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in Sep, Oct, Nov, Dec ONLY! Depreciation = any method allowed by IRS is o.k. Organizational Costs = may expense up to $5K & amortize rest over 15 years • Legal fees, drafting the charter, etc… (NOT FEES TO RAISE $$$$) Start-up Costs = raising cash = MUST CAPITALIZE these costs DISTRIBUTIONS CURRENT (non-liquidating) • No loss can be recognized for current distributions • Gain to PTR = cash received in excess of outside tax-basis • Basis of non-cash Property Received = Adj basis to PTP ○ Limited to PTR’s outside basis (-) cash received in same distribution ○ Effect: Adjusted basis may be reduced/lost • Inside basis = actual interest = interest in profits/losses LIQUIDATING • Losses: can be recognized to extent PTR’s basis exceeds Cash & basis of sec. 751 property received (ordinary income assets) • Adjusted Basis of Property Received from PTP in liquidation ○ = PTR’s basis (-) cash received Order of Allocation if PTR’s basis insufficient than property’s inside basis 1. Reduce PTR basis by cash received 2. Hot Assets (new basis = inside basis is < PTR’s remaining basis) a. If insufficient, allocate first to avoid built-in losses b. Then according to FMV c. Unrealized A/R and Inventory = ‘hot asset’ 3. Other Assets a. Same steps as above Example: A partnership distributes both its assets, Parcel 1 and Parcel 2 in liquidation of partner T whose basis in her interest is $55. Neither asset consists of inventory or unrealized receivables (step 1). Parcel 1 has a basis to the partnership of $5 and a fair market value of $40, and Parcel 2 has a basis to the partnership of $10 and a fair market value of $10. Basis is first allocated $5 to Parcel 1 and $10 to Parcel 2 (their adjusted basis to the partnership under step 2). The $40 basis increase (the partner's $55 basis minus the partnership's total basis in distributed assets of $15) is first allocated to Parcel 1 in the amount of
Partnerships $35, its unrealized appreciation (step 3), and the remaining basis adjustment of $5 is allocated according to the assets' fair market values (step 4). Thus, $4 is allocated to Parcel 1 (for a total basis of $44) and $1 to Parcel 2 (for a total basis of $1). SPECIAL ISSUES Mixing Bowl-> attempt to avoid tax by shifting assets among partners • Ex: PTR ‘A’ transfers land w/NBV = $5K and FMV = $20K to ABC partnership, which distributes to PTR ‘C’ two years later, when FMV = $22K ○ Must be made w/in 7 years of contribution to be taxed ○ If contributing partner receives property back -> Tax-free ○ Like-kind-prop transferred to ‘C’ w/in 180 days also counts ○ PTR ‘A’ -> recognize $15K gain (increases outside basis) ○ PTR ‘C’ -> basis in land = $20K (assuming sufficient basis to cover) Disproportional Distribution = unequal distribution of capital vs. ordinary assets to different partners Guaranteed Payments: Income to recipient, but DO NOT increase outside basis • Reduces Distributable PTP income (offsets ordinary income) • Cannot be indexed based on partnership income (e.g. 25% of profits) • Self-Employment tax applies 50.1%+ Partner sells property to PTP = No losses allowed • Gains taxed as ORDINARY INCOME to contributing PTR (no capital gain treatment allowed) 50% of less partner selling prop to PTP = Treat as a regular sale (realize G/L) Holding Period of PTP interest, in exchange for contributed property: • Capital: @ date PTR acquired the asset (retains original HP) • Non-capital & not used in PTR’s T/B: @ date PTP interest is acquired Sells PTP interest & Unrealized receivables/Inventory exists (no basis to PTP, but high FMV) • PTR selling the interest must recognize as ordinary income General Rule for sale of PTP interest = taxed as capital gain • Gain = Cash + debt relief – outside basis