Partnership Tax

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• General Definition
Partnership Tax - Introduction

• Flexibility in Allocating Profits & Losses

o Anti-abuse Regulations (Reg. 1.704-1)

Contributions to Partnership
• No gain or loss is recognized on a partner’s contribution of
property in return for partnership interest (Section 721)

• Partner takes a substituted basis. (Section 722)

• Partnership takes a carry over basis (Section 723)

• Starting point is basis in contributed property
Partner’s Basis in Partnership Interest (Section 722)

• Increase basis for partner’s share of partnership liabilities

• Increase basis for partner's distributive share of income or

gains

• Decrease basis for partners distributive share of deductions

and losses

• Decrease for non-taxable distributions to the partner.

Problem 33

• On January 1, James invests $25k for a 1/3 interest in Partnership.

Partnership buys a building at a cost of $200k. It pays $50k cash and
borrows the remaining $150k. Taxable income for the year was $0.
On December 31, James sells his partnership interest for $62,500.
How much gain/loss does James recognize?
Problem 31
• Jed transfers $90k cash for 60% of JN partnership. Ned transfers a
building with an adjusted basis of $30k and FMV of $100k (which is
subject to a mortgage of $40k) for 40% of partnership.
Problem 32
• Jed transfers $90k cash for 60% of JN partnership. Ned transfers a
building with an adjusted basis of $20k and FMV of $100k (which is
subject to a mortgage of $40k) for 40% of partnership.
Operations of Partnerships
• Reporting Partnership Income

• Allocation of Items (Section 704)

• Transactions between Partners & Partnership (Section 707)

o No loss recognition on sales between partnership and controlling

partner

o Guaranteed Payments

• Termination of Partnership if more than 50% of partnership

interests are sold w/in a12 month period.
Operations of Partnerships – Problem 26
• The following contributions are made to a partnership for 1/3 each:
o Bob – Cash: 15/15
o Carl – Inventory 9/15
o Don – Capital Asset 35/15
• The Partnership has $60k of ordinary income during the year and sells the following assets:
o Inventory for $27
o Capital asset for 9

• What does each Partner report as income