Cover Page

Title Page

Copyright Page

Dedication

Preface

About the Authors

Table of Contents

Contents in Detail

PART I BASIC PARTNERSHIP OPERATIONS

Chapter 1 — What Is a Partnership?

¶101 Introduction

¶102 Classification of Partnerships

¶103 Advantages and Disadvantages of Operating as a Partnership

¶104 Tax Issues Involving Classification of LLCs as Partnerships

¶105 IRS Reclassification

¶106 Distinguishing Partnerships from Other Relationships

¶106.01 Tenancy in Common Distinguished

¶106.02 Election to Be Excluded from Subchapter K

¶106.03 Shared Expenses Distinguished

¶106.04 Employment Relationships Distinguished

¶106.05 Creditor-Debtor Relationships Distinguished

¶106.06 Lessor-Lessee Relationships Distinguished

Chapter 2 — Partnership Formation and Computation of Partner Basis

¶201 Introduction

¶202 General Rule: Contribution of Property Is Treated as a Tax-Free Exchange of Property for a Partnership Interest

¶202.01 Basis of Partner’s Partnership Interest and Partnership’s Property

¶202.02 Holding Period of a Partner’s Partnership Interest and a Partnership’s Property

¶203 Depreciation Methods

¶204 Contributions of Encumbered Property

¶205 Effect of Partnership Operations on Basis

¶205.01 Income and Loss—Taxable and Tax-Exempt

¶205.02 Contributions and Distributions

¶206 Contributions Requiring Special Consideration

¶206.01 Property Subject to Depreciation Recapture

¶206.02 Accounts Receivable

¶206.03 Third-Party Notes Being Reported on the Installment Method

¶206.04 Third-Party Notes Not Being Reported on the Installment Method

¶206.05 Partner’s Personal Obligations

¶206.06 Personal-Use Property

¶206.07 Investment Partnerships

¶206.08 Suspended Losses

Chapter 3 — Receipt of a Partnership Interest for Services

¶301 Introduction

¶302 Capital Interest Received

¶302.01 Results to Service Partner

¶302.02 Results to Partnership

¶303 Profit Interest Received

¶304 Proposed Regulations

¶304.01 Results to Service Partner

¶304.02 Results to Partnership

¶304.03 Value of the Partnership Interest

Chapter 4 — Calculation of Partnership Income

¶401 Introduction

¶402 Both Entity and Aggregate Rules Apply

¶402.01 Involuntary Conversions

¶402.02 Code Sec. 1244 Stock

¶402.03 Prepaid Expenses

¶403 Calculation of the Amount of the Partnership’s Taxable Income

¶404 Payments to a Partner

¶404.01 Payments to Partners as Compensation for Services or Property Not Required as a Condition of Partner Status

¶404.02 Guaranteed Payments

¶404.03 Payments Not Governed by Code Sec. 707(a) or (c)

¶404.04 Summary: Is This “Much Ado About Very Little”?

¶405 Taxable Year

¶405.01 General Rules

¶405.02 Majority Interest Required Taxable Year

¶405.03 Principal Partner Required Taxable Year

¶405.04 Year of Least Aggregate Deferral

¶405.05 Changes in Required Taxable Years

¶405.06 Business Purpose Taxable Year—The Natural Business Year

¶405.07 Adopting a Taxable Year Other Than a “Required Year” or “Natural Business” Year-End

¶405.08 52-53-Week Taxable Year

¶406 Accounting Method

¶407 Organization and Syndication Expenses—Code Sec. 709

¶407.01 Organization Expenses

¶407.02 Syndication Costs

¶408 Investigation, Acquisition, and Start-Up Expenses— Code Secs. 195 and 263

¶408.01 Investigation Expenses

¶408.02 Pre-opening Start-Up Expenses

¶408.03 Unamortized Investigation and Start-Up Expenses

¶408.04 Code Sec. 195 Procedure

Chapter 5 — Character and Presentation of Partnership Income

¶501 Introduction

¶502 Presentation of a Partnership’s Taxable Income

¶503 Separately Stated Items

¶503.01 Rental Real Estate Activities

¶503.02 Rental Activities Other Than Real Estate

¶503.03 Compensation Paid to Service Partners

¶503.04 Interest and Royalty Income

¶503.05 Dividends

¶503.06 Capital Gains and Losses

¶503.07 Code Sec. 1231 Gains and Losses

¶503.08 Portfolio (Investment) Income and Related Deductions Other Than the Interest Deduction

¶503.09 Code Sec. 212—Expenses for the Production of Income

¶503.10 Code Sec. 179 Expense

¶503.11 Charitable Contribution Deduction

¶503.12 Self-Employment Income

¶503.13 Deduction for Foreign Taxes and Taxes of U.S. Possessions Allowed Under Code Secs. 164(a) and 901

¶503.14 Alternative Minimum Tax Information

¶503.15 Code Sec. 611—Oil and Gas Well Depletion

¶503.16 Income Attributable to Domestic Production Activities

¶503.17 Interest Deductions

¶503.18 Recovery of Previously Deducted Amounts

¶503.19 Cancelled Debt Income

¶503.20 Code Sec. 172—Net Operating Deduction, and Code Sec. 1212— Capital Loss Carrybacks and Carryovers

¶503.21 Deduction for Personal Exemptions

¶503.22 Code Sec. 213—Medical Expenses

¶503.23 Code Sec. 215—Alimony

¶503.24 Code Sec. 217—Moving Expenses

¶503.25 Code Sec. 219—Retirement Savings

¶503.26 Trust or Estate Partner

¶503.27 Fringe Benefits

¶503.28 Code Sec. 212(3)—Tax Return Preparation Expenditures

¶503.29 Special Allocations

¶504 Schedules M-1, M-2, and M-3

¶504.01 Schedules M-1 and M-2

¶504.02 Schedule M-3

¶505 Reporting Taxable Income for Large Partnerships/LLCs

¶505.01 Eligibility

¶505.02 Making the Election

PART II PARTNERSHIP ALLOCATIONS

Chapter 6 — Allocation of Partnership Income among the Partners: The Substantial Economic Effect Requirement

¶601 Introduction

¶602 The Partnership Agreement Is a Legal Contract

¶603 General Requirements for Substantial Economic Effect

¶604 The First Requirement: “Economic Effect”

¶604.01 General Rule

¶604.02 “Alternate” Test for Economic Effect

¶604.03 Economic Effect Equivalence

¶605 The Economic Effect of Partnership Allocations Must Be “Substantial”

¶605.01 Shifting Allocations Test

¶605.02 Transitory Allocations Test

¶605.03 Special Rule for Allocations of Future Gain on Disposition of Partnership Property

¶605.04 Overall Tax Effects Test

¶606 Allocating Partnership “Nonrecourse Deductions”

¶606.01 Overview

¶606.02 Minimum Gain

¶606.03 Partnership Agreement Must Contain a “Minimum Gain Chargeback Provision”

¶606.04 Identifying Nonrecourse Deductions Where the Partnership Has Both Recourse and Nonrecourse Indebtedness

¶607 Other Issues

¶607.01 Transfer of a Partnership Interest

¶607.02 Distributions Causing Code Sec. 734(b) Adjustments

¶607.03 Nondeductible, Noncapital Expenditures

¶607.04 Guaranteed Payments

¶607.05 Adjustments Where Guidance Is Lacking

¶607.06 Optional Revaluation of All Property and Capital Accounts

¶608 Summary and Concluding Remarks

Chapter 7 — Allocation of Income and Deductions from Contributed Property: Code Sec. 704(c)

¶701 Introduction

¶701.01 Anti-abuse Rule

¶702 Traditional Method

¶702.01 General

¶702.02 Ceiling Rule Limitation

¶703 Traditional Method with Curative Allocations

¶704 Remedial Allocations Method

¶705 Special Rules

¶705.01 Depreciation Methods

¶705.02 Small Disparities

¶705.03 Aggregation of Properties

¶705.04 Code Sec. 704(b) Revaluations

¶705.05 Nontaxable Dispositions

Chapter 8 — Other Limitations on Partnership Allocations

¶801 Allocation of Partnership Income and Loss on Transfer or Change in a Partner’s Interest in the Partnership

¶801.01 General

¶801.02 Special Rules Limiting Loss Allocations on Transfer or Change in a Partner’s Interest

¶801.03 Retroactive Allocations Among Newly Admitted and Continuing Partners

¶802 Allocations in Family Partnerships—Code Sec. 704(e)

¶802.01 Allocations Within the Family

¶802.02 Principles Underlying Code Sec. 704(e)

¶802.03 Capital as a Material Income-Producing Factor

¶802.04 Donor’s Reasonable Compensation

¶802.05 Donee’s Status as the Owner of the Partnership Interest

¶802.06 Purchasing Family Member’s Status as a Partner

¶802.07 Gifts of Partnership Interest When Partnership Capital Is Not a Material Income-Producing Factor

¶802.08 Nonpartner Family Member Performs Services for the Partnership

¶802.09 Estate Tax Planning with Family Partnerships

¶803 Depreciation Recapture

¶804 Credits

¶805 Income Allocation Recharacterized as Payment for Capital Expenditure

Chapter 9 — Partner’s Share of Partnership Debt

¶901 Introduction

¶902 Partner’s Share of Debt Included in Tax Basis

¶902.01 Adjustments to Basis for Changes in Partner’s Share of Liabilities

¶902.02 Contributions and Distributions of Encumbered Property

¶903 What Is a “Liability” for Purposes of Code Sec. 752?

¶903.01 Debt vs. Equity

¶903.02 Additional Code Sec. 752 Requirements

¶904 Classification of Partnership Liabilities as Recourse vs. Nonrecourse

¶905 Partner’s Share of Partnership Recourse Debt

¶905.01 Constructive Liquidation of the Partnership

¶905.02 Some “Nonrecourse” Loans Recharacterized as Recourse Loans

¶906 Partner’s Share of Partnership Nonrecourse Debt

¶906.01 Nonrecourse Liabilities Allocated by Reference to Partners’ Profits Interests

¶906.02 Minimum Gain

¶906.03 Code Sec. 704(c) Minimum Gain

¶906.04 “Excess” Nonrecourse Liabilities

¶906.05 Multiple Properties Secured by Single Nonrecourse Liability

¶907 Reg. § 1.752-7 Liabilities (Contingent Liabilities)

¶907.01 General

¶907.02 Mechanics

¶907.03 Sale or Transfer of an Interest in a Partnership with §1.752-7 Liabilities

¶907.04 Liquidating Distribution to § 1.752-7 Partner or Distribution of Property Secured by §1.752-7 Liability to Another Partner

¶907.05 Exceptions

PART III LIMITATIONS ON PARTNERSHIP DEDUCTIONS

Chapter 10 — Limitations on the Deductibility of Partnership Losses

¶1001 Introduction

¶1002 Disallowed Losses Are Carried Forward

¶1002.01 Carryforwards Under Code Sec. 704(d)

¶1002.02 Carryforwards Under Code Sec. 465

¶1002.03 Carryforwards Under Code Sec. 469 (Passive Loss Carryforwards)

¶1003 The Basis Limitations of Code Sec. 704(d)

¶1003.01 Losses Cannot Exceed Tax Basis

¶1003.02 Accounting for Debt

¶1003.03 Nonrecourse Debt

¶1004 Code Sec. 465—Losses Cannot Exceed Taxpayer’s “Atrisk Amount

¶1005 Passive Loss Limitations—In General

¶1005.01 General

¶1005.02 Passive Activity Losses Can Be Deducted Only Against Passive Activity Income

¶1005.03 Passive Activity Credits

¶1006 Classification of Income Under Code Sec. 469

¶1006.01 General

¶1006.02 Gain from Sale or Disposition of Property

¶1006.03 Gain from Sale of an Interest in a Partnership

¶1006.04 Special Rule for Substantially Appreciated Property

¶1007 Classification of Expenses and Deductions Under Code Sec. 469

¶1008 Taxpayers to Whom Code Sec. 469 Applies

¶1009 Passive Activities Defined

¶1009.01 Material Participation—the “500 Hour” Rule

¶1009.02 Alternative Standards for Material Participation

¶1009.03 Defining Participation

¶1009.04 Limited Partners

¶1009.05 Rental Activities

¶1009.06 Real Estate Professionals

¶1009.07 Exemption for Rental Activities in which Taxpayer “Actively” Participates

¶1010 Activities That Are Not Passive Activities

¶1011 Recharacterization of Certain Passive Activities as Nonpassive

¶1012 Operating Rules

¶1012.01 Calculation and Use of Carryforwards

¶1012.02 Installment Sales

¶1012.03 Gifts

¶1012.04 Dispositions by Death

¶1013 Grouping Activities

¶1013.01 General

¶1013.02 Appropriate Economic Units

¶1013.03 Limitations on Grouping Certain Activities

¶1013.04 Consistency Is Required

PART IV SALES AND DISTRIBUTIONS

Chapter 11 — Sale of a Partnership Interest

¶1101 Introduction

¶1102 Amount Realized

¶1103 Adjusted Basis in Partnership Interest

¶1103.01 General Rule

¶1103.02 Alternate Rule

¶1103.03 Adjustments to Basis for Changes in Partner’s Share of Liabilities

¶1104 Ordinary Income from the Sale of an Interest in the Partnership

¶1104.01 Definition of Unrealized Receivables

¶1104.02 “Inventory Items” Defined

¶1104.03 Tiered Partnerships

¶1104.04 Enforcement

¶1104.05 Comparison with Code Sec. 341

¶1105 Collectibles and Unrecaptured Code Sec. 1250 Gain

¶1105.01 Collectibles Gain

¶1105.02 Unrecaptured Section 1250 Gain

¶1106 Installment Sale of a Partnership Interest

¶1107 Abandonments and Gifts of a Partnership Interest

¶1108 Like-Kind Exchanges of Partnership Interests

¶1108.01 Code Sec. 1031(a)(2)(D)

¶1108.02 Planning for Exchanges of Some Partnership Property and Sale of Other Partnership Property

¶1109 Change in Status

¶1110 Miscellaneous Partnership Interest Transfers

Chapter 12 — Partnership Distributions

¶1201 Introduction

¶1202 Operating or “Current” Distributions

¶1202.01 Cash Distributions—Effect on Basis and Recognition of Gain

¶1202.02 Mid-year Advances and Partner “Draws”

¶1203 Property Distributions—Consequences to the Partnership

¶1204 Partner’s Basis in Distributed Property

¶1204.01 General Rule—Carryover Basis

¶1204.02 Effect of Prior Partnership-level Basis Adjustments

¶1204.03 Character and Holding Period of Distributed Property

¶1204.04 Receipt of Multiple Properties

¶1205 Liquidating Distributions

¶1205.01 Recognition of Gain or Loss by Distributee Partner

¶1205.02 Property Distributions and Determination of Basis

¶1206 Disproportionate Distributions—Results to Partner and Partnership When the Partner’s Share of Ordinary Income Assets Is Af

¶1207 Definition of Unrealized Receivables

¶1208 Definition of Substantially Appreciated Inventory Items

¶1209 Distribution of Marketable Securities

¶1210 Definition of Marketable Securities

¶1211 Basis in Securities Distributed, Partnership Interest, and Assets Remaining in the Partnership

¶1212 Coordination with Other Provisions

Chapter 13 — Basis Adjustments to Partnership Property—Code Secs. 734(b), 743(b)

¶1301 Basis Adjustment to Partnership Property—Code Sec. 743(b) Basis Adjustments

¶1301.01 Code Sec. 743(b) Transfers

¶1301.02 Code Sec. 743(b) Adjustments—Overview

¶1301.03 Partnerships with “Substantial Built-in Loss” Immediately Following Transfer of an Interest

¶1301.04 Partnerships Without Substantial Built-in Losses

¶1301.05 Making the Code Sec. 743(b) Adjustment

¶1301.06 Distribution of Property with Code Sec. 743(b) Adjustments

¶1301.07 Transfer of Partnership Interests with Existing Code Sec. 743(b) Adjustments

¶1301.08 Compliance Requirements Under Code Sec. 754

¶1301.09 Partner-Level Code Sec. 743(b) Adjustments—Code Sec. 732(d)

¶1302 Technical Terminations

¶1302.01 Consequences of Partnership Termination

¶1302.02 Other Consequences

¶1303 Partnership Basis Adjustments Following Distributions of Property

¶1304 No Code Sec. 754 Election in Effect

¶1305 Code Sec. 754 Election in Effect or Substantial Basis Reduction

¶1305.01 Amount of the Adjustment

¶1305.02 Allocation of Code Sec. 734(b) Adjustment Among Partnership Property

¶1305.03 Substantial Basis Reduction

PART V ADVANCED TOPICS

Chapter 14 — Disguised Sales

¶1401 Introduction

¶1402 Tax Treatment of Sale of Property to the Partnership by a Partner

¶1402.01 Sale at a Gain

¶1402.02 Sale at a Loss

¶1403 Property Contributions Treated as Disguised Sales

¶1403.01 In General

¶1403.02 Contributions Related to Distributions—The Facts and Circumstances Test of Code Sec. 707(a)(2)(B)

¶1403.03 Special Rules for Guaranteed Payments, Preferred Returns, Cash Flow Distributions, and Pre-formation Expenditures

¶1403.04 Effect of Liabilities

¶1403.05 Treatment of Qualified Liabilities when Transfer Is Treated as Part of a Sale

¶1403.06 Disguised Payment for Services

¶1404 Partner Contributes Property and Partnership Distributes It to Another Partner—Code Sec. 704(c)(1)(B)

¶1404.01 Recognition of Gain or Loss

¶1404.02 Character of Gain or Loss

¶1404.03 Basis Rules

¶1404.04 Special Rules for Constructive Termination of Partnerships

¶1404.05 Exceptions

¶1404.06 Contributor Receives Like-kind Property in Same Distribution

¶1405 Partner Contributes Property and Partnership Distributes Other Property to the Partner—Code Sec. 737

¶1405.01 Mechanics

¶1405.02 Net Pre-contribution Gain

¶1405.03 Basis Rules Following Application of Code Sec. 737

¶1405.04 Character of Gain

¶1405.05 Code Sec. 737 not Triggered if Contributed Property Distributed Back to the Contributor

¶1405.06 Constructive Terminations of the Partnership

¶1405.07 Hierarchy of Statutes

Chapter 15 — Death or Retirement of a Partner

¶1501 Introduction

¶1502 Payment for Retiring General Partner’s Interest in a Partnership When Capital Is Not a Material Income-Producing Factor

¶1502.01 When Is Capital a Material Income-Producing Factor?

¶1502.02 Retired Partner Defined

¶1502.03 Payments for Retiring Partner’s Share of Unrealized Receivables—Code Sec. 736(a)

¶1502.04 Payments for Retiring Service Partner’s Share of Goodwill—Code Sec. 736(a) or (b)

¶1502.05 Payments for Property Other Than Unrealized Receivables and Goodwill—Code Sec. 736(b)

¶1502.06 Allocating the Payment Among Code Sec. 736 Categories

¶1502.07 Accounting for a Series of Payments

¶1502.08 Allocating Property Distributions Between Code Sec. 736(a) Payments and Code Sec. 736(b) Payments

¶1502.09 Passive Gain or Loss

¶1502.10 Effect of Code Sec. 754 Election

¶1502.11 Classification of Retirement Payments as Self-Employment Income

¶1503 Payment for Retiring Partner’s Interest When Capital Is a Material Income-Producing Factor or Partner Is a Limited Partner

¶1504 Partnership Interest Sale Compared to Liquidation

Chapter 16 — S Corporations

¶1601 Eligibility, Election, and Formation

¶1601.01 Eligibility

¶1601.02 Election

¶1601.03 Corporate Contributions

¶1601.04 S Corporation Method of Accounting and Taxable Year

¶1602 Taxation of S Corporations

¶1602.01 Built-in Gains Tax

¶1602.02 Tax on Excess Net Passive Investment Income

¶1602.03 LIFO Recapture

¶1602.04 Penalties for Failure to File

¶1602.05 General Business Credit Recapture

¶1603 Treatment of Income by the Shareholder

¶1603.01 Allocation Among Shareholders

¶1603.02 Pass-through of Items to Shareholders

¶1603.03 Deduction or Exclusion Limitations at the Shareholder Level

¶1603.04 Loss Limitations Basis

¶1603.05 Loss Limitations At Risk

¶1603.06 Loss Limitations Passive Activity

¶1604 Treatment of S Corp Distributions to Shareholders

¶1604.01 Overview

¶1604.02 Distributions—S Corp has no Prior Year E&P

¶1604.03 Distributions—S Corp has Prior Year E&P

¶1604.04 Accumulated Adjustments Account (AAA)

¶1604.05 Distributions of Property

¶1604.06 Distributions in Redemption of Stock

¶1605 Termination of Election

¶1605.01 General

¶1605.02 Revocation

¶1605.03 Termination via Violation of Eligibility Requirements

¶1605.04 Termination Due to Excess Passive Investment Income

¶1605.05 Effective Date of Termination

¶1605.06 Reelection of S Status Following a Termination

¶1606 Tax Administration

Appendix

Case Table

Finding Lists

Index

A

B

C

D

E

F

G

H

I

J

L

M

N

O

P

Q

R

S

T

U

V

W

Y

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