Contributions - narrated PP-5-14-take-2

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Partnership Taxation by Joe Walsh:

Partnership Taxation by Joe Walsh Contributions to Partnerships (c) Joe Walsh, 2012

Contributions to Partnerships:

Contributions to Partnerships Sec. 1001 says that upon a sale or exchange of property all gain realized must be recognized, except … Sec. 721 says no gain or loss is recognized upon contribution of property to partnership Gain or loss preserved through substituted basis (c) Joe Walsh, 2012

Contributions to Partnerships General Rules:

Contributions to Partnerships General Rules Sec. 723 says Inside Basis is basis of contributed property in hands of contributing partner Sec. 722 says Outside Basis is amount of money plus basis of contributed property Reg. 1.704-1(b)(2)(iv)(d) says Capital Account is increased by money plus fair market value of contributed property Sec. 1223 provides tacking of holding period for capital and 1231 assets (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Three equal partners A contributes cash of 100 B contributes property X with a FMV of 100 and a basis to B of 25 C contributes property Y with a FMV of 40 and a basis of 30 and property Z with a FMV of 60 and a basis of 75 (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 A 100 (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 Property X 25 B 25 (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 Property X 25 100 B 25 100 (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 Property X 25 100 B 25 100 Property Y 30 40 C 105 100 Property Z 75 60 (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 Property X 25 100 B 25 100 Property Y 30 40 C 105 100 Property Z 75 60 Total 230 300 230 300 (c) Joe Walsh, 2012

Contributions to Partnerships:

Contributions to Partnerships Sec. 721 applies to PROPERTY not SERVICES Sec. 83 applies to taxpayers rendering SERVICES and receiving property (partnership interest) Profits interest Capital interest (c) Joe Walsh, 2012

Partnership Interest for Services Profits Interest:

Partnership Interest for Services Profits Interest Rev. Proc. 93-27 – Profits interest for services provided to or for the benefit of partnership IRS will not treat receipt of a Profits interest for services as a taxable event Does not apply if: Profits interest relates to substantially certain and predictable stream of income If partner disposes of interest within 2 years In interest is in “publically traded partnership” (c) Joe Walsh, 2012

Partnership Interest for Services Profits Interest- an Example:

Partnership Interest for Services Profits Interest- an Example ABC admits D as a partner D receives 25% PROFITS [ not capital ] interest for services D gets zero capital account No income to D No deduction by partnership (c) Joe Walsh, 2012

Contributions to Partnerships An Example:

Contributions to Partnerships An Example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 Property X 25 100 B 25 100 Property Y 30 40 C 105 100 Property Z 75 60 D 0 0 Total 230 300 230 300 (c) Joe Walsh, 2012

Contributions to Partnerships Services for Capital Interest:

Contributions to Partnerships Services for Capital Interest Capital interest is one that would give holder a share of proceeds if partnership liquidated Positive Capital Account Ordinary income to service provider Deduction to partnership – allocated to other partners FMV determined using liquidation approach I n year service provider’s interest vested Sec. 83(b) election accelerates income but establishes partner status (c) Joe Walsh, 2012

Contributions to Partnerships Services – an example:

Contributions to Partnerships Services – an example Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 100 A 100 100 Property X 25 100 B 25 100 Property Y 30 40 C 105 100 Property Z 75 60 Total 230 300 230 300 (c) Joe Walsh, 2012

Contributions to Partnerships Services for CAPITAL INTEREST:

Contributions to Partnerships Services for CAPITAL INTEREST Partnership decides to admit D as equal ¼ partner for profits and capital for services rendered D makes Sec. 83(b) election D has 75 income (300 total capital x ¼) P artnership has 75 deduction allocated to A,B and C No gain or loss to partnership – deemed cash payment to D and contribution by D (c) Joe Walsh, 2012

Contributions to Partnerships Services – deemed cash payment:

Contributions to Partnerships Services – deemed cash payment Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 100 -75 =25 100 -75 =25 A 100 -25 =75 100 -25 =75 Property X 25 100 B 25 -25 = 0 100 -25 =75 Property Y 30 40 C 105 -25 =80 100 -25 =75 Property Z 75 60 Total 230 -75 =155 300 -75 =225 230 -75 =155 300 -75 =225 (c) Joe Walsh, 2012

Contributions to Partnerships Services – deemed cash contribution:

Contributions to Partnerships Services – deemed cash contribution Asset Inside Basis Book Value Partner Outside Basis Book Value Cash 25+75 =100 25+75=100 A 75 75 Property X 25 100 B 0 75 Property Y 30 40 C 80 75 Property Z 75 60 D 75 75 Total 155+75=230 225+75=300 155+75=230 225+75=300 (c) Joe Walsh, 2012

Contribution to Partnership Recap:

Contribution to Partnership Recap No current recognition of gain or loss for contributions of property Gain or loss preserved through substituted basis Inside Basis is basis of assets contributed to partnership Outside Basis is basis of contributed assets Capital Account is FMV of contributed assets (c) Joe Walsh, 2012

Partnership Taxation:

Partnership Taxation Hope this helped See you next week for Distributions (c) Joe Walsh, 2012

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