997 Rules
54
ch. 3
Tax Accounting for Partnerships and Limited Liability Companies
59
3.01.
Overview of Tax Accounting
59
3.02.
Computing Taxable Income
60
A.
Items That Must Be Separately Stated
61
1.
Items Specified in Section 702
61
2.
Items Specified in the Regulations
63
3.
Items That Affect Partner's Tax Liability
63
4.
Items Subject to Limitations on Partner's Return
65
B.
Determining Partner's Share of Partnership Gross Income
66
C.
Level for Determining Character of Partnership Income
66
1.
Effect of Partnership-Level Characterization
67
2.
Character of Income if Partner Is Controlled Foreign Corporation
68
D.
Character of Gain or Loss on Disposition of Certain Contributed Property
71
3.03.
Elections Affecting Partnership or LLC Income
74
A.
Overview
74
B.
Accounting Method
76
1.
Cash Method Not Allowed if C Corporation Is a Partner
76
2.
Cash Method Not Allowed if Partnership Is a Tax Shelter
76
3.
Cash Method Not Allowed to Farming Partnership with Corporate Partner
77
C.
Amortization of Organization Expenses
77
D.
Amortization of Start-Up Costs
77
E.
Election to Expense Cost of Depreciable Property
77
F.
Elections Made by Partners
78
1.
Foreign Tax Credit
78
2.
Discharge of Indebtedness
79
a.
Purchase Price Adjustment
79
b.
Reduction of Tax Attributes
79
c.
Election to Reduce Basis of Depreciable Property
80
d.
Qualified Real Property Business Indebtedness
81
e.
Debt-Discharge Rules Apply to Each Partner Separately
81
f.
Partner's Election to Reduce Basis of Depreciable Property or Depreciable Real Property
82
g.
Effect of Debt Discharge Income on Basis of Partnership Interest
83
h.
Exchange of Partnership Interest for Discharged Debt
84
3.04.
Partnership or LLC Tax Year
85
A.
Timing of Partner's Share of Partnership Income
85
B.
Adoption or Change of Partner's or Member's Tax Year
87
C.
Rules Governing Selection of Partnership Tax Year: I.R.C. Section 706
87
1.
Majority-Interest Taxable-Year Rule
89
2.
Principal-Partners Rule
90
3.
Least-Aggregate-Deferral Rule
90
D.
Business Purpose for Fiscal Tax Year
91
1.
Natural Business Year-Gross-Receipts Test
92
2.
Business Purpose When Gross-Receipts Test Not Satisfied
92
E.
52-53-Week Tax Year
93
F.
Election of Tax Year Other Than Year Required by I.R.C. Section 706
93
3.05.
Simplified Flow Through for Electing Large Partnerships
95
ch. 4
Acquiring a Partnership or LLC Interest by Contribution
97
4.01.
Overview of General Rules
97
4.02.
Contributing Property in Exchange for a Partnership or LLC Interest
100
A.
General Rule: Gain and Loss Not Recognized
100
B.
Definition of Property Under I.R.C. Section 721(a)
101
1.
Installment Obligations
102
2.
Right to Use Property
102
3.
Cancellation of Partnership or LLC Debt
102
4.
Assets Produced by Personal Services
103
5.
Personal Notes
103
6.
Property Subject to At-Risk Provisions
104
7.
Passive Activity Property
104
C.
Gain Recognized on Contribution of Property to Investment Company
104
D.
Contribution to Partnership with Related Foreign Partners
105
4.03.
Basis, Holding Period, and Characterization Rules
106
A.
Partner's or Member's Basis in the Partnership or LLC Interest
106
B.
Partner's or Member's Holding Period for the Partnership or LLC Interest
107
C.
Partnership's or LLC's Basis and Holding Period in Contributed Property
108
D.
Character of Contributed Property
108
E.
Allocation of Income, Gain, Loss, and Deduction Attributable to Contributed Property
109
F.
Distributions May Require Property Contributor to Recognize Gain
110
4.04.
Partnership or LLC Interest Acquired for Contribution of Property Subject to a Liability
110
A.
General Treatment of Changes in Partners' or Members' Liabilities
110
B.
Effect of Change in Liabilities on the Noncontributing Partners or Members
111
C.
Effect of Change in Liabilities on the Partnership or LLC
112
D.
Effect of Decrease in Contributing Partner's or Member's Individual Liabilities
112
E.
Gain Recognized When Liabilities Exceed Contributing Partner's or Member's Basis
113
F.
Assumption of Accounts Payable when Existing Business Is Contributed
114
4.05.
Partnership or LLC Interest Acquired for Contribution of Services
115
A.
Overview
115
B.
Receiving a Capital Interest for Services
117
1.
Value of Interest Received for Services
118
2.
Unvested Interests
119
3.
Electing to Include Income Under I.R.C. Section 83(b)
120
4.
Service Partner's Basis in Partnership Interest
121
5.
Deduction for Payment to Service Partner or Member
122
6.
Partnership May Recognize Gain or Loss
122
C.
Receiving an Interest in Future Profits
123
1.
Background-The Diamond Decision
124
2.
Background-The Campbell Decision
125
3.
Service's Current Position-Revenue Procedures 93-27 and 2001-43
127
4.06.
Start-Up, Organization, and Syndication Expenses
129
A.
Amortization of Start-Up Expenses
129
B.
Amortization of Organization Expenses
130
C.
Nondeductibility of Syndication Expenses
131
D.
"Disguised" Organization and Syndication Expenses
132
ch. 5
Basis in Partnership/LLC Interest
133
5.01.
Overview of Basis of Partner's or Member's Interest
133
A.
When Is Determination of Basis Required?
133
B.
Initial Basis-How It Is Determined
134
C.
Continuing Adjustments to Partner's Basis
137
1.
Basis Adjustment for Taxable Income or Loss
138
2.
Basis Increase for Tax-Exempt Income
140
3.
Basis Decrease for Nondeductible Expenditures
141
4.
Basis Decrease for Distributions
142
5.
Basis Increase for Depletion Deductions
143
6.
Basis Decrease for Depletion Deductions
143
7.
Basis Adjustment When Partnership Sells Corporate Partner's Stock
143
a.
Limitation on Basis Adjustment if no I.R.C. Section 754 Election in Effect
145
b.
Limitation on Basis Adjustment if Partnership Makes Distribution to Another Partner
146
D.
Basis Adjustment When Partner or Partnership Debt Is Discharged
148
E.
Basis Adjustment on Sale, Exchange, or Liquidation of Partnership Interest
149
F.
Order of Basis Adjustments
149
1.
Loss-Deduction Limitation
150
2.
Distributed Property
150
3.
Gain Recognized on Cash Distribution
151
4.
Marketable Securities
152
5.
Advance or Draw Taken
152
6.
Encumbered Property Contributed or Distributed
152
G.
Partnership's Basis in Its Assets-How It Is Determined
153
H.
"Inside Basis" and "Outside Basis"
154
1.
Events That Upset Equivalence of Inside Basis and Outside Basis
155
2.
Restoring Equivalence: I.R.C. Section 754 Election
156
I.
Relationship between Partner's Basis and Capital Account
157
5.02.
Alternative Method for Determining Basis: I.R.C. Section 705 (b)
157
5.03.
Effect of Partnership Liabilities on Basis of Partner's Interest in Partnership
158
A.
Overview of General Rules
158
B.
Nonrecourse Liabilities in Tax-Sheltered Investments
161
C.
Interaction with At-Risk and Passive Activity Rules
162
5.04.
Partnership Liabilities Defined
162
A.
General Rules
162
B.
Sham Liabilities
163
C.
Contingent Liabilities
165
D.
Obligations Treated as Liabilities under Regulations Section 1.752-7
166
E.
Loans Treated as Capital Contributions - "Thin" Partnerships
168
5.05.
General Rules Governing Partner's Share of Partnership Liabilities
168
A.
Overview of Regulations
168
B.
Interests of Related Persons
170
C.
Assumption of Partnership or Partner Debt
170
5.06.
Partner's Share of Recourse Liabilities
170
A.
Partner's Economic Risk of Loss
172
B.
Partner's Payment Obligation
174
C.
Special Rules for "Bottom Dollar Payment Obligations"
175
D.
Anti-Abuse Rule
176
E.
When Must Partner or Partnership Obligations Be Satisfied?
177
F.
Obligation to Pay Interest on Nonrecourse Debt
177
G.
Partner's Nonrecourse Loan to Partnership
177
5.07.
Partner's Share of Nonrecourse Liabilities
178
A.
Liability and Allocation Rules Coordinated
178
B.
Computing a Partner's Share of Nonrecourse Liabilities
178
5.08.
Changes in Partner's Share of Partnership Liabilities
184
A.
Events That Change Partner's Share of Liabilities
184
B.
Changes in the Amount of Partnership Liabilities
184
C.
Addition or Loss of a Partner
184
D.
Contribution or Distribution of Encumbered Property
185
1.
Contribution of Encumbered Property
185
2.
Distribution of Encumbered Property
186
3.
Encumbrance Limited to Value of Property
187
4.
Payments Made on Excess Encumbrance
187
E.
Sale or Exchange of Partnership Interest
188
ch. 6
Distributive Shares
189
6.01.
Overview of Distributive Share Rules
189
A.
General Rules
189
B.
When Distributive Share Is Taxable
190
6.02.
Allocations Attributable to Contributed Property
191
A.
Reasonable Allocation Methods
194
1.
Traditional Method
195
2.
Traditional Method with Curative Allocations
200
3.
Remedial Allocations
201
4.
Small Disparities and Aggregation Rules
203
5.
Securities Partnerships
203
6.
Allocations for Noncompensatory Options
203
B.
Distribution of Contributed Property to Noncontributing Partner
204
1.
Basis Adjustments
204
2.
Anti-Abuse Rule
205
C.
Distributions to Contributing Partner
206
1.
Special Rules for Computing Net Precontribution Gain
208
2.
Distributions Not Subject to I.R.C. Section 737
209
3.
Basis Adjustments
209
6.03.
Allocations When Interests Change
211
A.
General Rules
211
B.
Determining Distributive Shares Under the Varying-Interest Rule
213
C.
Special Rule for Allocable Cash-Basis Items
214
D.
Change of Interests in Tiered Partnerships
216
E.
Change in Partners' Interests Under Partnership Agreement
218
6.04.
Special Allocations-Overview
218
A.
General Rules
219
B.
Partnership Agreement Defined
220
C.
Distributive Shares in Absence of Valid Partnership Agreement
220
6.05.
Substantial Economic Effect
221
A.
Economic-Effect Test
223
1.
Provisions Required in Partnership Agreement
223
2.
Liquidating Distributions of Positive Capital Account Balances
224
3.
Liquidation When Partner Has Deficit Capital Account
225
a.
General Rule-Deficit Must Be Restored
226
b.
Exceptions to Deficit-Restoration Requirement
227
i.
Alternate Economic-Effect Test
227
ii.
Partial Obligation to Restore Deficit
230
iii.
Reduction of Deficit-Restoration Obligation
231
4.
Economic-Effect Equivalence
232
5.
Partial Economic Effect
232
B.
Substantiality Test
233
1.
After-Tax Economic Consequences Rule
233
2.
Shifting Tax Consequences
234
3.
Transitory Allocations
236
6.06.
Capital Account Requirements
237
A.
General Rules
238
B.
Adjustments for Contributions and Distributions
239
C.
Adjustments for Assumed Partnership Liabilities
241
D.
Promissory Notes
241
E.
Revaluations of Partnership Property
242
F.
Adjustments for Disparities Between Book Value and Tax Basis of Contributed or Revalued Property
245
G.
Adjustments for Nondeductible, Noncapital Expenditures and Disallowed Losses
248
H.
Adjustments for Guaranteed Payments and Employee Benefit Plan Contributions
248
6.07.
Partners' Interests in the Partnership
248
A.
General Rules
249
B.
Factors Considered When Determining Partners' Interests in the Partnership
249
6.08.
Allocations "Deemed" in Accordance with Partners' Interests in the Partnership
250
A.
Allocations Reflecting Book-Value/Tax-Basis Disparities
251
B.
Allocations of Tax Credits and Credit Recapture
251
C.
Creditable Foreign Taxes
251
D.
Allocations of Excess Percentage Depletion
252
E.
Allocations of Oil and Gas Depletion
252
F.
Allocations of Recapture Income
252
6.09.
Allocations of Items Attributable to Nonrecourse Liabilities
253
A.
Overview of Regulations
255
B.
Safe Harbor for Allocations of Nonrecourse Deductions
257
C.
Partnership Minimum Gain
258
D.
Nonrecourse Deductions
261
E.
Partners' Shares of Partnership Minimum Gain
264
F.
Distributions Allocable to Nonrecourse Borrowings
265
G.
Minimum-Gain Chargeback
268
H.
Nonrecourse Debt for Which Partner Bears Risk of Loss
271
6.10.
Limitations on Partner's and LLC Member's Deduction for Losses - I.R.C. Section 704(D)
271
A.
General Rules
271
B.
Effect of Sale, Death, Termination, or Gift
273
ch. 7
Transactions Between Partners/Members and Partnership/LLC
275
7.01.
Overview of Partnership Transactions
275
A.
Transactions in Which the Partner Acts in a Nonpartner Capacity
275
B.
Transactions That May Be Recharacterized as Occurring Between the Partnership and a Partner Acting in a Nonpartner Capacity
276
C.
Special Treatment of Losses and Capital Gains on Sales Between a Partnership and Persons with Controlling Interests
276
D.
Accrual-Method Deductions Deferred Until Payment Occurs
277
E.
Guaranteed Payments to a Partner Who Provides Services or Capital to the Partnership in a Partner Capacity
277
F.
Partnership-Partner Transactions Treated as Contributions or Included in the Partner's Distributive Share
277
7.02.
Determining Whether a Partner Acts in a Partner or Nonpartner Capacity
278
7.03.
Guaranteed Payments for Partner's Services or Capital
279
A.
General Tax Consequences of Payments for Services or Use of Capital
279
B.
Guaranteed Payments
281
C.
Character of Guaranteed Payments for Use of Partner's Capital
285
D.
Payments Computed from Gross Income
286
E.
Draws, Bonuses, and Payments Dependent on Profits
286
7.04.
Transactions in Which Partner Acts in Nonpartner Capacity
287
A.
Loans and Leases
288
1.
Bad Debts
288
B.
Services
289
C.
Sales
290
D.
Contribution and Related Distribution Treated as Disguised Sale
290
1.
Overview of Regulations
294
2.
Tests for Determining Whether Disguised Sale Occurs
297
3.
Payments Not Included in Disguised Sale
306
4.
Contribution of Encumbered Property Treated as Disguised Sale
307
a.
Qualified Liabilities
308
b.
Nonqualified Liabilities
310
5.
Debt-Financed Disguised Sales
311
6.
Disguised Sale by Partnership to Partner
313
7.
Disguised Sale of Partnership Interest
315
8.
Disclosure of Disguised Sale Transactions
315
E.
Contribution and Related Income Allocation Treated as Disguised Payment for Services or Property
315
7.05.
Sales and Exchanges Involving Controlled and Related Partnerships
318
A.
Special Rules to Prevent Tax-Motivated Transactions Between a Partnership and Its Partners-An Overview
318
B.
Definition of Control Under I.R.C. Section 707(b)
319
C.
Limitation on Loss Deductions
321
D.
Gain Treated as Ordinary Income if Property Is Not a Capital Asset to Purchaser
322
E.
Gain Treated as Ordinary Income if Property Is Depreciable by Purchaser
322
F.
Deductions for Accrued Expenses
323
ch. 8
Distributing Partnership/LLC Property to Partners or Members
325
8.01.
Overview of Distribution Rules
325
A.
General Rules Applicable to Distributions
326
1.
Gain or Loss on Current or Liquidating Distribution
326
2.
Basis of Distributee Partner's Interest in the Partnership
327
3.
Basis of Distributed Property in the Distributee Partner's Hands
328
4.
Character and Holding Period of Distributed Property
328
5.
Distribution That Changes Partner's Share of I.R.C. Section 751 Property
329
6.
Partnership's Basis in Undistributed Property
329
7.
Payments to a Retiring Partner or Deceased Partner's Successor
329
B.
Distinction Between Current and Liquidating Distributions
330
8.02.
Special Rules for Certain Distributions
331
A.
Distribution of Marketable Securities
331
1.
Marketable Securities Defined
331
2.
Money Distribution Reduced by Partner's Share of Appreciation
332
3.
Certain Distributions Not Subject to Gain Recognition Rule
333
4.
Exception for Investment Partnerships
334
5.
Basis Adjustments
334
6.
Anti-Abuse Rule
335
B.
Constructive Distribution of Money Upon Decrease in Partner's Share of Partnership Liabilities
335
C.
Distributions Associated with Contribution of Property
338
D.
Distribution of Stock to a Corporate Partner
338
8.03.
Current (Nonliquidating) Distributions
340
A.
Money Distribution
340
B.
Advances or Draws Against a Partner's Expected Distributive Share
341
C.
Property Distribution
342
D.
Money and Property Distribution
344
E.
Special Basis in Distributed Property Under I.R.C. Section 732(d)
345
F.
Partnership Tax Consequences
346
8.04.
Liquidating Distributions
347
A.
Recognizing Gain on Money Distribution
348
B.
Recognizing Loss on Liquidating Distributions
349
C.
Determining and Reporting Gain or Loss on a Series of Liquidating Distributions
350
D.
Property Distribution
350
E.
Allocating Basis to Distributed Property
351
8.05.
Characterizing Partner's Gain or Loss on Disposition of Distributed Property
354
A.
Unrealized Receivables and Inventory
355
B.
Recapture Property
356
8.06.
Disproportionate Distributions of Unrealized Receivables and Inventory
357
A.
Transactions Not Treated as Disproportionate Distributions
361
B.
Computing Gain or Loss in a Disproportionate Distribution
361
1.
Computational Steps
361
2.
Noncash Distributions
367
3.
Constructive Distribution When Partner's Share of Partnership Liabilities Decreases
369
C.
Distributions Involving Recapture Property
372
D.
Distributions in Liquidation of Entire Partnership
373
8.07.
Basis Adjustments Related to Distributions
374
A.
Computing and Allocating Basis Adjustments Under I.R.C. Section 754 Election
378
B.
Illustrating Basis Adjustments
380
1.
Distributee Partner Recognizes Gain on Cash Distribution
380
2.
Distributee Partner Recognizes Loss on Liquidating Distribution
382
3.
Basis of Distributed Property Changes
383
4.
Elective Adjustment Under I.R.C. Section 732(d)
385
C.
Unusable Basis Adjustments Carried Forward
386
D.
Distributions by Tiered Partnerships
387
E.
Basis Adjustment on Distributions Subject to I.R.C. Section 751(b)
388
F.
Making a Basis-Adjustment Election
388
ch. 9
Family Partnerships and Limited Liability Companies
389
9.01.
Overview of Family Partnership Rules
389
9.02.
Key Issues in Establishing Partner Status in a Family Partnership
391
A.
Subjective Test of Partner Status: Commissioner v. Culbertson
391
B.
Partner Status When Capital Is Material in Producing Income: I.R.C. Section 704(e)(1)
394
C.
Partner Status When Capital Interest Is Acquired by Gift
396
1.
Donor Is the Real Owner
398
2.
Donee Is the Real Owner
400
3.
Limited Partnership Interest Acquired by Gift
402
4.
Tax-Avoidance Motive in Gift of Partnership Interest
403
9.03.
Determining Partner Status of Trustees
403
9.04.
Determining Partner Status of Minor Children
405
9.05.
Selling a Partnership Interest to a Family Member: Sale or Gift?
406
9.06.
Allocating Partnership Income among Family Members
407
A.
Intrafamily Sales Considered Indirect Gifts
409
B.
Indirect Gifts
410
C.
Reallocation for Reasonable Value of Donor's Services
410
D.
Reallocation for Disproportionate Allocation
412
E.
Allocation in Year of Gift
413
9.07.
Estate and Gift Tax Considerations: Effect of I.R.C. Sections 2701-2704 on Transfers to Family Members
413
ch. 10
Liquidating Payments to a Retiring Partner/Member or a Decedent's Successor
417
10.01.
Overview of Liquidating Payments-I.R.C. Section 736
417
A.
Payments Governed by I.R.C. Section 736
418
B.
Classification of Liquidating Payments
419
C.
Payments for Partner's/Member's Interest in Partnership/ LLC Property-I.R.C. Section 736(b) Payments
420
1.
Valuing Partner's/Member's Share of Partnership/ LLC Property
420
2.
Limited Exclusion for Unrealized Receivables and Goodwill
420
3.
Taxation of I.R.C. Section 736(b) Payments
423
D.
Payments Exceeding Partner's/Member's Interest in Partnership/ LLC Property-I.R.C. Section 736(a) Payment
427
1.
Determining the Amount of I.R.C. Section 736(a) Payments
427
2.
Taxation of I.R.C. Section 736(a) Payments
428
3.
Summary-Steps in Determining Taxation of Lump-Sum Liquidating Payment
430
10.02.
Series of Cash Liquidating Payments
431
A.
Determining the I.R.C. Section 736(a) and I.R.C. Section 736(b) Portions of Each Payment
431
B.
Computing Gain or Loss Recognized on the I.R.C. Section 736(b) Portion
434
C.
Computing Gain or Loss Recognized on the I.R.C. Section 736(a) Portion
437
10.03.
Noncash Liquidating Payments
439
ch. 11
When a Partner or LLC Member Dies
447
11.01.
Overview of State Law and Tax Considerations
447
A.
State Law Considerations
447
1.
General Partnership
447
2.
Limited Partnership
448
3.
Limited Liability Company
448
B.
Tax Considerations-In General
449
1.
Tax Year Closes for Deceased Partner or Member
449
2.
Death of Partner or Member May Terminate Partnership or LLC
449
3.
Basis of Successor's Partnership/LLC Interest
450
4.
Basis of Partnership/LLC Property
451
5.
Value of Decedent's Interest Subject to Estate Tax
451
6.
Liquidation of Interest of Deceased Partner or Member
452
7.
Sale of Decedent's Interest to Remaining Partners or Members
452
8.
Sale of Decedent's Interest to Third Party
453
9.
Liquidation of Partnership or LLC
454
10.
Successor Joins Partnership or LLC
454
11.02.
Pre-1998 Rules for Allocating Income for Year of Partner's Death
454
11.03.
Effects of Income-in-Respect-of-a-Decedent (IRD) Rules
455
A.
General Explanation of IRD Rules
455
B.
IRD Attributable to a Partnership or LLC Interest
456
1.
Liquidating Payments
456
2.
Assets That Would Be IRD if Held by Decedent
457
11.04.
Effect of Partner's or Member's Death on Basis
458
A.
Successor's Basis for Partnership or LLC Interest
458
B.
Basis of Partnership or LLC Property
459
1.
I.R.C. Section 754 Election
459
2.
I.R.C. Section 732(d) Election for Distributed Property
460
3.
Summary of Effect of Partner's or Member's Death on Basis of Partnership/LLC Interests and Partnership/LLC Property
462
11.05.
Estate Taxation: Determining the Value of a Partnership/LLC Interest
464
A.
Effects of Partnership/LLC Agreements
465
1.
Insurance-Funded Cross-Purchase Agreements
466
2.
Insurance-Funded Redemption Agreements
467
B.
Special Valuation Rules-I.R.C. Section 2032A
467
ch. 12
Selling or Exchanging a Partnership or LLC Interest
469
12.01.
Overview
469
12.02.
Computing Selling Partner's or Member's Gain or Loss
471
A.
Seller's Amount Realized
471
B.
Seller's Basis
473
C.
Sale of Portion of Partner's Interest
474
D.
Abandoned or Worthless Interest: Character of Loss
475
E.
Deficit-Capital-Account Effect on Amount Realized
477
F.
Tax Rate and Holding Period Applied to Seller's Capital Gain or Loss
477
12.03.
Characterizing Seller's Gain or Loss: Ordinary Income Recognized on I.R.C. Section 751 Property
478
A.
Defining I.R.C. Section 751 Property
479
1.
Unrealized Receivables
480
2.
Inventory
482
B.
Reporting Requirements
483
12.04.
Determining Effects of Sale or Exchange on Partnership Tax Year
483
12.05.
Determining Effects of Sale or Exchange on Partner's Loss Deductions
484
12.06.
Exchange of Partnership Interests in Nonrecognition Transaction
485
A.
Exchanging Interests in the Same Partnership
485
B.
Converting Partnership's Interests to LLC Interests and Vice-Versa
486
C.
Exchanging Interests in Different Partnerships
487
D.
Contributing a Partnership or LLC Interest to a Corporation
487
E.
Conversion of a Corporation to a Partnership or LLC
488
F.
Contributing a Partnership or LLC Interest to Another Partnership
488
G.
Distribution of a Partnership or LLC Interest by a Corporation
489
H.
Distribution of a Partnership or LLC Interest by a Partnership
490
I.
Distribution of a Partnership or LLC Interest by a Trust or Estate
490
J.
Transferring a Partnership Interest at Partner's Death
490
K.
Gifting a Partnership or LLC Interest
491
L.
Making a Charitable Contribution
491
12.07.
Recharacterizing Sale or Exchange of a Partnership Interest
492
12.08.
Adjusting Basis of Partnership or LLC Property
495
A.
General Rule: Sale or Exchange of Interest Does Not Affect Basis of Partnership or LLC Property
495
B.
Electing to Adjust Basis of Partnership or LLC Property
496
C.
Determining Whether Basis Adjustment Rules Apply
498
D.
Computing the I.R.C. Section 743(b) Basis Adjustment
499
E.
Transferring an Interest in a Tiered Partnership
503
F.
Allocating Basis Adjustments Among Partnership Assets
504
1.
Income in Respect of a Decedent
507
2.
Carryover Basis Transaction
508
G.
Contribution of Basis Adjusted Property to a Partnership or Corporation
510
H.
Allocations to Goodwill
511
I.
Computing Tax Consequences of I.R.C. Section 743(b) Basis Adjustment
514
1.
Effect of Basis Adjustment on Partner's Income, Gain, or Loss
515
2.
Effect of Basis Adjustment on Partner's Cost Recovery, Amortization and Depletion Deductions
515
J.
Distributing Property for Which I.R.C. Section 743(b) Adjustment Has Been Made
519
K.
Sale of Partnership Interests Between Members of Affiliated Group of Corporations
520
L.
Transfer Terminating a Partnership
521
M.
Making and Reporting the I.R.C. Section 754 Election
522
12.09.
Adjusting Basis of Property Distributed to Purchasing Partner: I.R.C. Section 732(D) Election
523
A.
Effect of Election on Disproportionate Distributions of I.R.C. Section 751 Property
525
B.
Making the Election
526
C.
Mandatory I.R.C. Section 732(d) Adjustments
526
ch. 13
Terminating as Partnership or LLC
529
13.01.
Overview of Events Terminating a Partnership or LLC
529
13.02.
Ceasing Partnership Business or Financial Activities
530
13.03.
Changing Business Form
531
A.
Changing to a Sole Proprietorship
532
B.
Changing to a Corporation
533
C.
Converting Interests in the Same Partnership
535
D.
Converting a Partnership to an LLC and Vice Versa
535
13.04.
Selling or Exchanging 50 Percent or More of Interests in Partnership or LLC Profits and Capital
535
A.
Sale or Exchange Requirement
537
1.
Transfers Not Causing Termination
538
2.
Nontaxable Transfers Considered Exchanges Under Termination Rules
539
3.
Tiered Partnerships
540
B.
Determining Whether 50 Percent of Profits and Capital Are Transferred
541
1.
Determining Capital Interest
541
2.
Determining Profits Interest
542
13.05.
Merging, Consolidating, Dividing, and Converting Partnerships or LLCs
542
A.
Continuing or Terminating Partnership or LLC in Merger or Consolidation
542
B.
Tax Consequences of Merger or Consolidation
544
C.
Dividing a Partnership or LLC
550
13.06.
Tax Consequences of Partnership Termination
554
A.
Partnership Tax Year Closes
554
B.
Elections
555
C.
Cessation of Business-Assets Deemed Distributed
556
D.
Termination by Sale or Exchange-Assets Deemed Contributed to New Partnership
556
E.
Holding Period for Partnership Assets Following Termination
559
F.
Character of Partnership Property Following Termination
559
G.
Suspended Losses
560
Index
561