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Partnership allocations – general rules . Introduction. Substantiality. Economic Effect. PIP. Problems. oper. Partnership allocations - introduction. lots of flexibility why? problem with flexibility responsibility. Orrisch.

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partnership allocations general rules
Partnership allocations – general rules

Introduction

Substantiality

Economic Effect

PIP

Problems

Chapter 4A

oper

partnership allocations introduction
Partnership allocations - introduction
  • lots of flexibility
    • why?
    • problem with flexibility
  • responsibility

Chapter 4A

orrisch
Orrisch
  • special allocation of depreciation deductions and gain chargeback to O
  • evidence of tax avoidance purpose:
    • depreciation deduction is predictable amount;
    • O had taxable income, C did not;
    • C avoids future CG tax.
  • TP: merely equalize capital accounts
  • TP: SEE met – do capital account adjustments consistent with tax allocations insulate the latter from challenge?

Chapter 4A

orrisch simplified facts
Orrisch (simplified facts)
  • O and C each contributes $1,000 to the OC partnership which purchases 5-year depreciable property for $2,000.
  • In the first 3 years, partnership income and expenses are exactly equal except for $400 of depreciation deductions each year which are all allocated to O.
  • Beginning year 4, partnership sells the property; parties agree to allocate any gain disproportionately to O equal to prior allocations of depreciation to him.
  • All other items to be split equally.

Chapter 4A

orrisch capital accounts
Orrisch: capital accounts

O,C: $1,000 initial contributions

$400 depreciation/yr – all to O

sale yr. 4 – gain chargeback to O

all other items shared equally

Chapter 4A

orrisch capital accounts6
Orrisch: capital accounts

O,C: $1,000 initial contributions

$400 depreciation/yr – all to O

sale yr. 4 – gain chargeback to O

all other items shared equally

Chapter 4A

orrisch capital accounts7
Orrisch: capital accounts

O,C: $1,000 initial contributions

$400 depreciation/yr – all to O

sale yr. 4 – gain chargeback to O

all other items shared equally

Chapter 4A

orrisch capital accounts8
Orrisch: capital accounts

O,C: $1,000 initial contributions

$400 depreciation/yr – all to O

sale yr. 4 – gain chargeback to O

all other items shared equally

Chapter 4A

section 704 b regulations

(iv) rules

respect pos. bal. on liquidation

EE

no deficit

DRO

take into account

expected dists.

substantiality

shifting

QIO

transitory

overall test

Section 704(b) regulations

or alt EE

or

“DBL”

SEE

PIP

deemed PIP

Chapter 4A

problem 4 1
Problem 4-1
  • G (general partner) and L (limited partner) each contributes $100K to partnership GL which purchases 10-year depreciable property for $200K cash
  • L has no DRO; otherwise, EE tests are met.
  • partnership agreement contains a QIO.
  • all dep allocated to L
  • partnership breaks even except for $20K/yr. in depreciation deductions.

Chapter 4A

problem 4 1 a
Problem 4-1(a)

G,L $100K contribs. each

all dep allocated to L

GL breaks even except for $20K/year depreciation

L-no DRO

Chapter 4A

problem 4 1 b
Problem 4-1(b)

G,L $100K contribs. each

all dep allocated to L

GL breaks even except for $20K/year depreciation

L-25 DRO

Chapter 4A

problem 4 1 c
Problem 4-1(c)

G,L $100K contribs. each

all dep allocated to L

GL breaks even except for $20K/year depreciation

L-no DRO

Chapter 4A

problem 4 1 d
Problem 4-1(d)

G,L $100K contribs. each

all dep allocated to L

GL breaks even except for $20K/year depreciation

L-no DRO

Chapter 4A

problem 4 1 e
Problem 4-1(e)

G,L $100K contribs. each

all dep allocated to L

GL breaks even except for $20K/year depreciation

L-no DRO

Chapter 4A

blank
Blank

Chapter 4A

rev rul 97 38
Rev. Rul. 97-38
  • G (general partner) and L (limited partner) each contribute $100K to partnership GL which purchases 5-year depreciable property for $200K cash and a $800K recourse note.
  • L has no DRO; G to restore deficit only to pay creditors, not L; otherwise, EE tests are met.
  • partnership agreement contains a QIO.
  • all tax items to be shared equally, except all depreciation deductions to G.
  • partnership breaks even except for $200K/yr. in depreciation deductions.

Chapter 4A

rev rul 97 3818
Rev. Rul. 97-38

G’s limited DRO (end yr. 1):

liabs: 800

value: 800

DRO: -0-

Chapter 4A

rev rul 97 3819
Rev. Rul. 97-38

Chapter 4A

rev rul 97 3820

G’s limited DRO (end yr. 2):

liabs: 800

value: 600

DRO: 200

Rev. Rul. 97-38

Chapter 4A

section 704 b regulations21

(iv) rules

respect pos. bal. on liquidation

EE

no deficit

DRO

take into account

expected dists.

substantiality

shifting

QIO

transitory

overall test

Section 704(b) regulations

or alt EE

or

“DBL”

SEE

PIP

deemed PIP

Chapter 4A

reason for substantiality test

A

B

50%

50%

allocate

$50 t.i.

$50 t-e inc.

allocate

$50 t.i.

$50 t-e inc.

AB partnership

Reason for “substantiality” test

$100 tax. inc.

$100 t-e inc.

Chapter 4A

reason for substantiality test23

(zero bracket)

(high bracket)

A

B

50%

50%

allocate

$100 t.i.

$0 t-e inc.

allocate

$0 t.i.

$100 t-e inc.

AB partnership

Reason for “substantiality” test

$100 tax. inc.

$100 t-e inc.

Chapter 4A

orrisch capital accounts24
Orrisch: capital accounts

O,C: $1,000 initial contributions

$400 depreciation/yr – all to O

sale yr. 3 – gain chargeback to O

all other items shared equally

Chapter 4A

shifting and transitory allocations
Shifting and Transitory Allocations
  • is there strong likelihood that allocations will not affect substantially the CA balances of the partners yet will reduce their collective tax liabilities after taking into account their individual tax situations?
  • presumption of “strong likelihood”
  • “shifting”: allocations take place w/i single year
  • “transitory”: allocation in one year that is offset by an allocation in a subsequent year

Chapter 4A

value basis rule
Value = basis rule

Value = basis rule:

there is never a “strong

likelihood” that a

special allocation of

depreciation deductions

will be offset by a

later allocation of

gain pursuant to gain

chargeback provision

Chapter 4A

five year rule
Five-year rule
  • transitory allocation not present if the original allocations will not be largely offset within five years (determined on a FIFO basis)

Chapter 4A

overall test for substantiality
“Overall” Test for Substantiality
  • looks behind the pre-tax effect of an allocation on partners’ capital accounts
  • two-pronged inquiry: allocation must improve after-tax consequences of at least one partner and there must be strong likelihood that no partner is made worse off by the allocation (again determined after taxes)

Chapter 4A

section 704 b regulations29

(iv) rules

respect pos. bal. on liquidation

EE

no deficit

DRO

take into account

expected dists.

substantiality

shifting

QIO

transitory

overall test

Section 704(b) regulations

or alt EE

or

“DBL”

SEE

PIP

deemed PIP

Chapter 4A

partner s interest in partnership
Partner’s interest in partnership
  • partner’s share of economic benefit/burden corresponding to tax item being allocated
    • item-by-item determination
  • all partnership interests presumed equal
  • factors to consider:
    • partners’ relative contributions
    • partners’ interests in economic profits/losses
    • partners’ interests in cash flow/non-liq. distribs.
    • partners’ interests in liquidating distributions

Chapter 4A

deemed pip
Deemed PIP
  • special rules provided to validate allocations of items which cannot have economic effect
    • tax credits
    • section 704(c) items
    • nonrecourse deductions

Chapter 4A

problem 4 3 a
Problem 4-3(a)

Sale at the end of Yr. 6

Sale at the end of Yr. 5

book value: 80

book value: 100

book basis: 80

book basis: 100

G/L : -0-

G receives $88 ($80 proceeds

plus $8 from L’s contribution

G/L : -0-

G receives $100

Chapter 4A

problem 4 3 b
Problem 4-3(b)

Sale at the end of Yr. 1

book value: 180

book basis: 180

G/L : -0-

G receives $100;

L receives $80

Chapter 4A

problem 4 4
Problem 4-4
  • A (LP) contribs $80; B (GP)contribs $120
    • A has no DRO; B has unlimited DR0
  • PS buys dep prop--$200
    • $50 annual dep ($200/4)
  • all items allocated 40:60, except dep allocated entirely to A
    • PS agreement satisfies requirements of alt EE test
    • contains gain chargeback provision

Chapter 4A

problem 4 4 a
Problem 4-4(a)

Chapter 4A

problem 4 4 b
Problem 4-4(b)

Chapter 4A

problem 4 4 c
Problem 4-4(c)

Chapter 4A

problem 4 4 d
Problem 4-4(d)

Sale for $175

Sale for $250

Chapter 4A

problem 4 4 e
Problem 4-4(e)

Sale for $150

Chapter 4A

problem 4 4 f
Problem 4-4(f)

B has unlimited DRO

B has limited DRO

Chapter 4A