1. Copyright © Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. All rights reserved. Profit and Loss Allocations, Distributions, and Other Key Tax Provisions for Partnership Agreements 901 Main Street, Suite 3700 Dallas, TX 75202 214.744.3700 800.451.0093 fax 214.747.3732 mbeard@meadowscollier.com www.meadowscollier.com Matthew S. Beard, J.D., LL.M. Tuesday, December 9, 2014 San Antonio Friday, December 5, 2014 Houston Friday, December 12, 2014 Arlington TSCPA 2014 CPE EXPO

2. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 2 PARTNER: 721(a): no gain or loss recognized –EXC: services for capital interest (61 & 1.721-1(b)(1)) –EXC: investment company (721(b)) –EXC: disguised sale (707(a)(2)) –EXC: encumbered property (731(a)) 722: exchanged basis (“outside basis”) 1223(1): holding period tacking if capital asset or 1231 asset; no tacking if ordinary income asset Formation PARTNERSHIP: 721(a): no gain or loss recognized 723: transferred basis (“inside basis”) 1223(2): holding period carries over 724: in certain situations, character of gain or loss carries over 704(c): precontribution gain will be allocated to contributing partner Partnership Partner property

3. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 3 PARTNER: 752(a): increase in partner’s share of partnership liabilities treated as contribution of money by partner to partnership 722: partner’s outside basis increased by amount of money contributed Recourse Liability PARTNERSHIP: 1.752-2(a): partner’s share of partnership liability equals portion, if any, for which partner or related person bears economic risk of loss 1.752-2(b): partner bears economic risk of loss to extent, if partnership constructively liquidated, partner obligated to make payment to any person or contribution to partnership general partner vs. limited partner Partnership Partner recourse loan Creditor

4. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 4 PARTNER: 752(a): increase in partner’s share of partnership liabilities treated as contribution of money by partner to partnership 722: partner’s outside basis increased by amount of money contributed Nonrecourse Liability PARTNERSHIP: 1.752-1(a)(2): By definition, a nonrecourse liability is a liability to the extent no partner or related person bears the economic risk of loss 1.752-3(a): allocate excess nonrecourse liability among partners (general and limited) in accordance with share of partnership profits rather than losses 1.704-2(b)(4): special rules for partner nonrecourse liability Partnership Partner nonrecourse loan Creditor

5. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 5 PARTNER: 1.752-1(c): contributing partner treated as receiving distribution of money from partnership to extent partner relieved of liability 1.722-1: outside basis reduced by portion of indebtedness shifted to other partners 731(a)(1); 1.722-1: if debt exceeds outside basis, then may trigger capital gain from the sale or exchange of a partnership interest Encumbered Property PARTNERSHIP: 752(c) & 1.752-1(e): if contributed property subject to liability, partnership treated as assuming liability to extent liability does not exceed property FMV Partnership Partner encumbered property

6. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 6 Partnership Agreement Three Approaches –“Primary SEE Approach” –“Alternate SEE Approach” –“Target Approach”

7. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 7 Overview of Selected Tax Rules Subchapter K –3 ways an allocation will be respected for tax purposes Substantial Economic Effect –Primary Test –Alternate Test –Economic Equivalence Test Partner’s Interest in the Partnership

8. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 8 Overview of Selected Tax Rules Allocations with Respect to Nonrecourse Liabilities –Nonrecourse Liability –Minimum Gain –Nonrecourse Deductions –Minimum Gain Chargeback –Partner Nonrecourse Liability

9. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 9 Primary SEE Approach Characteristics –Capital accounts should be determined and maintained in accordance with the Regulations –Liquidating distributions should be made in accordance with the positive capital account balances of the partners –Partners are required to restore deficit capital account balances –Special allocations are made with respect to nonrecourse liabilities, including a minimum gain chargeback

10. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 10 Primary SEE Approach Liquidation –Distributions in accordance with positive capital account balances –Deficit capital account restoration obligation Capital accounts

11. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 11 Primary SEE Approach Regulatory Allocations –Nonrecourse deductions –Minimum gain chargeback –Partner nonrecourse deductions –Partner minimum gain chargeback Curative allocations Allocations of Profits or Losses Tax Allocations

12. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 12 Primary SEE Approach Other –Definitions –Accounting method –Fiscal year –Tax Matters Partner –Tax Returns –Elections

13. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 13 Alternate SEE Approach Characteristics –Capital accounts should be determined and maintained in accordance with the Regulations –Liquidating distributions should be made in accordance with the positive capital account balances of the partners –Partners are not required to restore deficit capital account balances (or only a limited amount) –Qualified income offset –Limitation on losses –Special allocations are made with respect to nonrecourse liabilities, including a minimum gain chargeback

14. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 14 Alternate SEE Approach Liquidation –Distributions in accordance with positive capital account balances –No deficit capital account restoration obligation QIO and limitation on losses Capital accounts

15. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 15 Regulatory Allocations –Nonrecourse deductions –Minimum gain chargeback –Partner nonrecourse deductions –Partner minimum gain chargeback –QIO Curative allocations Allocations of Profits or Losses –Limitation on losses Tax Allocations Alternate SEE Approach

16. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 16 Example 1 Partnership ABAB 50% AssetsLiabilities $1,000,000$800,000 machinery nonrecourse debt

17. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 17 Example 1 Year 1 –Losses of $100,000 –Repay $50,000 of debt Year 2 –Losses of $165,000 –Repay $50,000 of debt –Distribute $2,500 to each partner Year 3 –Dispose machinery

18. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 18 Example 2 Partnership ABAB 90%* 10%* AssetsLiabilities $1,000,000$800,000 building nonrecourse debt

19. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 19 Example 2 Years 1 & 2 –Losses of $85,000 each year ($170,000 total) Year 3 –Losses of $85,000 Year 4 –Dispose building

20. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 20 Target Approach Characteristics –Liquidating distributions are not made in accordance with the positive capital account balances of the partners –Allocations are based on a hypothetical liquidation standard –Distributions (both operating and liquidating) and allocations (both book and tax) are tied to one standard, which is contained in the distribution provision –Partners are not required to restore deficit capital account balances (or only a limited amount) –Special allocations are made with respect to nonrecourse liabilities, including a minimum gain chargeback

21. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 21 Target Approach Liquidation –Tied to distributions Capital accounts

22. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 22 Target Approach Regulatory Allocations –Nonrecourse deductions –Minimum gain chargeback –Member nonrecourse deductions –Member minimum gain chargeback –QIO Curative allocations Tax Allocations Limitation on losses

23. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 23 Target Approach Distributions Allocations of Profits and Losses –Hypothetical liquidation standard –Formula –Steps

24. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 24 PARTNER: 731(a)(1) & 752(a): no gain recognized, except to extent money (including debt relief) and marketable securities exceed outside basis 731(a)(2): loss recognition in certain circumstances 732(b): outside basis reduced by any money distributed 735(b) & 1223(2): holding period carries over Termination If pro rata distribution, then 751(b) (distributions of unrealized receivables and inventory items) not applicable PARTNERSHIP: 708(b)(1)(A): partnership terminates when no part of any business, financial operation, or venture is carried on 731(b): no gain or loss recognized Partnership Partner property

25. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 25 Matthew S. Beard Mr. Beard's practice spans two broad areas of taxation: estate planning and probate and income tax and business planning. In his estate planning and probate practice, Mr. Beard designs and implements estate and business succession plans with an emphasis on federal tax issues. He often works closely with accountants, bankers and financial advisors in this process. Mr. Beard also represents fiduciaries in all facets of estate and trust administration. This typically includes court proceedings, tax matters, administration and transfer of assets, and matters before the IRS. Mr. Beard is the author of "An Introductory Guide to Tax and Estate Planning," which provides an introduction to estate planning under Texas law and planning for federal estate, gift, and generation-skipping transfer taxes. On transactional matters, Mr. Beard advises clients with a focus on tax issues. He works with a broad range of entities, such as partnerships, limited liability companies, and publicly traded "C" corporations. Transactions include formations, acquisitions/mergers, and liquidations. Mr. Beard is the author of "Annotated Tax Provisions for Limited Liability Companies," which includes tax provisions for company agreements with explanations of how the provisions operate and provide pass-through taxation. Mr. Beard was admitted to practice in Texas in November 2005. phone (214) 744-3700 toll-free (800) 451-0093 fax (214) 747-3732 mbeard@meadowscollier.com

26. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 26 DISCLAIMER The information included in these slides is for discussion purposes only and should not be relied on without seeking individual legal advice.