Prof. Beale; Partnership Taxation; Winter 2011
Chapter 1
· Check Box Method of Determining a PS [7701(a)(3)]
o must be a separate legal entity
o If not a trust, then it is a “business entity”
o Corporations:
§ elected
§ deemed one by state, federal law as corporation, incorpated, body corporate
o PS
§ if there are two or more members and it is not an incorporated entity by either election or statute
o Elections:
§ deemed effective either 75 days b/f or 12 months after
§ requires signature by either 1) each member fo the electing entity, including priority members affected by retroactive; 2) by an authorized officer, manager or member.
o Change in Number of Members
§ only changes if drops below 2 = disregarded entity; OR
§ grows from 1 member to 2 = PS unless election for corp.
· Podell v. Commissioner
o petitioner & another had oral agreement to buy, renovate/improve and sell real estate
o they deemed proceeds as a capital investment
o IRS deemed Petitioner and other’s arrangement as a PS or Joint Venture = Ordinary income
o 761(a) – includes many unincorporated organizations through or by means of which any business, financial operation ro venture is carried on & is not a trust or estate.
o Rule: Joint Venture: 1) a contract 2) joint control 3) contribution of money, property or services by members 4) sharing of profits [sometimes losses]
o Application: there was an oral agreement, there was joint control b/c one managed and the other retained executive control through funding, money and services were contributed and they agreed to share profits and losses
o Holding: PS for purposes of taxation = ordinary income
· Allison v. Commissioner
o involves 4 groups: Acceptance, Mortgage, Allison & Krikac
o Acceptance & Investment argue they entered into PS and distribution of 75 lots to Acceptance = distribution
o Commissioner argues that there was no PS and 75 lots were payment for services rendered
o Rule: [same as Podell] – emphasis on facts and circumstances indicating intent of parties
o Application: there was a written agreement regarding property; there was no clear agreement of joint control (not written or oral how property would be divided and sold) [nothing indicating business venture or seeking profit]; Acceptance was a lending institution and loaned money to Investor [fits w/in business activity]; agreement said Acceptance got lots free and clear of any incumberance and in consideration for loan [no joint control or propriortership]; agreement further said agreement would end once lots transferred; Acceptance had arrangement to sell all but three lots prior to transfer [no intention of entering real estate business]; agreement also shows that Acceptance and Investor had no joint control; no PS books or schedule K
o Holding: there was no PS or joint venture b/c the few factors indicating a PS [agreement, working to develop property] were greatly outweighed by facts indicating no PS [see above].
· *members of non-incorporated entity [PS] to elect for exclusion from Schedule K if: 1) for investment purposes only; 2) joint production, extraction, use of property BUT NOT purposes of selling property; 3) securities dealers engaged in short-term joint venture to underwrite or sell/distribute particular issues of securities
· **Married Business PS: [761(f)]
o can elect not to be a PS if 1) married, 2) file jointly and 3) both materially participate in business
· Problems on Page 16:
o 1 – which will be separate entities for tax purposes?
§ (a) A, B, C purchase land as tenants-in-common for investment purposes: NOPE b/c
§ (b) same as (a), except land subdivided and sold: Yes, b/c clear business purpose
§ (c) litigation & negotiator share office and secretary – each services and bills own clients: probably NOPE b/c they are not jointly controlling anything except building, but that is not for profits or losses and secretary is not for profits or losses
§ (d) doctor & architect buy building, architect renovates, then they sell as group and architect gets 25% of profits: yes b/c there is agreement, joint control, business venture and sharing profits
§ (e) would results in (d) differ if building not sold and Doctor gets to rent out 75% of it and Architect gets to rent out 25% of it: unclear b/c while it seems like an investment it could be the PS agreement that architect contributes services and is paid through rental income.
§ (f) Investor and Fisher sign agreement where investor pays for boat [boat secures loan] and is payable for 10 years w/15% of fishers net profits: is this equity or debt? Seems more like debt b/c investor retains no managerial control and only contributed money for the boat [analogous to Allison]
· Publically Traded PS [PTP] [7704]
o PTP is classified as a Corp. if 1) traded on an established securities market or 2) readily tradable on 2d market [7704(b)]
o EXCEPTION: [7704(c)] if 90% or more of income is through passive activity, then can maintain PS tax status
· Trusts [Reg. 301.7701-4(a) & (b)]
o normal trusts = corp.
o Business trusts w/2 or more members and that are unincorporated go through the “check the box” test and could be PS
Chapter 2 FORMATION OF THE PS
· s.721 neither a P nor a PS will realize any gain or loss upon the P’s contribution of property to the PS for interest
o Services do not count as contributed property [see s. 61]
· Disregard Exchange – s.1001(a); for purposes of purchasing a PS interest w/cash or property, no exchange will be recognized at that time
· Basis in PS – s.722 P’s basis in PS is equal to cash contribution or F.M.V. of property
· AB – s.723 provides that the PS takes on the contributing P’s AB in the property
· Holding Period
o P – s.1223(1): tack on PIP – a P’s holding period for cap. asset. or 1231 prop. is determined by his holding period for PIP
o PS – s.1223(2): PS takes on contributing P’s holding period
· PS ACCOUNTING
· *A capital account is typically what a P is entitled to upon liquidation of the PS
· Maintenance of P Capital Account – r.1.704-1(b)(2)(iv)(b)
o Cash + FMV of property + distributive shares
o subtract Cash Distributions & losses
·
cated to contributing P: remaining debt relief will be allocated according to PIP
Contribution of Services
· s.83(a) – when a service P receives interest it is considered transfer of property for service = restricted by substantial risk of forfeiture
o s.83(b)(1) – election to include property transfer in inc. immediately
· Service P interest in PS = interest transferred + amt. contributed
o Service P recognizes ordinary income = value of interest – amt. contributed
· PS deduction – depends upon the Service P’s services
o organizational expense = $5,000 immediate expense, and rest amortizable over 5 yrs.
o capital service – if service is building asset then entire amt. must be capitalized into bldg.
· Transfer for Property Interest: multi-step process for paying service P
o P is being paid for services = 61 gain
o PS [might] get ordinary business expense = 162 deduction
o P is giving back income to PS for interest = 722
o PS is recognizing gain when it transfers interest [1001 AR – AB]
· McDougal v. Commissioner
o McDougal promised 50% interest in Iron Card racing horse to McClanahan once Iron Clad made back money spent
o Iron Clad made back money – transferred 50% interest to McClanahan when Iron Card FMV = $60,000
o Transfer = PS
o Analysis: McC realized $30,000 of gain [50% interest of Iron Card]
§ McD realized $25,000 gain [sale of 50% interest of Iron Card: AR30 – AB5 (10 cost /2)]
§ PS had a basis of $35,000 and a FMV of $60,000
· McD basis is ½ $10,000 cost basis = $5,000
· McC basis is cost basis = $30,000
· Hale v. Commissioner
o H sole 90% interest in W to D-K
o H’s interest in W was to receive profits
o H argues it was a capital gain b/c PS interest is usually capital gain
o Held: ordinary income: in line with P.G. Lake & Hort – current receipt of future ordinary income does not get capital treatment
· Diamond v. Commissioner
o Issue is whether D sold interest in a PS or a profit-share
o D argues it is interest in a PS = STCP [offset by STCL]
o Commiss. argues that it is profit-share, so he is now receiving lump sum for future ordinary income [see Hale, P.G. Lake & Hort]
o Holding: b/c what he sold had an ascertainable market value [40K], it can be taxed as ordinary income
§ dicta: if it did not have an ascertainable value it might not be taxed as ordinary income and TX payer would be subject to only one level of tax from PS distributive share.
