American Bar Association. BASIC PARTNERSHIPS TAX PRINCIPLES July 22, 23, 2008. Michael Hirschfeld Dechert LLP New York, New York (212) 698-3635 [email protected] Are you a PS?. LLC PS for tax Check the box rules: Single member v Multi Member Use: Non-US Entity. Form 8832.
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The game: Get cash back later in time after property contribution is made
Why? Cash distributions from a PS are not generally taxable until they exhaust your tax basis BUT
Increased by $100 due to cash contribution
If allocate A 50% of gain then increased to $150
If liquidate, A gets $150 if follow capital account-something is wrong since A thinks he should get only $100
Increased by zero upon property contribution since AB of property was zero
If allocate B 50% of gain then increased to $50
If liquidate, B gets $50 if follow capital account—something is wrong since B thinks she should get $100!Capital Account Analysis if Use AB of Assets
Cookbook for PS Agreements-Tax Allocations Section 754
Tax must follow economics
A’s Cap Acc = $1M Section 754
A’s share of loss = 0
A’s Cap Acc after Loss Allocation = $1M
SO WHAT DOES THIS MEAN---If then sold property for $9M, pay off debt of &8M and who gets $1M cash
A gets all the cash
B’s Cap Acc = $1M
B’s share of loss = $1M
B’s Cap. Acc = 0
- Provision must direct PS to allocate subsequent items of income to partner in order to eliminate partner’s capital account deficiency as quickly as possible.
(cont’d on next slide)
What to do?