This article reviews and analyzes recent rulings and decisions involving partnerships. The discussion covers developments in partnership formation, debt and income allocations, distributions, passive activity losses, and basis adjustments.
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TOPICS / PASSTHROUGHS
Partnership and LLC Taxation
Trusts Owning Partnership Interests and the Revised UPIA
A special problem faces trustees whose principal or sole asset is a partnership that does not distribute all its taxable income. The problem arises because partnership distributions not in liquidation are “trust income” payable to the income beneficiary. Yet if the trustee pays the income beneficiary the full amount of the partnership distribution, the trust may not have sufficient cash to pay the trust’s own tax liability.
Definition of Omission from Gross Income for Partnership Items and the Six-Year Period for Assessing Tax
The IRS has issued temporary and proposed regulations defining an omission from gross income for purposes of the six-year minimum period for assessment of tax attributable to partnership items and the six-year period for assessing tax.
Recapture of Sec. 179 Expense Deduction for Passthrough Entities
How to report the recapture of Sec. 179 expense for passthrough entities at both the entity and owner levels.
LLC Interests as Limited Partnership Interests: Sec. 469 Revisited
The focus of recent cases has been on application of the “limited partner” rule of Sec. 469(h)(2) and, based on the specific language contained in Temp. Regs. Sec. 1.469-5T, whether an interest in an LLC should be treated as an “interest in a limited partnership as a limited partner.”
LLCs, LLPs, and the Passive Loss Rules
Sec. 469(h)(2) treats a limited partner’s losses from an interest in a limited partnership as presumptively passive. The IRS has taken the position that a taxpayer who is a member of an LLC or LLP that is taxed as a partnership should be treated as a limited partner and therefore any losses passed through to the member are passive activity losses.
Impact of Anticipated COD Income on Investors Joining Existing Partnerships
When appreciated property is contributed to a partnership, the precontribution gain is accounted for under Sec. 704(c), which provides that income, gain, loss, and deduction for property contributed to the partnership by a partner are shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value (FMV) at the time of contribution.
Passive Activity Rules Not Presumed to Apply to LLCs and LLPs
In the Garnett case, the Tax Court set precedent for the reporting of losses from LLPs and LLCs by limited liability partners who materially participate in the operations of the businesses in which they are investors.
Partnership Structural Changes: Deductibility of Expenses
This item examines several partnership restructuring transactions and discusses the circumstances in which a restructuring expense can be deducted and amortized under Sec. 709 or must be capitalized under Regs. Sec. 1.263(a)-5(a).
Trusts Owning Partnership Interests
When a trust instrument is silent and no discretionary power of administration exists, trustees and their advisers need to be knowledgeable of how partnership activity (including both taxable income and distributions received) is affected by the trust administration statutes of the state of situs of the trust.
Interests in LLCs and LLPs Not Presumed to Be Passive Activities
The Tax Court held that the taxpayers’ interests in their LLPs and LLCs were not presumptively passive because they did not hold their interests in the entities as limited partners in a limited partnership.
Restructuring Partnership Debt May Create Unexpected Results
A partnership or an LLC taxed as a partnership contemplating a debt restructuring should carefully consider the tax effects of Sec. 108.
Ninth Circuit Rules on Tax Court Jurisdiction in Partnership Cases
The Ninth Circuit has held in a group of consolidated cases that the Tax Court has jurisdiction to decide in partner-level proceedings whether a partnership’s transactions were tax motivated.
Revenue Ruling on S Elections for Partnerships Converting to Corporations
The IRS has issued a revenue ruling that addresses the question of whether, when a partnership becomes a corporation for federal tax purposes, it is eligible to elect to be taxed as an S corporation in its first tax year.
Taxpayer Not Allowed to Defer Income on Sale of Partnership Interest
A partner in a consulting partnership who received restricted stock in the sale of her interest in the partnership to a corporation and agreed by contract to report the full value of the stock in income in the year the stock was transferred could not defer including part of the value of the stock in income until the year the restrictions on the stock were lifted.
Tax Shelter Transactions Disregarded
The Fifth Circuit joined the majority of circuits and held that a lack of economic substance will invalidate the results of a transaction even if a taxpayer had a genuine motive other than tax avoidance for entering into the transaction.
Allocating Liabilities Among Related Partners: Determining the Impact of IPO II
This item discusses IPO II’s potential impact on allocating partnership liabilities under Sec. 752 and, given the decision, the unique considerations that must be taken into account in reaching a desired liability allocation among related partners.
Prop. Regs. on Determining Partners’ Distributive Shares
The IRS has issued proposed regulations on determining partners’ distributive shares of partnership items of income, gain, loss, deduction, and credit when a partner’s interest varies during a partnership tax year.
Navigating Secs. 743 and 734 in the Current Economy
Given the current economy and the resulting decline in the value of investment partnership portfolios, tax practitioners must be familiar with the mandatory basis adjustments under Secs. 743 and 734 and the alternative rules for electing investment partnerships.
Target or Waterfall: Partnership Allocations
In recent years, more and more partnership agreements have been drafted using the targeted capital account approach for allocating partnership items of income or loss (targeted capital approach) versus the typical Sec. 704(b) economic effect approach (waterfall approach).
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