1. Corporate & Partner Tax Instructor: Dwight Drake Property Sales Between Partner and Partnership General Rule: Treated as sales or exchanges between unrelated parties. 707(a)(1). Loss Exception: No loss allowed if partner owns directly or indirectly more than 50% of capital and profits. 707(b)(1) Use 267(c) attribution rules. Ordinary Income Exception: If more than 50% (with attribution) and depreciable asset sold, gain is ordinary and no 453 installment treatment (unless prove no tax avoidance purpose). 707(b)(2) and 1239(a). Related Allocation Exception: Partner transfers property to P for less than full consideration and then related income allocation, per (a)(2)(A) transaction treated as sale between unrelated parties under 707(a)(1). Otherwise, current expense for capital item. Related Distribution Exception: Partner contributes property to partnership and then partnership makes related distribution to partner. Treated as sale between unrelated parties. 707(a)(2)(B). 2 yr rebuttable presumption rule. Partner-to Partner Exception: Reciprocal partner transfers/distribution through partnership treated as transaction from partner to partner. 707(a)(2)(B). 267 applies to knock out loss.

2. Corporate & Partner Tax Instructor: Dwight Drake Attribution Under 267(c) - Entity from attribution: Shareholder, partner or beneficiary deemed to own proportional interest of any stock owned by corporation, partnership, trust or estate. -Corp to partner: Any corporate stock owned by individual shall be deemed owned by his partner. -Family attribution: Brothers and sisters, spouse, ancestors and descendants. -Only “entity from attribution” can be re-attributed.

3. Corporate & Partner Tax Instructor: Dwight Drake Problem 253 -1 Basic Facts: P partnership owned equally (25% each) by A, A’s wife, A’s father- in-law, and X Corp, 50% owned by A. (a)P sells A land with basis 50k and FMV 40k. Following year, A sells to B for 45k. 707(b)(1) denies loss on sales between partnership and more than 50% partner, with 267(c) attribution. Here, A deemed to own 62.5% (25% directly, 25% spouse, 12.5% X Corp). Thus, loss to P disallowed per 707(b)(1). To assure loss is just not postponed, the partners’ outside basis would be reduced for the loss per 705(a)(2)(A). When the land is sold by A, per 267(d) via 707(b)(1) no gain is recognized to extent of disallowed loss. Hence, A has no gain for sale of 45k because 5k gain less than 10k disallowed loss. (b)P sells same land to other partnership (P-2), owned by same parties except X Corp is out and that 25% owned by unrelated party. Since both Ps have same owners for 75%, loss disallowed under 707(b)(1)(B) and partners in P still required to reduce outside bases. 267(d) still applies to P-2, so 5k gain not recognized because less than disallowed loss. But P-2 partners still increase their respective shares of outside basis for 5k gain.

4. Corporate & Partner Tax Instructor: Dwight Drake Problem 253 -1 Basic Facts: P partnership owned equally (25% each) by A, A’s wife, A’s father- in-law, and X Corp, 50% owned by A. c)A sells depreciable equipment (basis 20k) to P for 30k. 10k recognized gain. Since A deemed to own 62.5% of P, gain ordinary income per 707(b)(2) because equipment not capital asset in hands of transferee - P. d)A’s wife sells rental property (her capital asset, basis 100k) to P for 120k. 20k gain recognized. A’s wife constructive ownership 87.5% (Direct 25%, A’s 25%, father’s 25% and half of X Corp’s 25%). Thus, gain is ordinary per 707(b)(2)(A) because P in business of renting property and not capital asset to P. e) Same as (d) but P in business of selling real estate. Same result - ordinary income of 20k - because control still 87.5% and property still not capital asset to P, but now inventory.

5. Corporate & Partner Tax Instructor: Dwight Drake Problem 253 - 2 Basic Facts: P partnership owned equally by C and D. C sells asset to P, recognizes loss of 1k. - Loss to C not disallowed by 707(b)(1)(A) because C not own more than 50%. - What if sale by C’s father? 707(b)(1)(A) not apply because only for sales with partner. But 267 apply and Reg. 1.267-(b)-1(b)(1) says treated as sale from C’s father to C & D, the partners. Hence 1/2 loss disallowed as sale to related party. Other half of loss allowed. Nutty comparative result.

6. Corporate & Partner Tax Instructor: Dwight Drake Problem 253 - 3 Basic Facts: A, cash basis, 25% partner in P, accrual basis, with 30k outside basis. A owns depreciable equipment, 1k basis, 20k FMV, 2k annual rental value. P has 60k income per year. (a)A sells equipment to P for 20k. Treated as sale between unrelated parties per 707(a)(1). A has 19k gain; P’s basis 20k. Much or all gain may be ordinary income depreciation recapture per 1245. (b)A contributes equipment to P, capital account increased 20k and later in year gets 20k cash distribution. If transactions viewed separately, no gain on contribution per 721, A’s capital account goes up 20k, A’s outside basis goes up 1k, P takes 1k basis per 723. 20k cash distribution reduces A’s capital account 20k, and A’s outside basis reduced 20k to 11k. But 707(a)(2)(B) treats transactions as disguised sale under 707(a)(1) because so close in time. Rebuttable presumption of sale if within 2 yrs per Reg. 1.707-3©(1). Thus, same result as in (a) - straight sale.

7. Corporate & Partner Tax Instructor: Dwight Drake Problem 253 - 3 Basic Facts: A, cash basis, 25% partner in P, accrual basis, with 30k outside basis. A own depreciable equipment, 1k basis, 20k FMV, 2k annual rental value. P has 60k income per year. c)Same as (b), but 15k distribution. Deemed part sale (75%) and part contribution (for 5k). Gain on sale is 14.25k (15k less.75 basis). Contribution for 5k, with.25 basis. P’s basis is 15k plus.25k carry-over basis. A’s outside basis increased.25k and inside capital account increased 5k. d)A transfers equipment to P. B transfers similar depreciable property (4k basis, 18k FMV) and 2k cash. Two months later, P distributes A’s old property to B and B’s old property and 2k cash to A. Per 707(a)(2)(B), deemed taxable direct exchange between A and B. A has 19k gain; B has 14k gain). B basis 20k; A’s basis 18k. If property like-kind, all or part of gain may be deferred under 1031. P not deemed to be player in this deal.

8. Corporate & Partner Tax Instructor: Dwight Drake S Corp Comp v. Allocation Compensation impacts: 1.Income tax impact is “push” between shareholders in aggregate, but may alter interests among shareholders. 2.Comp creates payroll tax hit (15.3%) while distribution does not. Huge factor. Planning point – pigs get slaughtered. If services significant, have some comp. 3.More than 2% shareholder treated as partner for employee benefits. Hence tax preferred fringes (group term life, medical – dental) usually not available to S Corp shareholder.