Partnership Taxation Formations Chapter Objectives –To understand the acquisition of a partnership interest in exchange for a contribution of property –To understand the acquisition of a partnership interest in exchange for a contribution of services –To understand the basis of a partners interest in the partnership after contribution of property –To understand the partnerships basis in the property received.

General Rules What it the general rule in Code Sec. 721(a)? –What is partners tax basis of partnership interest? (Sec. 722) –What is partnerships interest in basis of property received? (Sec. 723) –What holding period does the partnership take in the assets contributed (Sec. 1223) Do not lose sight of the FMV aspect of partnership formations - Why is this important

Rationale Behind Partnership Formation Rules Are the gain/loss rules of Sec. 721 permanent or deferred? What tax doctrine best summarizes why Sec. 721 exists? What is meant by inside basis v. outside basis. How might these numbers differ? Can we balance the playing field if there is a difference? Why is it necessary to monitor built in gain/losses? Character of income etc.

What is property? Money – how valued? Tangible Real Property (if title transferred) Tangible Personal Property (if title transferred) Partner’s personal notes – no basis until note paid Intangible Assets What value is assigned to personal use property that is contributed to a partnership as business use property? Accounts Receivable – how is basis different based on method of accounting?

Other General Rules Excess of any money distributed over a partners adjusted basis will result in a taxable gain (Sec. 731) - may be triggered by contributing an encumbered asset. - Give a common example of this. Does a negative tax capital account suggest there will be gain recognition? Partner’s are allocated their pro-rata share of partnership liabilities (Sec. 752) - cash contribution. Different types of liabilities. Transfer of a liability to the partnership is deemed to be a cash distribution (Sec. 752(b)

Special Considerations Depreciation methods – typically carryover basis and method – special rule for Sec 704 (b) allocations. Depreciation recapture / Sec gain on contribution Investment Partnerships – see rules on page 69. Supsended lossses under Sec. 465/469 on contributed property remain with contributing partner, not transferred to partnership.

Partnership Interest for Services Partnership interests acquired in exchange for services rendered or promised - may be taxable – holding period starts day after receipt of interest. Partnership interest - share in the profit/losses, risk of loss, and a capital interest. FMV (Sec. 83) of an interest in partnership capital transferred to a partner as compensation is taxable (Reg. Sec (b)1, Sec. 61. Generally amount is taxable when the capital interest in received unless substantial restrictions exist

Receipt of Interests for Services (Continued) Taxable amount to partner: FMV of the interest received – not necessarily the amount credited to the tax capital account due to valuation discounts. Partnership takes a deduction / Partner recognizes income. Prior partners may recognize built-in-gains/losses though because the assets are deemed sold so that they can be transferred to the new partner

Formations (cont) What is the relevance of the Sec 83(b) election? Is the receipt of a profits interest in a partnership taxable to the recipient? If not, why not? If a partner receives the interest as compensation for services, does the partnership get a deduction? When a partner receives a property interest as compensation, is there any gain or loss recognized to the partnership? Special rules for Profits Interest only.