ACC 551: Dispositions of Partnership Interests and Partnership Distributions

+3

No comments posted yet

Comments

angelica2313 (11 months ago)

Thank you so much for posting this! I am taking a Corporate Tax class online and there are no powerpoints offered, and I have been finding it difficult to learn from the book. This powerpoint was easy to follow and really helped me understand the material. The multiple choice questions and explanations were awesome :)

Slide 1

Chapter 10 Dispositions of Partnership Interests and Partnership Distributions

Slide 2

Learning Objectives Determine the tax consequences to the buyer and seller of the disposition of a partnership interest, including the amount and character of gain or loss recognized List the reasons for distributions, and compare operating and liquidating distributions Determine the tax consequences of proportionate operating distributions Determine the tax consequences of proportionate liquidating distributions Explain the rationale for special basis adjustments, determine when they are necessary, and calculate the special basis adjustment for dispositions and distributions

Slide 3

Sales of Partnership Interests Raise unique issues because of the flow-through nature of the entity If tax rules follow an entity approach, the interest is considered a separate asset and sale of partnership interest would be very similar to the sale of corporate stock If tax rules use the aggregate approach, the disposition represents a sale of the partner’s share of each of the partnership’s assets

Slide 4

Sales of Partnership Interests Seller Issues Primary tax concern is calculating the amount and character of gain or loss on the sale Selling partner determines gain or loss as the difference between the amount realized and his/her outside basis in the partnership Hot Assets The term generally includes unrealized receivables and appreciated inventory. A selling partner must recognize ordinary income to the extent of the partner’s share of the appreciation in hot assets.

Slide 5

Sale of partnership interest 52. On December 31, 2011, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark’s partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or appreciated inventory. What is Clark’s gain or loss on the sale of his partnership interest? a. Ordinary loss of $10,000. Cash 30,000 b. Ordinary gain of $15,000. Debt relief 25,000 c. Capital loss of $10,000. 55,000 d. Capital gain of $15,000. Basis -40,000 Gain 15,000

Slide 6

Sale of Partnership Interests – Hot Assets Unrealized receivables generally refers to the receivables of cash method taxpayers because the income has been earned but not yet included in gross income. The term unrealized receivables also includes the recapture potential in depreciable assets under Secs. 1245 and 1250. The accounts receivable of accrual-method taxpayers are not considered unrealized receivables because the amounts have already been included in gross income. Inventory includes property held for sale to customers in the ordinary course of business, and also includes any assets that are not capital assets or §1231 assets.

Slide 7

Sales of Partnership Interests Process for determining gain or loss Step 1: Total gain or loss = Amount realized – Outside basis Step 2: Calculate the partner’s share of gain from hot assets as if the partnership sold these assets at their fair market value. This represents the amount that must be reported as ordinary income Capital gain = Step 1 – Step 2 Capital loss = Step 1 + Step 2

Slide 8

Sale of partnership interest The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2011: Adjusted basis Market Assets per books value Cash $102,000 $102,000 Unrealized accts receivable -- 0__ 420,000 Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 Totals $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2012. In addition, Dole assumed Carr’s share of the partnership’s liability. 53. What was the total amount realized 54. What amount of ordinary income should Carr report by Carr on the sale of his in his 2012 income tax return on the sale of his partnership interest? partnership interest? a. $174,000 154,000 b. $154,000 + 20,000 a. $0 420,000 c. $140,000 174,000 b. $ 20,000 - 0__ d. $134,000 c. $ 34,000 420,000 d. $140,000 x 1/3_ 140,000

Slide 9

Sale of partnership interest 56. On June 30, 2012, James Roe sold his interest in the calendar-year partnership of Roe & Doe for $30,000. Roe’s adjusted basis in Roe & Doe at June 30, 2012, was $7,500 before apportionment of any 2012 partnership income. Roe’s distributive share of partnership income up to June 30, 2012, was $22,500. Roe acquired his interest in the partnership in 2007. How much long-term capital gain should Roe report in 2012 on the sale of his partnership interest? a. $0 b. $15,000 c. $22,500 d. $30,000

Slide 10

Sales of Partnership Interests Buyer and Partnership Issues For sale transaction, the new investor’s outside basis will be equal to the cost of the partnership interest To the extent that the new investor shares in the partnership liabilities, the buying partner’s share of partnership liabilities increases his outside basis

Slide 11

Operating (Current) Distributions Are usually paid to distribute the business profits to the partners but can also reduce a partner’s ownership Operating Distributions of Cash Only Partners generally do not recognize gain or loss on the distribution of money One exception is when the distribution of money is greater than the partner’s outside basis. Partner will recognize gain to the extent of the excess

Slide 12

Current distribution Curry’s adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of $8,000 cash. What amount of gain was recognized by Curry as a result of the cash distribution? a. $0 b. $3,000 c. $5,000 d. $8,000

Slide 13

Operating (Current) Distributions Partner reduces his/her (outside) basis in the partnership interest by the cash and the adjusted basis of property distributed Partnership’s basis in its remaining assets remains unchanged Partner never recognizes a loss from an operating distribution because still a partner Partner recognizes gain only if a money distribution exceeds the basis for partnership interest

Slide 14

Operating Distributions Operating Distributions That Include Property Other Than Money Partner must allocate their outside basis to the distributed assets (including money) and their continuing partnership interest Carryover basis - Partner takes a basis in the distributed property equal to the partnership’s former basis in the property

Slide 15

Current distribution Mike Reed, a partner in Post Co., received the following distribution from Post: Post’s basis Fair market value Cash $11,000 $11,000 Inventory 5,000 22,500 Before this distribution, Reed’s basis in Post was $25,000. If this distribution were nonliquidating, Reed’s basis for the inventory would be PI a. $14,000 25,000 b. $12,500 -11,000 c. $ 5,000 - 5,000 d. $ 1,500 9,000

Slide 16

Operating Distributions Order in which to allocate outside basis to the bases of distributed assets First, the partner allocates the outside basis to any money received, then to receivables and inventory, and finally to other property as a carryover basis Remainder is the partner’s outside basis after the distribution When the partnership distributes property other than money with a basis that exceeds the remaining outside basis, the partner assigns the remaining outside basis to the distributed assets, and the partner’s outside basis is reduced to zero

Slide 17

Current distribution The adjusted basis of Jody’s partnership interest was $50,000 immediately before Jody received a current distribution of $20,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $35,000. 61. What amount of taxable gain must Jody report as a result of this distribution? a. $0 b. $ 5,000 c. $10,000 d. $20,000 62. What is Jody’s basis in the distributed property? a. $0 50,000 b. $30,000 -20,000 c. $35,000 30,000 d. $40,000

Slide 18

Liquidating Distributions Tax issues are basically: to determine whether the terminating partner recognizes gain or loss, and to allocate his or her entire outside basis to the distributed assets Rationale behind the rules for liquidating distributions is simply to replace the partner’s outside basis with the underlying partnership assets distributed to the terminating partner

Slide 19

Liquidating Distributions In theory, there would be no gain or loss on the distribution, and the asset bases would be the same in the partner’s hands as they were inside the partnership-- however this rarely occurs because a partner’s outside basis often differs from the inside basis for assets So rules are designed to determine when gain or loss must be recognized and to allocate the partner’s outside basis to the distributed assets

Slide 20

Liquidating Distributions Gain or Loss Recognition in Liquidating Distributions Generally neither partners nor the partnership recognizes gain or loss Exception Gain - Partner recognizes gain when partnership distributes money (includes debt relief) and the amount exceeds the partner’s outside basis for the partnership interest

Slide 21

Liquidating distribution 57. Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest’s balance sheet was as follows: Cash $2,000 Land (adjusted basis) 2,000 Capital—Stone $3,000 Capital—Frazier 1,000 The fair market value of the land was $3,000. Frazier’s outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? a. $0 b. $250 c. $300 d. $500

Slide 22

Liquidating Distributions Loss - Partner recognizes loss when two conditions are met Distribution consists of only cash, receivables and inventory, and Partner’s outside basis exceeds the sum of the bases of the distributed assets Basis in Distributed Property Primary objective is to allocate the partner’s entire outside basis in the partnership to the assets the partner receives in the liquidating distribution

Slide 23

Liquidating distribution 67. In 2007, Lisa Bara acquired a one-third interest in Dee Associates, a partnership. In 2012, when Lisa’s entire interest in the partnership was liquidated, Dee’s assets consisted of the following: cash, $20,000 and tangible property with a basis of $46,000 and a fair market value of $40,000. Dee has no liabilities. Lisa’s adjusted basis for her one-third interest was $22,000. Lisa received cash of $20,000 in liquidation of her entire interest. What was Lisa’s recognized loss in 2012 on the liquidation of her interest in Dee? a. $0. b. $2,000 short-term capital loss. c. $2,000 long-term capital loss. d. $2,000 ordinary loss.

Slide 24

Liquidating Distributions Allocation essentially depends on two things the partnership’s bases in distributed assets relative to the partner’s outside basis and the type of property distributed—whether it is money, hot assets (receivables and inventory), or other property

Slide 25

Liquidating distribution Mike Reed, a partner in Post Co., received the following distribution from Post: Post’s basis Fair market value Cash $11,000 $11,000 Land 5,000 12,500 Before this distribution, Reed’s basis in Post was $25,000. 66. If this distribution were in complete liquidation of Reed’s interest in Post, Reed’s recognized gain or loss resulting from the distribution would be a. $7,500 gain. PI b. $9,000 loss 25,000 c. $1,500 loss. Cash -11,000 d. $0. 14,000 Reed’s basis for the land would be Land -14,000 a. $0 0 b. $5,000 c. $12,500 d. $14,000

Slide 26

Liquidating distribution Mike Reed, a partner in Post Co., received the following distribution from Post: Post’s basis Fair market value Cash $11,000 $11,000 Inventory 5,000 12,500 Before this distribution, Reed’s basis in Post was $25,000. 66. If this distribution were in complete liquidation of Reed’s interest in Post, Reed’s recognized gain or loss resulting from the distribution would be a. $7,500 gain. b. $9,000 loss c. $1,500 loss. d. $0. Reed’s basis for the inventory would be a. $0 b. $5,000 c. $12,500 d. $14,000

Slide 27

Liquidating Distributions Character and Holding Period of Distributed Assets Generally, character stays the same to the partner as it was in the partnership. Inventory retains “taint” of ordinary income or loss for five years after distribution. Partner’s holding period includes the partnership’s holding period

Slide 28

Special Basis Adjustments Help to eliminate discrepancies between the inside and outside bases and correct artificial income or loss at the partnership level Basis discrepancies arise in two situations: Following sales of partnership interests, and Following distributions when the basis of distributed property is increased or decreased, or when the distributee partner recognizes a gain or loss on the distribution

Slide 29

Special Basis Adjustments Partnership makes §754 election. Once made, special basis adjustments are required for: Subsequent sales of partnership interests Partnership distributions Even without §754 election, special basis adjustments are required in some cases For sales of partnership interests if the partnership has a “substantial built-in loss” at the time of the sale For distributions if there is a substantial basis reduction.

Slide 30

Special Basis Adjustments

Slide 31

Special Basis Adjustments Special Basis Adjustments for Dispositions Special basis adjustment partnership makes when a partner sells his/her partnership interest is designed to give the new partner a share in the partnership assets equal to the new buying partner’s outside basis Inside bases of the continuing partners remain unchanged so their income and losses will continue to be accurately allocated

Slide 32

Special Basis Adjustments Adjustment is equal to the difference between the new investor’s outside basis and his share of inside basis New investor’s outside basis is generally equal to the cost of his partnership interest plus his share of partnership liabilities When a new partner’s special basis adjustment is allocated to depreciable or amortizable assets, the new partner will benefit from additional depreciation or amortization

Slide 33

Sale of partnership interest The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2011: Adjusted basis Market Assets per books value Cash $102,000 $102,000 Unrealized accounts receivable __0 420,000 Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 Totals $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2012. In addition, Dole assumed Carr’s share of the partnership’s liability. 54. What amount of ordinary income should Carr report in his 2012 income tax return on the sale of his Partnership interest? a. $0 420,000 b. $ 20,000 - 0__ c. $ 34,000 420,000 d. $140,000 x 1/3 140,000

Slide 34

Sale of partnership interest The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2011: Adjusted basis Market Assets per books value Cash $102,000 $102,000 Unrealized accounts receivable 0__ 420,000 Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 Totals $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2012. In addition, Dole assumed Carr’s share of the partnership’s liability. 54. What is Dole’s outside basis (tax basis) for his partnership interest? a. $ 34,000 b. $154,000 c. $174,000 What is Dole’s inside basis for his share of the receivables if no Sec. 754 election is made? a. $0 b. $140,000 What is Dole’s inside basis for his share of the receivables if a Sec. 754 election is made? a. $0 b. $140,000

Slide 35

Special Basis Adjustments Special Basis Adjustments for Distributions Potential problem exists when the partnership distributes property to the partners and the basis of the distributed property is changed as a result of the distribution This adjustment affects the common basis of partnership property for all partners and not merely one partner’s basis

Slide 36

Special Basis Adjustments Positive basis adjustment will increase the basis in the partnership assets When a partner receiving distributed property recognizes a gain on the distribution When a partner receiving distributed property takes a basis in the property less than the partnership’s basis in the property

Slide 37

Special Basis Adjustments Negative basis adjustment will decrease the basis in partnership assets When a partner receiving distributed property in a liquidating distribution recognizes a loss on the distribution

Slide 38

Sec. 754 election for distribution 58. Curry’s adjusted basis in Vantage Partnership was $5,000 at the time he received a non liquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What is the amount of Curry’s basis for the land? a. $9,000 PI b. $6,000 5,000 c. $5,000 - 5,000 land d. $1,000 0 What happens to the $1,000 of land basis that is not transferred to Curry if no Sec. 754 election is made? The basis is lost. What happens to the $1,000 of land basis that is not transferred to Curry if a Sec. 754 election is made? $1,000 is reallocated to other land parcels of the partnership.

Summary: ACC 551-Ed Foth Last Updated: 6/27/12

URL: