Contributions, Distributions & Basis

IRS Maintains Stance on Omissions from Gross Income and Overstatement of Basis

The IRS released final 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. The regulations are designed to resolve whether an overstatement of basis in a sold asset results in an omission from gross income.

Current Developments in S Corporations (Part II)

This article discusses S corporation eligibility, elections, and termination issues from the period July 2009–July 2010.

Appeals Court Overturns Taxpayer Win in Tax Shelter Case

The Tenth Circuit held that a taxpayer’s investment in a “son of boss” tax shelter lacked economic substance and therefore did not generate deductible losses, reversing a taxpayer win on the issue in which a district court had allowed the taxpayer to deduct losses from the investment.

Potential Implication of Recent Sec. 469 Court Decisions for Self-Employment Tax Rules

For purposes of self-employment taxes, many members of LLCs have treated themselves as limited partners and have therefore reported that their distributive share of income was not subject to self-employment tax under Sec. 1402(a)(13). If recent Sec. 469 court cases were to be applied beyond Sec. 469, this self-employment tax position might be more difficult to sustain.

Sec. 465 Traps for the Unsuspecting S Corporation Shareholder

Without proper planning, the at-risk rules set out in Sec. 465 can limit the amount of deductible S corporation losses.

The Story of Basis

Basis is a beneficial concept for a taxpayer—it shields the taxpayer from tax on the sale of an asset and can produce losses that reduce tax liability. It has been described as a “summary of the tax impact of [past] events” that have affected an asset. Nevertheless, basis can be elusive: It can appear or disappear when we are not paying attention. It can cling to an asset, be adjusted up or down, replicate itself, or shift to another asset. In other words, the summary that basis provides can have a number of potential twists and turns.

Tax Court Holds Invalid Temporary Regulations on Overstatement of Partnership Basis

The Tax Court held that temporary regulations issued by the IRS last year that defined an overstatement of partnership basis as an omission from gross income are invalid.

S Corp. Shareholder Basis for Circular or Certain Back-to-Back Loans

Practitioners advising on proper methods to use for shareholders to acquire basis in loans made to S corporations incurring losses can take away several points from recent court decisions.

S Corporation Basis Reductions for Nondeductible Expenses

When an S corporation has losses and deductions in excess of basis, some of which are nondeductible, noncapital expenses, will there be a carryover of the nondeductible items for purposes of reducing basis in a future year?

Current Developments in Partners and Partnerships

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.

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.

Final Regs. Issued on S Corp. DOI Income Exclusion and Tax Attributes

The IRS issued final regulations governing how an S corporation reduces its tax attributes under Sec. 108(b) when the S corporation has discharge of indebtedness income that is excluded from gross income under Sec. 108(a).

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.

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).

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.

Economic Outlay Revisited

Under the economic outlay doctrine, to obtain basis in an S corporation with respect to debt, a shareholder must make an actual economic outlay, the outlay must somehow leave the shareholder poorer in a material sense, and the debt created must run directly between the shareholder and the S corporation.

Temp. Regs. Allow Deemed Election to Expense Startup, Organizational Costs

Effective July 8, 2008, the IRS issued new temporary regulations to amend the rules under Secs. 195, 248, and 709 regarding elections to deduct startup expenditures and organizational expenditures of corporations and partnerships (T.D. 9411).
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