I got most of these notes from a fellow poster. These are so good that I dedicate them to me passing REG. Hope they help you too.
Partnerships
*No gain or loss is recognized on a contribution of property to a partnership in return for partnership interest
> Services Rendered FMV
> Value of partnership interest acquired for services rendered is ordinary income to partner
> Property subject to excess liability – When property is contributed that is subject to a liability where the decrease in the partner’s individual liability exceeds his partnership basis, the excess is treated as taxable boot and is gain to the partner.
*Basis of contributing partner’s interest
1) Cash – amount contributed
2) Property – Adjusted Basis (NBV)
3) (Liabilities) – Incoming partner’s liabilities assumed by other partners is a reduction – what you put in
4) Services – FMV
5) Liabilities – Other partners’ liabilities assumed by incoming partner – what you take on
*Special allocation – When a partner contributes property with a FMV that is higher or lower than the property’s NBV, a built-in gain exists at the date of contribution. Upon the subsequent sale of that property, the built-in gain or loss that existed @ date of contribution must be specially allocated to the contributing partner.
*Related-party loss disallowed – Losses between a controlling partner (over 50%) and his controlled partnership from the sale or exchange of property are not allowed.
*Related –party gain is ordinary income
*Tax losses – generated by the partnership are deductible by the partners and can be used to offset ordinary income. The losses must clear three hurdles:
(1) Tax Basis
(2) At-risk amount
(3) Passive activity
*Losses limited to tax basis
• Deduction is limited to partners’ adjusted basis in the partnership, which is increased by an partnership liabilities for which he is liable for additional capital contributions to the partnership.
*Losses limited to at-risk amount
• Similar to calculation of partner’s basis, but at-risk amount in partnership doesn’t include certain nonrecourse liabilities
*Passive Loss Limitations
• Rules limit the ability of partners involved in passive activity from using ordinary losses from the passive activity to reduce ordinary taxable income
*Carryforward of losses
• Any unused loss resulting from the tax basis limitations can be carried forward and used in future years when basis becomes available
*Guaranteed Payments – are reasonable payments or compensation paid to a partner for services rendered or use of capital without regard to his ratio of income
Tax treatment
1) Partnership tax deduction
2) Partner taxable income
*Non-liquidating Distributions – Basis Reduction
> distributions of cash or property to a partner reduces the partner’s basis by the cash or adjusted basis of the property distributed
*3 Ways a partner may liquidate partnership interest*
1) Complete Withdrawal
2) Sale of partnership interest
3) Retirement or death
Beginning Capital Account (zero out to get out)
% of Income/(Loss) up to withdrawal
Partner’s capital account
% of liabilities
Adjusted basis @ date of withdrawal
(Cash withdrawn)
Remaining basis to be allocated to assets withdrawn
*Sale of partnership interest – General rule: partner has a capital gain/loss when transferring a partnership interest because a partnership interest is a capital asset
Beginning capital account
% Income/(Loss) up to sale
Capital account@ sale date
% of liabilities
Adjusted basis
(Amount rec’d) —-> Cash, COD, FMV Property, etc.
Gain/(Loss)
“Hot Assets”
1) Unrealized receivables
2) Appreciated inventory
3) Recapture income regarding depreciable assets owned by the partnership
Limited Liability Companies (LLCs)
“Members” are not personally liable
*For federal income tax preparers, an LLC is treated as one of the following:
• Disregarded Entity/Sole proprietorship
• Partnership
• Corporation
*An LLC with at least two members/owners is taxed as a partnership unless an election is made to have the LLC taxed as a corporation
*A single-member LLC not electing to be taxed as an corporation, is considered as a disregarded entity for federal income tax purposes and will be treated as a sole proprietorship
Additional notes on corporate/partnership basis:
C-Corporations
Shareholder Initial Basis:
Adjusted basis of property transferred (including cash)
+ FMV of services
+ Gain recognized by shareholder
– Cash received (distribution)
– Liabilities assumed by corporation
– FMV of nonmoney boot received (bonds/debt securities
= Basis of Common Stock
Note: A contribution of 80% must be made to qualify for a non-taxable transaction
Taxable transaction – property transferred at FMV
Services do NOT count towards the 80% contribution
Initial basis – corporation
The greater of shareholder’s basis in property (NBV + gain recognized) or debt assumed
E&P calculation:
Taxable Income
+ Nontaxable income (perm. Differences)
– Nondeductible expenses (perm. Differences)
+/- Temporary GAAP vs Tax differences
= Current E & P
[Summary R3 pg 22)
Classifications of distributions:
E&P (current and accumulated) = taxable dividend
No E&P = return of capital (reduces basis – remember CANNOT have negative basis)
No basis = capital gain distribution (long term)
Current earnings are allocated to distributions on a pro rata basis (ratio of each distribution to total distributions)
Accumulated earnings are allocated to distributions in chronological order
Current E&P +, Accum E&P + = taxable dividend
Current E&P +, Accum E&P – = taxable dividend to extent of current
Current E&P -, Accum E&P – = no dividend at all
Current E&P -, Accum E&P + = net the two together and a taxable dividend exists to the extent of positive accum E&P
Preferred stock – paid a set amount, always get paid first, always a dividend
Taxable amounts to shareholders:
Cash dividend – amount received
Property dividend – FMV of prop received
Taxable amounts to corporation:
Property dividend – FMV of prop – NBV = corporate gain = current E&P
S-Corporations
S Corporation’s shareholder’s basis:
BAILED = Ending basis
+B – Beginning basis
+A – Additional investment in stock
+I – Income items*
-L – Loss items
-E – Expense items
-D – Distributions to shareholders
*Consisting of: (SSII + NSII) => Separately Stated Income Items + Nonseparately Stated Income Items, which includes tax-free income
S corp distributions with C corp E&P:
1) To extent of AAA – reduces basis – not taxed
2) To extent of C corp E&P – does not reduce basis – taxable dividend
3) To extent of basis – reduces basis – return of capital not taxed
4) In excess of basis – taxable capital gain distribution
For corporations, contributed property by shareholder is simply the basis of the contributor + any gain recognized by the shareholder or boot received (lower of the two). Gain recognized by the shareholder is to the extent that liabilities assumed by the corporation exceed the basis in the assets contributed by the shareholder.
Distribution of corporate property for shareholder: the amount distributed is the FMV less any liability assumed by the shareholder. Basis of that property to the shareholder is FMV. It is important to remember that whenever appreciate property is distributed by a corp, a gain must be recognized but not a loss.
Distribution to the shareholder is treated as follows: 1. Ordinary dividend to the extent of E&P (remember that current year is treated separately from accum E&P. If no accum, still use current year earnings (don’t net them). 2. Tax free to the extent of basis in the stock 3. Gain treated as capital gain.
2. For partnerships, the basis for the partnership when a partner contributes property is the partner’s basis. Partnership distributed property for the partner is the adjusted basis of the partnership property right before distribution. Partner’s basis is cash and property contributed (partner’s basis) less: 100% of mortgage assumed by partnership + partner’s portion of the mortgage based on ownership + partner’s share of debt (recourse is only assumed by general partners while nonrecourse is assumed by all partners) + value of services contributed +/- partner’s share of income/loss from the partnership – debt reduction of the partnership (partner’s share) – distributions to partner.
For partnerships, no gain can be recognized unless cash is also distributed. However, in a liquidating distribution, the property basis distributed is a PLUG since the ending basis must be zero (so, less any cash received in the distribution). Note that the capital account shown on the Partner’s k-1 is NOT the same as basis. The accounts can differ.
REG - 79
FAR - ?
AUD - ?
BEC - ?
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