Partnership Tax Outline–Spring 2014
· Chapter 1–The Tax Character of Partnerships–
· REMEMBER partnerships are NOT separate taxable entities, HOWEVER, they are separate legal entities.
o Pass through entitles.
o Form 1065, informational partnership tax returns.
§ Form K-1s are distributed to the partners (at least two Forms K-1)
o K-1 is used by each partner in preparing his own personal return.
· State Law Characteristics–
o A partnership is a contractually based relationship among owners of an enterprise organized for profit.
o Two broad categories:
· General Partnerships–
§ Can arise orally and may be informal.
§ Each partner bears unlimited personal liability to 3rd parties for the partnership's obligations.
· Limited Partnerships–
§ Creatures of state law that must satisfy filing requirements.
§ Limited partners (Like shareholders in a corporation) are liable to third parties ONLY to the extent of their actual contributions to the limited partnership, plus any promised additional contributions.
· NOTE, limited partners are generally precluded from managing the partnership.
· Tax Background–
o IRC Sections 701-777, known as Subchapter K.
· POLICY–Need of administrative convenience, do NOT want to hinder business.
· “Aggregate Theory”–
o A partnership is both an aggregate of individual partners who pay taxes directly on their share of partnership's profits.
o Under a pure aggregate conception, partners would be viewed as co-owners, each with an undivided interest in the partnership's assets, and each partner would account separately for her share of all partnership transactions.
· “Entity Theory”–
o A partnership is a separate entity for a variety of other purposes (such as filing the tax return, having a distinct taxable year, and adopting an accounting method to compute its profits/losses).
o Under a pure entity conception, the partnership would be treated as a separate and distinct taxpayer, adopting a method of accounting and a taxable year and annually reported its taxable income.
· The partners would each an undivided interest in the partnership entity, and would be viewed very much like shareholders in a corporation.
· NOTE, generally there is tension between the aggregate and entity theories.
· Partnership Status–
o ISSUE–Whether an entity organized as a partnership under local law stands up as such, or whether it has to be reclassified as another form of organization for federal income tax purposes.
· Reg. Section 301.7701-2 through 301.7701-4–
o For federal income tax purposes of all business or investment entities that are NOT sole proprietorships fall into one of the following basic classifications:
· Corporation (or S corporation),
· Trust or estate, or
o NOTE, many relationships that appear to involve no entity at all, such as landlord and tenant or debtor and creditor, have the potential for inadvertently producing a partnership for federal income tax purposes.
o REMEMBER there does not need to be a partnership agreement.
(PAST WAY TO DETERMINE IF A
f it has “associates”), it becomes a “business entity”, and it can elect whether to be taxed as a partnership or a corporation.
· Reg. Section 301.7701-2(b)–
o Eight specific business organizations that each will be deemed a “per se corporation” for federal tax purposes”:
· All statutory corporations,
· Joint-stock companies,
· Insurance companies subject to Subchapter L;
· State-chartered banks that have deposits insured by the Federal Deposit Insurance Acts;
· State-owned entities;
· Non-Section 7701(a)(3) entities; and
· Specified foreign business entities.
· Reg. Section 301.7701-3(b)(1)–
o If it is a US business entity, then the “default” outcome is that it is a sole proprietorship if there is only one owner and a partnership if there are several owners.
o If it is foreign business entity, and no one has personal liability, then the default result is that it is a corporation for federal income tax purposes.
o If it is foreign business entity, and if at least one person has personal liability, then the enterprise is a sole proprietorship if there is only one owner and a partnership if there are several owners.
o NOTE, an election MUST be made by all the owners, and may NOT be changed again for five years.