Partnership and LLC Taxation

Termination of an LLC

This column reviews the determination of when an event triggers the termination of an LLC classified as a partnership

The Tax Cost of Hot Assets upon the Disposition of a Partnership Interest

A disposition of a partner’s interest in an entity that holds hot assets may convert long-term capital gain to ordinary income or in certain cases may force the partner to recognize ordinary income offset by a nonutilizable capital loss upon the disposition.

IRS Issues Partnership Anti-Abuse Rule Regs.

The IRS and Treasury issued final regulations on June 8 to provide that the Sec. 704(c) anti-abuse rule takes into account the tax liabilities of both partners and certain owners of partners (T.D. 9485). The regulations also provide that partnerships cannot use an allocation method to achieve tax results that are inconsistent with the intent of the partnership rules in the Internal Revenue Code.

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.

Temporary Regs. Held Invalid

The Tax Court held that temporary regulations the IRS issued after an earlier adverse decision did not apply to that case and that the temporary regulations were invalid because they were contrary to the Supreme Court’s opinion in Colony, Inc., 357 U.S. 28 (1958).

IRS Issues Partnership Anti-Abuse Rule Regulations

The IRS and Treasury issued final regulations to provide that the Sec. 704(c) anti-abuse rule takes into account the tax liabilities of both partners and certain owners of partners (T.D. 9485).

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.

IRS Continues Focus on Disallowing Annual Exclusions for Gifts of Partnership Interests

The Tax Court held, in Price, T.C. Memo. 2010-2, that taxpayers were not entitled to annual gift tax exclusions under Sec. 2503(b) for the outright gifts of partnership interests.

Assessment Period Remains Open in Partnership Case

In Blak Investments, the Tax Court applied Sec. 6501(c)(10) to extend the assessment statute of limitation for a taxpayer with an undisclosed listed transaction on a return due prior to October 22, 2004.

Choice of Entity: Benefits of a Partnership

In the choice-of-entity decision, there are many considerations that should play a role. The S corporation form may lead to decreased compliance costs in the short run, but the flexibility provided by the partnership rules may lead to increased value for the business and easier operations in the future.

Careful Analysis Required for Potential Regs. Sec. 1.752-7 Liabilities

Regs. Sec. 1.752-7 defines what constitutes a 1.752-7 liability, how these liabilities are treated when assumed by the partnership or another partner, and the impact of a later sale (or redemption) of a partnership interest by the partner that contributed the debt to the partnership.

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.

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.
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