Partnership Taxation

Front 1

What is a Code Section 721 transaction?

Back 1

Partners contribute property to partnership in exchange for partnership interest.

Front 2

What are the tax consequences of Code Section 721 to a partner that contributes property to a partnership (except an investment partnership)?

Back 2

GAIN/LOSS: Partner does not recognize gain or loss. Code Section 721.

BASIS IN PARTNERSHIP INTEREST (OUTSIDE BASIS): Basis equals amount of cash contributed plus adjusted basis in contributed property. Code Section 722.

HOLDING PERIOD OF PARTNERSHIP INTEREST: Holding period equals holding period of contributed property plus holding period of partnership interest. Some contributed property (cash, inventory, etc.) has a holding period of zero. Code Section 1223(1).

Front 3

What are the tax consequences of Code Section 721 to a partner that contributes property to an investment partnership?

Back 3

GAIN/LOSS: Partner recognizes gain. Code Section 721.

BASIS IN PARTNERSHIP INTEREST (OUTSIDE BASIS): Basis equals amount of cash contributed, plus adjusted basis in contributed property, plus amount of gain recognized. Code Section 722.

HOLDING PERIOD OF PARTNERSHIP INTEREST: Holding period equals holding period of contributed property plus holding period of partnership interest. Some contributed property (cash, inventory, etc.) has a holding period of zero. Code Section 1223(1).

Front 4

What are the tax consequences of Code Section 721 to the partnership?

Back 4

GAIN/LOSS: Partnership does not recognize gain or loss. Code Section 721.

BASIS IN CONTRIBUTED PROPERTY (INSIDE BASIS): Basis equals partner's adjusted basis in contributed property plus any gain recognized by partner as a result of contributing to an investment partnership. Code Section 723.

HOLDING PERIOD: Partnership tacks partner's holding period of contributed property to its own holding period of contributed property. Code Section 1223(2).

Front 5

What constitutes property for purposes of Code Section 721?

Back 5

Very broad. Money, installment obligations, goodwill, cash receivables of a cash method taxpayer, letter of intent.

NOT SERVICES! A contribution of services in exchange for a partnership interest is not a Code Section 721 transaction.

Front 6

What are the tax consequences of a contribution of services in exchange for a partnership interest?

Back 6

Capital interest:

Profits interest:

Front 7

What if a partner contributes appreciated or depreciated property to the partnership in a Code Section 721 transaction?

Back 7

Built in gain or loss must be allocated to the contributing partner. Code Section 704(c)(1)(A).

Front 8

What are the allowable methods of allocating built in gain or loss to the contributing partner?

Back 8

Any reasonable method. Three methods described in regulations -- traditional method, traditional method with curative allocations, and remedial method. Regulations Section 1.704-3(a).

Front 9

What are the tax consequences of the following example? A partner contributes property to a partnership with a value of $100 and adjusted basis of $60. Five years later, the partnership sells the contributed property for $130.

Back 9

$40 gain must be allocated to the partner.

$30 gain may be allocated to the partners pursuant to the partnership agreement.

Front 10

What if the partner contributes depreciable property to the partnership in a Code 721 transaction?

Back 10

Partner does not recognize depreciation recapture on contribution (Code Sections 1245 and 1250), but partnership recognizes depreciation recapture on sale of property. Recapture attributable to depreciation deductions taken by partner are allocated to partner under Code Section 704(c).

Partnership steps into shoes of contributing partner regarding method of depreciation and elections.

Front 11

What if partner contributes ordinary income property and the partnership later sells it?

Back 11

Unrealized Receivables -- Partnership will always recognize ordinary income upon dispostion of property. Code Section 724(a).

Inventory Items -- Partnership will recognize ordinary income upon dispostion of property within 5 years of contribution. Code Section 724(b).

Rationale -- to keep partnership from converting ordinary income into capital gain.

Front 12

What if a partner contributes property with a built-in capital loss and the partnership later sells it?

Back 12

To the extent of built-in capital loss, any loss that the partnership recognizes upon disposition of the property within 5 years of contribution will be a capital loss. Code Section 724(c).

Rationale: to keep the partnership from converting capital loss into ordinary loss.

Front 13

What if a partner contributes encumbered property to the partnership?

Back 13

Two adjustments happen simultaneously:

Partner is relieved of liability. This is a deemed cash distribution under Code Section 754. It decreases the partner's outside basis.

Partner is subject to his share of new partnership liability. This is a deemed cash contribution under Code Section 754. It increases the partner's outside basis.

After these adjustments are netted against each other, if the partner has a deemed cash distribution that exceeds his basis in the partnership interest, the partner will recognize gain under Code Section 731 and 733. (If liability is nonrecourse, there is a special rule that avoids this result at 1.752-3.)

Front 14

What if partner contributes accounts receivable to partnership?

Back 14

Accounts receivable are property for purposes of Code Section 721. Partnership receives a zero basis in accounts receivable under Code Section 723. Partnership recognizes ordinary income on collection under Code Section 724. Ordinary income is allocated to contributing partner under Code Section 704(c).

Rationale: Prevents assignment of income.

Front 15

What if partner contributes accounts payable to partnership?

Back 15

Not treated as contribution of liability. Instead, deduction for payment is specially allocated to contributing partner.

Rationale: Treating accounts payable as liabilities would often result in gain recognition to partners who contribute an ongoing business with accounts receivable (zero basis) and accounts payable.

Front 16

What are partnership organization and syndication expenses? Are they deductible?

Back 16

Organization expenses are incident to creation of partnership, chargeable to capital account, and would be amortized over life of partnership with an ascertainable life. Code Section 709(b)(2). Usually includes filing fees.

Syndication expenses are connected with issuing and marketing of partnership interests, including legal, accounting and brokerage fees.

Partnership may elect to deduct currently the lesser of (1) organization expenses or (2) $5,000, reduced by the amount that organization expenses exceed $50,000. Remaining organization expenses can be amortized over a 180-month (15-year) period. Syndication expenses are not deductible. Code section 709.

Front 17

Is a partnership a taxpayer?

In what ways is a partnership treated as a taxpayer?

Back 17

No. Its primary function is to facilitate the share of profit or loss that "flows" through to each partner. Code Section 701.

Like a taxpayer, a partnership must (1) adopt a taxable year, (2) choose a method of accounting, (3) compute taxable income, (4) make elections, and (5) file a tax return.

Front 18

When does a partner include his distributable share of partnership items?

Back 18

In the partner's tax year that contains the ending date of the partnership's tax year.

Example: If the partnership's tax year ends on June 30, 2010, and the partner's tax year ends on December 31, 2010, then the partner will include his distributable share from July 1, 2009 to June 30, 2010.

Front 19

What tax year can a partnership have?

Back 19

A partnership may have any tax year if it can establish a valid business purpose for such year. If it cannot establish such a purpose, it must adopt its "required tax year" or make an election under Code Section 444. Code Section 706(b).

Rationale: This prevents partnerships from adopting a tax year solely for the purpose of deferring the partners' inclusion of income.

Front 20

What is a valid business purpose?

Back 20

Cyclical activity. For example, a ski resort may have a valid business purpose to end its tax year in April when the skiing stops.

Front 21

What is a partnership's required tax year?

Back 21

First Tier: If partner or partners with the same taxable year own more than 50% of profits and capital, the partnership must adopt that taxable year.

Second Tier: If all partners owning 5% or more of profits or capital have the same taxable year, then the partnership must adopt that taxable year.

Third Tier: The taxable year (chosen from among all the taxable years of the partners) that results in the least aggregate deferral.


Code Section 706(b)(1)(B)

Front 22

How often must a partnership "test" the validity of its required tax year?

Back 22

On the first day of each tax year. If the partners have changed and the tax year is no longer valid, it must change. If the partnership changes its tax year because a partner or partner owns more than 50%, it is not required to change again for a minimum of 3 years. Code Section 706(b)(4)(B).

Front 23

What is a Code Section 444 election?

Back 23

Partnership may adopt a taxable year that results in no more than 3 months of deferral.

Example: If the partnership has a required tax year ending on December 31, the partnership may elect to adopt a tax year ending on September 31, October 31 or November 31.

Partnership must make "required payments" to offset the deferral.

Front 24

What method of accounting may a partnership choose?

Back 24

Cash or accrual. However, if the partnership (1) has C corporation partners and average gross receipts in excess of $5 million or (2) is a tax shelter, then it must choose the accrual method.

Front 25

How are elections made?

Back 25

Generally, elections are made at the partnership level.

Example: Partnership sells property under installment method. Code Section 453 requires partners to report income as payments are received, unless an election is made to the contrary. If partnership does not make election, all partners report income as payments are received. If partnership makes election, all partners report all income currently.

Front 26

What are some common elections made at partnership level?

Back 26

Depreciation methods. Code Section 168.
Expense cost of depreciable property. Code Section 179.
Amortize organization expenses. Code Section 709.

Front 27

What elections are made at partner level?

Back 27

Code Section 108(b)(5).
Code Section 617.
Code Section 901.

Front 28

How is outside basis adjusted?

Back 28

Increased by:
1. contributions to the partnership
2. share of income
3. share of tax-exempt income
4. excess of depletion deductions over basis of property

Decreased by:
1. distributions from the partnership
2. distributable share of losses
3. non-deductible expenditures of partnership not properly chargeable to capital account.
4. depletion deduction for oil and gas property not in excess of proportionate share of adjusted basis of such property.

Code Section 705.

Front 29

What are the different kinds of capital accounts?

Back 29

1. 704(b) "book" capital accounts (hereafter called book capital accounts)
2. tax basis capital accounts
3. 704(c) capital accounts
4. financial accounting capital accounts

Front 30

What is a book capital account? What does it show?

Back 30

A capital account calculated and maintained in accordance with Treasury Regulations under Code section 704(b), which is generally calculated with respect to the FMV of contributed property. It is intended to show the partner's economic interest in the partnership. It is generally the amount that a partner would receive on liquidation if the partnership sold all assets for book value, paid off creditors and distributed net proceeds to partners.

Front 31

How are book capital accounts calculated and adjusted?

Back 31

Increased by:
1. amount of money contributed or used to acquire the partnership interest
2. the FMV of property contributed (less liabilities assumed by the partnership)
3. distributive share of partnership income (including tax-exempt income and COD income, even if COD income is excluded at partner level)

Decreased by:
1. amount of money distributed
2. the FMV of property distributed (less liabilities retained by the partnership)
3. distributive share of partnership losses (ordinary, capital, passive activity, etc.), including depreciation, which must be computed consistently with tax depreciation.
4. partner's share of nondeductible expenses (political contributions, premium payment on partner's life insurance, etc.)

The partner's share of partnership liabilities is not reflected in capital accounts.

Front 32

Under what circumstances may the partnership "book up" or "book down" book capital accounts?

Back 32

1. Contribution of property by new or existing partner
2. Distribution of money or property in liquidation of all or a part of a partner's interest.

Front 33

What happens on a "book-up" or "book-down" of book capital accounts?

Back 33

Adjusts book value of assets (but not tax basis of assets) to reflect FMV of assets. The difference between the former book value and current FMV is either book gain (if the assets have appreciated in value) or book loss (if the assets have decreased in value) and is allocated among the partners in accordance with the partnership agreement and reflected in their book capital accounts as if the partnership sold the assets.

Front 34

Example #1. A and B form a new partnership with all items shared 50/50. A contributes $150 cash. B contributes land with FMV of $150. What does the balance sheet look like?

Back 34

ASSETS (book)
Cash $150
Land $150
Total $300

CAPITAL ACCOUNTS (book)
A $150
B $150
Total $300

Front 35

Example #1 (continued): Suppose the land appreciates in value to $250. Then C contributes $200 for a 1/3 interest in the partnership, and the partnership elects to book up capital accounts. What does the balance sheet look like?

Back 35

ASSETS (book)
Cash $350
Land $250*
Total $600

* The book up results in a total of $100 of book income (or reverse 704(c) gain)

CAPITAL ACCOUNTS (book)
A $200**
B $200**
C $200
Total $600

** the $100 book income (or reverse 704(c) gain) is shared among the partners in accordance with the partnership agreement, in this case 50/50.

Front 36

Example #1 (continued): Suppose instead that the land decreases in value to $50. Then C contributes $100 for a 1/3 interest in the partnership, and the partnership elects to book down capital accounts. What does the balance sheet look like?

Back 36

ASSETS (book)
Cash $250
Land $50*
Total $300

* The book down results in a total of $100 of book loss (or reverse 704(c) loss)

CAPITAL ACCOUNTS (book)
A $100**
B $100**
C $100
Total $300

** the $100 book loss (or reverse 704(c) loss) is shared among the partners in accordance with the partnership agreement, in this case 50/50.

Front 37

What is a tax basis capital account? What does it show?

Back 37

A capital account calculated with respect to the tax basis of contributed property. It shows the partner's share of the partnership's inside basis.

Front 38

How are tax basis capital accounts calculated and adjusted?

Back 38

Increased by:
1. amount of money contributed or used to acquire the partnership interest
2. the tax basis of property contributed (less liabilities assumed by the partnership)
3. distributive share of partnership income (including tax-exempt income and COD income, even if COD income is excluded at partner level)

Decreased by:
1. amount of money distributed
2. the tax basis of property distributed ([less liabilities retained by the partnership -- CHECK THIS])
3. distributive share of partnership losses (ordinary, capital, passive activity, etc.), including depreciation, which must be computed consistently with tax depreciation.
4. partner's share of nondeductible expenses (political contributions, premium payment on partner's life insurance, etc.)

The partner's share of partnership liabilities is not reflected in capital accounts.

Front 39

Under what circumstances will a tax basis capital account differ from a book capital account?

Back 39

1. Contribution of property with FMV that differs from its tax basis

2. Revaluation of property FMV for book purposes, which changes book value of property and book capital accounts, but not tax basis of property or tax basis capital accounts.

Front 40

What information becomes apparent when you compare the tax basis of an asset with the book value of the asset?

Back 40

704(c) gain and reverse 704(c) gain.

Front 41

What information becomes apparent when you compare book capital accounts to tax basis capital accounts?

Back 41

How 704(c) gain and reverse 704(c) gain are allocated among the partners.

Front 42

Is there a relationship between tax basis capital accounts and (1) the partnership's inside basis and (2) the partner's outside basis?

Back 42

As long as there are no liabilities:

1. the total of all tax basis capital accounts should equal the partnership's inside basis, and

2. a partner's tax basis capital account should equal his outside basis.

This changes when there are liabilities, becasue liabilities are included in inside basis and outside basis, but not tax basis capital accounts.

Front 43

If a partner acquires another partner's interest, what happens to the tax basis capital account?

Back 43

Generally carries over to the new partner, unless new partner elects to "step up" his tax basis capital account pursuant to Code Section 754.

Front 44

Example #1: A and B form a new partnership. A contributes $150 in cash. B contributes land with FMV $150 and tax basis $100. What does the balance sheet look like?

Back 44

ASSETS (tax/book)
Cash $150/$150
Land $100/$150*
Total $250/$300

* shows that there is $50 of 704(c) gain.

CAPITAL ACCOUNTS (tax/book)
A $150/$150
B $100/$150**
Total $250/$300

** shows how 704(c) gain is allocated among partners. B has $50 of 704(c) gain.

Front 45

Example #2. A and B form a new partnership. A contributes $50 cash and equipment with FMV and tax basis of $50. B contributes land with FMV and tax basis of $100. What does the balance sheet look like?

Back 45

ASSETS (tax/book)
Cash $50/$50
Equipment $50/$50
Land $100/$100
Total $200/$200

CAPITAL ACCOUNTS (tax/book)
A $100/$100
B $100/$100
Total $200/$200

Front 46

Example #2 (continued): The equipment appreciates in value to $100 and the land appreciates in value to $250. Then C contributes $200 cash to become a 1/3 partner. The partnership elects to "book up" its assets. What does the balance sheet look like?

Back 46

ASSETS (tax/book)
Cash $250/$250
Equipment $50/$100*
Land $100/$250*
Total $400/$600

* the "book up" results in a total of $200 of book income, or reverse 704(c) gain.

CAPITAL ACCOUNTS (tax/book)
A $100/$200**
B $100/$200**
C $200/$200
Total $400/$400

** The $200 of reverse 704(c) gain is allocated among A and B according to the partnership agreement. We are assuming a 50/50 allocation.

Front 47

[Say something about 704(c) capital accounts]

Back 47

a

Front 48

[Say something about financial accounting capital accounts]

Back 48

a

Front 49

What is the starting point to determine a partner's distributive share of income, gain, loss, credit and deduction?

Back 49

The partnership agreement. Code section 704(a).

Front 50

What if the partnership agreement is silent regarding a partner's distributive share?

Back 50

The partner's distributive share must be determined in accordance with the partner's interest in the partnership.

Front 51

When will an allocation of income, gain, loss, deduction or credt be respected?

Back 51

1. It has substantial economic effect
2. It has substantial economic effect equivalence
3. It is in accordance with the partners' interests in the partnership
4. It is deemed to be in accordance with the partners' interests in the partnership

Front 52

What elements are required for an allocation to have substantial economic effect?

Back 52

1. capital accounts
2. liquidation in accordance with positive capital account balances
3. unlimited deficit restoration obligation OR allocation does not create or increase deficit beyond limited deficit restoration obligation, as adjusted, and qualified income offset

Front 53

What is a deficit restoration obligation?

Back 53

An unconditional obligation (pursuant to the partnership agreement or state law) to contribute additional capital to the partnership to restore any deficit in the partner's capital account.

Front 54

Example #1: A and B each contribute $50 to a new partnership that satisfies the first two requirements for substantial economic effect and either (1) contains a deficit restoration obligation or (2) is formed in a jurisdiction that requires repayment of deficit capital accounts. There is a $60 loss that the partnership agreement allocates entirely to A. Does this allocation have substantial economic effect?

Back 54

Yes. A and B each receive an initial capital account of $50. A's capital account is reduced by the $60 loss to -$10, but A still bears the economic burden of the entire allocation because A will have to contribute $10 to the partnership upon liquidation.

Front 55

Example #2: Same as Example #1, except the partnership agreement does not contain a deficit restoration obligation and state law does not require A to repay a deficit capital account (perhaps because A is a limited partner). Does the allocation have substantial economic effect?

Back 55

No. If the partnership liquidated, A would not be required to repay the $10 deficit and B would only get $40 ($100 - $60) instead of his full $50 capital account. Accordingly, B is actually bearing the economic burden of the $10.

Front 56

What is a limited deficit restoration obligation, as adjusted?

Back 56

A deficit restoration obligation limited to a certain dollar amount (or zero dollars), reduced by reasonably expected future distributions in excess of reasonably expected offsetting allocations.

Front 57

Example #1: Partner A has a book capital account of $50, and a deficit restoration obligation of $20. It is reasonably anticipated that A will receive a cash distribution of $10 with no offsetting allocation of income. The partnership proposes to allocate a $60 loss to A. Does it have substantial economic effect?

Back 57

Yes. The deficit restoration obligation is reduced by $10 to cover the anticipated cash distribution, but that still leaves $60 ($50 book capital account plus $10 remaining deficit restoration obligation) to cover the loss allocation.

Front 58

Example #2: Same as Example #1, but the partnership proposes to allocate a $70 loss to A. Does it have substantial economic effect?

Back 58

No.

Front 59

What is a qualified income offset provision?

Back 59

If a partner receives an unexpected distribution creating a deficit in his capital account in excess of the amount he is required to restore, the partnership will allocate items of income (including gross income) to the partner in order to eliminate the deficit as quickly as possible.

Note -- allocations of gross income can increase the bottom line loss of a partnership and interfere with the economic deal.

Front 60

What is economic effect equivalence?

Back 60

Even if the partnership agreement does not contain one or more of the provisions required for economic effect, an allocation may still be deemed to have economic effect as long as the liquidation of the partnership would produce the same result to the partners as if the partnership agreement included the three required provisions.

Front 61

What makes an allocation substantial?

Back 61

An allocation with economic effect (or economic effect equivalence) is substantial only if there is a reasonable possibility that it will substantially affect the dollar amounts to be received by the partners, independent of tax consequences.

Front 62

What are some allocations that lack substantiality?

Back 62

1. shifitng tax consequences (allocations in the same year)
2. transitory allocations (allocations in different years)
3. after-tax exception

Front 63

What are shiftng tax consequences?

Back 63

There is a strong likelihood that:

1. The partners' capital accounts will not be significantly different than in the absence of the allocations; and

2. The partners' total tax liability (taking into consideration their individual circumstances) will be reduced.

Front 64

What is presumed if the elements of shifting tax consequences are present?

Back 64

A stong likelihood.

Front 65

Example #1: A (a 40% taxpayer) and B (a 0% taxpayer) form a partnership that satisfies the requirements for economic effect. It is anticipated that the partnership will have at least some tax-exempt income. Everything is shared 50/50, except that A will be allocated all tax-exempt income to the extent of A's distributable share of profits. The partnership has $110 of tax-exempt income and $90 of taxable income. $100 of tax-exempt income is allocated to A and $10 of tax-exempt income and $90 of taxable income is allocated to B. Do these allocations have substantial economic effect?

Back 65

No. Shifitng tax consequences. There is a strong likelihood that (1) the partners' capital accounts will be the same and (2) the partners' total tax liability will be decreased.

Front 66

Example #2: A (a 40% taxpayer with more than $100,000 of capital loss carryover) and B (a 20% taxpayer with no capital losses) form a partnership that satisfies the requirements for economic effect. The partnership expects to recognize $100,000 of capital gain and $100,000 of ordinary income. At the beginning of the year, the partnership agreement is amended to allocate the capital gain to A and an equal amount of ordinary income to B. Any excess ordinary income will be split 50/50. Does this allocation have substantial economic effect?

Back 66

No. Shifting tax consequences. There is a strong likelihood that (1) the partners' capital accounts will be the same and (2) the partners' total tax liability will be decreased.

Front 67

What are transitory allocations?

Back 67

There is a strong likelihood that:

1. The partners' capital accounts will not be substantially different due to the the original and offsetting allocations than in the absence of such allocations; and

2. The partners' total tax liability (taking into consideration their individual circumstances) will be reduced.

Front 68

What is presumed if the elements of transitory allocations are present?

Back 68

A strong likelihood.

Front 69

What two presumptions are made in connection with a transitory allocations analysis?

Back 69

1. First year rule -- if at the time the allocations are incorporated into the partnership agreement, there is a strong likelihood that the original allocation will not be "largely" offset within 5 years, then it is presumed that the allocations are not transitory.

2. Value equals basis -- a partnership's assets are irrebuttably presumed to have a value equal to basis (or book value, if different).

Front 70

Example #1: A (a 40% taxpayer with a $100 NOL that will expire this year) and B (a 40% taxpayer) are partners in a partnership that satisfies the requirements for economic effect. The partnership expects $100 of income this year and next year, and the partnership agreement is amended to allocate all of this year's income to A and all of next year's income to B. Do these allocations have substantial economic effect?

Back 70

No. Transitory allocations. There is a strong likelihood that (1) the partner's capital accounts will not be different than in the absence of such allocations and (2) the partners' total tax liability will be reduced.

Front 71

Example #2: A (a 40% taxpayer) and B (a 0% taxpayer) are partners in a partnership that satisfies the requirements for economic effect and holds an apartment building for investment. There is a strong likelihood that in the next 5 years the apartment building will increase in value and be sold. All items are shared equally, except that A is allocated all depreciation deductions. Also, if the building is sold, all gain is allocated first to A to reverse all depreciation deductions. Do these allocations have substantial economic effect?

Back 71

Yes. Gain allocation does not "offset" the depreciation allocation. It is presumed that the value of the property is equal to its basis and therefore, there is no gain to allocate.

Front 72

What is the after-tax exception?

Back 72

Even if an allocation satisfies the general rule of substantiality, it may still lack substantiality if:

1. the allocation may enhance the after-tax economic consequences to one partner in present value terms; and

2. there is a strong likelihood that the after-tax economic consequences of no partner will be diminished.

Front 73

Example #1: A (a 40% taxpayer with an NOL that will expire after 2 years) and B (a 40% taxpayer) form a partnership that satisfies the requirements for economic effect. The partnership is expected to generate $100 of net taxable income for the next 5 years. The partnership agreement says that A will be allocated all income for the first two years and B will be allocated all income for the following three years. Afterward, all items will be shared equally. Do these allocations have substantial economic effect?

Back 73

No. But why?

Basic rule for substantiality is satisfied. There is a reasonable possibility that allocation will substantially affect dollar amounts received. Without allocation, A and B would receive $250 each. With allocation, A will receive $200 and B will receive $300.

No shifting tax consequences or transitory allocations because the partners' capital accounts will be different than without the allocations. Without the allocations, A and B's capital accounts would each be increased by $250. With the allocations, A's capital account will be increased by $200 and B's capital account will be increased by $300.

But this allocation fails the after-tax exception. The after-tax consequences to A are enhanced (A pays no tax) and the after tax consequences to B are not diminished (B would have kept 60% of $250, but instead keeps 60% of $300).

Front 74

What happens if an allocation lacks substantial economic effect?

Back 74

It is reallocated in accordance with the partners' interests in the partnership.

Front 75

How are items reallocated?

Back 75

To the partners who are bearing the economic burden, or enjoying the economic benefit, of such items. There is a presumption is that all items will be shared per capita, but can be rebutted with facts and circumstances.

Front 76

What are some of the facts and circumstances considered when reallocating items?

Back 76

1. relative contributions;
2. interests in economic profits and losses (if different from taxable income and loss);
3. interests in cash flow and other nonliquidating distributions; and
4. rights to distribution on liquidation.

Front 77

What is the special rule for reallocating tax items when the partnership does not contain a deficit restoration obligation?

Back 77

You compare what each partner would receive if the partnership liquidates at the end of the current year with what each partner would have received if the partnership liquidated at the end of the previous year. This should show who was burdened by, or benefitted from, the item in question.

Front 78

Example

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