2011 November Tax Core Technical Series Subchapter K 120

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Learning objectives

Recognize basic concepts and principles of formation and operations in partnership taxation Apply basic concepts of formation and operation using T accounts t Recognize advanced concepts of substantial economic effect and the existence of a tax partnership

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Agenda

Subchapter K review Partnership tax accounting using T accounts Application 1 Tax vs. 704(b) "book" accounting using T accounts Application 2 Introduction to "substantial economic effect" Application 3 Case analysis: existence of a partnership Application 4
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Some basic principles of subchapter K

1. 2. 3. 4. 5. 6.

Partnership is a conduit partners only subject to tax Character of income in partnership retained by partner Most tax elections made by partnership Operating agreement specifies partnership allocations Distributive share must have substantial economic effect Pre-contribution gain/loss generally allocated to contributing partner 7. Partner has inside/outside basis 8. Partners' ability to use losses limited by basis
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Some basic principles of subchapter K

9. Partnership tax year restrictions 10. Partners can act as third party 11. Partners can receive guaranteed payments 12. Partnerships can terminate automatically 13. Partnership formation is non-recognition event 14. Contributed property basis carries over 15. Contributed property character may be limited 16. Cash distributions may be taxable

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Some basic principles of subchapter K

17. Property distributions generally not recognized 18. Distributed property may have carryover or substituted basis 19. Undistributed property may receive basis adjustments 20. Certain hot assets create ordinary income 21. Retiring partners may have ordinary income or capital gain 22. Character of gain on sale of interest can be capital or ordinary 23. Liabilities can create partner basis
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Poll

Ready for some review exercises? A. Yes B. No

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Review exercise 1

What are the aggregate and entity theories of partnership taxation and how do they differ?

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Review exercise 2

What are the tax consequences for a partner's contribution to a partnership?

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Review exercise 3

What are the tax consequences of contribution of services by a partner to a partnership?

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Review exercise 4

How long does a property retain its character once contributed to a partnership? Provide answers for character of unrealized receivables, builtin capital loss, and assets treated as inventory give examples of each.

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Review exercise 4

How long does a property retain its character (unrealized receivables) once contributed to a partnership? A. B. C. D. 1 year 5 years 10 years Indefinitely

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Review exercise 5

What are the tax consequences when a contribution to a partnership is linked to a distribution?

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Review exercise 6

Where is partnership income taxed? At the partner or partnership level? Discuss how taxable income, deductions, gains, losses, and credits are determined and calculated for activity that occurs in a partnership.

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Review exercise 6

Where is partnership income taxed? At the partner or partnership level? A. Partner level B. Partnership level

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Review exercise 7

What is substantial economic effect and why is it important?

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Review exercise 8

How is the deductibility of partnership losses limited?

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Review exercise 9

What taxable year restrictions exist for partnerships?

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Review exercise 10

Can a partner also be a creditor of a partnership? A. Yes B. No

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Review exercise 11

What are the tax consequences to a partner and the partnership resulting from a partnership distribution?

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Review exercise 12

What special rules apply when a partnership distributes unrealized receivables or inventory?

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Review exercise 13

What happens when a partner retires?

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Review exercise 14

What are the tax consequences of a transfer of a partnership interest?

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Agenda

Subchapter K review Partnership tax accounting using T accounts Application 1 Tax vs. 704(b) "book" accounting using T accounts Application 2 Introduction to "substantial economic effect" Application 3 Case analysis: existence of a partnership Application 4
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Poll

Are you ready to continue with Partnership tax accounting using T accounts? A. Yes B. No

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Application 1

Take 30 minutes using the information provided, record the entries in the T accounts and prepare the balance sheet and income statement of the partnership.

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Agenda

Subchapter K review Partnership tax accounting using T accounts Application 1 Tax vs. 704(b) "book" accounting using T accounts Application 2 Introduction to "substantial economic effect" Application 3 Case analysis: existence of a partnership Application 4
2011 Grant Thornton LLP. All rights reserved.

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Application 2

Take 30 minutes using the information provided and make the appropriate journal entries in the T accounts.

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Agenda

Subchapter K review Partnership tax accounting using T accounts Application 1 Tax vs. 704(b) "book" accounting using T accounts Application 2 Introduction to "substantial economic effect" Application 3 Case analysis: existence of a partnership Application 4
2011 Grant Thornton LLP. All rights reserved.

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Application 3

Take 30 minutes to record the transactions in the partnership T accounts provided and determine whether or not the allocation has substantial economic effect.

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Agenda

Subchapter K review Partnership tax accounting using T accounts Application 1 Tax vs. 704(b) "book" accounting using T accounts Application 2 Introduction to "substantial economic effect" Application 3 Case analysis: existence of a partnership Application 4
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Application 4

Read, discuss, and respond to AmeriGroup and WISGAS. Decide whether a partnership existed. Be prepared to discuss your conclusion.

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Application 4 debrief AmeriGroup

Facts summary 77 investors were tenants in common in computer equipment Agreement was for one year with 20 yearly renewals Taxpayer treated gains and losses individually in their personal returns

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Application 4 debrief WISGAS

Facts summary Three utilities were to construct and own together a nuclear generating plant Electricity was distributed to each utility based on ownership Expenses shared based on respective share of ownership

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Evaluation

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Regional session Northeast/Southeast/Midwest West/Central Program leaders Mike Kubacki Allison Green Jim Hill
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2011 November Tax Core Technical Series Subchapter K 120 Thank you for your participation

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