Partnership and LLC Taxation

Navigating the Net Investment Income Tax: Key Issues for Investment Funds and Their Partners

This item summarizes the aspects of the net investment income tax that are most relevant to hedge fund investors and general partners.

Proposed Partnership Liability Regulations Under Sec. 752

Treasury and the IRS issued comprehensive and particularly adverse proposed regulations regarding the allocation of partnership recourse and nonrecourse liabilities under Sec. 752.

The Limited Liability Company Basis Limitation

Under Sec. 704(d), a member’s allocable share of loss from a limited liability company (LLC) taxed as a partnership is deductible only to the extent of the member’s outside basis in his or her LLC interest at the end of the LLC year. In determining a member’s outside basis at year end, adjustments for increases and decreases are made in a specific order according to Regs. Sec. 1.704-1(d)(2).

Target Capital Allocations: Up to Code?

Target capital allocations attempt to have the allocations of profit and loss follow the cash by making partner capital accounts equal what the partner would receive if the partnership actually liquidated at the end of the year.

Computing the Domestic Production Activities Deduction for Passthrough Entities

Some unique issues can arise when computing the domestic production activities deduction for a passthrough entity.

Revisiting the Vainisi Decision: Why S Corporation Banks Are Not Completely in the Clear

While the Seventh Circuit’s decision in Vainisi was favorable for S corporation banks investing in tax-exempt obligations, those banks nonetheless must pay close attention to the specific type of tax-exempt obligations they purchase if they expect to reap the benefits of that decision.

Proposed Disguised-Sale Regs. Offer Clarification and Issues for Real Estate

The Treasury Department issued new proposed regulations intended to clarify the disguised-sale rules under Sec. 707 and the allocation of partnership liabilities under Sec. 752.

Using a Buy/Sell Agreement to Restrict Transfers of Partnership Interests

A buy/sell agreement is a popular way to establish some parameters for the disposition of a partnership interest while establishing a method that can be used to value the interest and the terms of a potential payout.

Final Rules Issued on Bona Fide Indebtedness and Terminating Partnership’s Startup Expenses

Final regulations were issued on S corporation shareholder basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide and on the deductibility of startup expenditures and organizational expenses for partnerships following a termination of a partnership.

Partnership Interest Expense Allocation Rules Are Finalized

Final regulations make permanent four changes to the rules for allocating and apportioning interest expense for partners in partnerships.

IRS Guidance Shows Risks to Nonguarantor LLC Members

Recent IRS guidance clarifies the treatment of both guarantor and the nonguarantor LLC members.

Determining If a Technical Termination Occurs

To determine if an LLC terminates, the practitioner must determine whether an LLC interest was disposed of in a “sale or exchange” as defined in the Sec. 708 regulations. If so, did the sale or exchange result in 50% or more of the total interests in LLC capital and profits being sold or exchanged during a consecutive 12-month period?

Startup and Organizational Costs in a Partnership Technical Termination

Proposed regs. clarify treatment of startup and organization costs for partnership technical terminations.

Sec. 752 Recourse Liabilities and Related-Party Rules

Proposed regulations on partnership recourse liabilities and special rules for related persons address issues that are either ambiguous or not covered under current regulations.

Contributed Property in the Hands of a Partnership

A partnership that receives contributions of property must establish the basis, the holding period, and the character of the property in the hands of the partnership, and also determine available accounting and depreciation methods.

Considerations for Filing Composite Tax Returns

Taxpayers and their advisers should consider some key issues before deciding that a composite return is the best choice.

IRS Disallows Write-Off of Startup and Organizational Costs in a Technical Termination

New partnerships formed from technical terminations must step into the shoes of the terminated partnership and continue to amortize Sec. 195 startup expenditures and Sec. 709 organization fees using the same amortization period the terminated partnership used.

Proposed Regs. Issued on Amortization of Startup Expenses by Terminating Partnerships

The IRS issued proposed regulations aimed at preventing partnerships from using technical terminations to accelerate their deductions of startup and organizational expenses.

Current Developments in Partners and Partnerships

This article reviews and analyzes recent rulings and decisions involving partnerships. The discussion covers developments in partnership formation, income allocations, and basis adjustments

Valuation-Misstatement Penalty Applies to Tax Shelter Transactions

The Supreme Court held in that the Sec. 6662(b)(3) penalty for tax underpayments attributable to valuation misstatements applies to an underpayment resulting from a basis-inflating transaction that is disregarded for a lack of economic substance.
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