Presenting a live 110-minute teleconference with interactive Q&A Recourse and Nonrecourse Liability in Partnership Agreements Minimizing Tax Impact of Partnership Liability and Debt Allocations TUESDAY, JULY 10, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Andrew W. Ratts, Partner, Winston & Strawn , Chicago Jon R. Stefanik, Buckingham Doolittle & Burroughs , Akron, Ohio Attendees seeking CPE credit must listen to the audio over the telephone. Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
Sound Quality For this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted. There will be no sound over the web connection. If you dialed in and have any difficulties during the call, press *0 for assistance. You may also send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.
FOR LIVE EVENT ONLY For CLE credits, please let us know how many people are listening online by completing each of the following steps: Close the notification box • • In the chat box, type (1) your company name and (2) the number of attendees at your location • Click the SEND button beside the box For CPE credits, attendees must listen to the audio over the telephone. Attendees can still view the presentation slides online. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926- 7926 ext. 10 .
If you have not printed the conference materials for this program, please complete the following steps: Click on the + sign next to “Conference Materials” in the middle of the left - • hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon. •
5 I. Overview of Section 752 Liabilities and Interplay with IRC Section 704 Allocations Andrew W. Ratts (312) 558-5991 aratts@winston.com July 11, 2012
6 Allocation of Partnership Income — Introduction • In determining its income tax, each partner must take into account separately its "distributive share" (whether or not any cash or property is distributed) of partnership items of income, gain, loss, deduction and credit. § 702. • A partner's distributive share of “book” income is determined by § 704(b) and the regulations thereunder. • A partner's distributive share of taxable income generally follows its § 704(b) share, but with modifications under § 704(c). 6
7 Allocation of Income — sec. 704(b) • Treas. Reg. § 1.704-1(b) provides the rules to determine whether an allocation provided in the partnership agreement will be respected for tax purposes as either • (i) having substantial economic effect or • (ii) being in accordance with the partners' interest in the partnership.
8 Allocation of Taxable Income — sec. 704(c) • Income, gain, loss and deduction with respect to property contributed by a partner to a partnership shall, under regulations, be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its FMV at the time of contribution. (§704(c)(1)(A)) • Treas. Reg. § 1.704-3 provides three methods for eliminating book/tax disparities: the traditional method, the traditional method with curative allocations and the remedial method. The partnership is also permitted to use any reasonable method of making the allocations. The partnership is not limited to the three methods described in the regulations. The choice of method may be made on a property-by- property basis.
9 Allocation of Taxable Income - IRC § 704(c) Traditional Method • Tax allocations to the noncontributing partner of cost recovery deductions with respect to the 704(c) property must equal book allocations of those deductions to the extent possible. • The “ceiling rule” provides that total income, gain, loss, or deduction may not exceed the partnership’s total income, gain, loss, or deduction recognized for tax purposes.
10 Allocation of Taxable Income - IRC § 704(c) Example Traditional Method
11 Allocation of Taxable Income - IRC § 704(c) Traditional Method With Curative Allocations • If the ceiling rule applies, the partnership looks for another tax item of the same amount and character as the item limited by the ceiling rule. Remedial Allocation Method • Two elements. ▫ The partnership steps into the shoes of the contributing partner for the portion of the book value equal to the adjusted tax basis. ▫ The remainder of the book value (book value less tax basis) is recovered as if it were a newly purchased asset placed in service at the time of the contribution.
12 Allocation of Taxable Income - IRC § 704(c) Example Traditional Method With Curative Allocations Use the same facts given for the traditional method, but assume that the partnership also has $4,000 of ordinary income to be allocated.
13 Allocation of Taxable Income - IRC § 704(c) Example Remedial Allocation Method
14 Outline of § 752 • Increase in partner’s liabilities ( §752(a) and Reg. §1.752-1(b)) ▫ Considered a contribution of money by the partner to the partnership ▫ Includes: Any increase in the partner's share of partnership liabilities. Any increase in the partner's individual liabilities by reason of the partner's assumption of partnership liabilities. • Decrease in partner’s liabilities ( §752(b) and Reg. §1.752-1(c)) ▫ Considered a distribution of money by the partner from the partnership ▫ Includes: Any decrease in the partner's share of partnership liabilities. Any decrease in the partner's individual liabilities by reason of the partnership's assumption of the partner's individual liabilities.
15 Outline of § 752 • Liability to which property is subject (§752(c)) ▫ Considered a liability of the owner of the property to the extent of the FMV of the underlying property • Sale or exchange of a partnership interest (§752(d) and Reg. §1.752-1(h)) ▫ Liabilities are treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships. ▫ The reduction in the transferor partner's share of partnership liabilities is treated as an amount realized under §1001 and the regulations thereunder.
16 Liability Defined • An obligation is a liability only if, when, and to the extent that incurring the obligation: ▫ Creates or increases the basis of any obligor’s assets (including cash); ▫ Gives rise to an immediate deduction of the obligor; or ▫ Gives rise to an expense that is not deductible in computing the obligor’s taxable income and is not properly chargeable to capital. An obligation is a fixed or contingent obligation to make payment without regard to whether the obligation is otherwise taken into account for purposes of the Code.
17 Recourse/Nonrecourse Liabilities • Definition of recourse liability ▫ Partnership liability to the extent any partner or related person bears the economic risk of loss for that liability under Reg. §1.752-2. • Definition of a “nonrecourse liability” ▫ Partnership liability to the extent that no partner or related person bears the economic risk of loss for that liability under Reg. §1.752-2. • Nonrecourse liabilities are allocated in three tiers: ▫ The partner's share of partnership minimum gain under §704(b); ▫ The amount of any taxable gain that would be allocated to the partner under section 704(c) (or in the same manner as section 704(c) in connection with a revaluation of partnership property) if the partnership disposed of all partnership property in full satisfaction of the liabilities and for no other consideration; and ▫ The partner’s share of the partnership’s excess recourse liabilities. (Flexibility!)
18 Allocations Attributable to Nonrecourse Liabilities (Reg. § 1.704-2) • Deductions attributable to partnership nonrecourse liabilities (“nonrecourse deductions”) cannot have economic effect. • Nonrecourse deductions must be allocated in manner deemed to be in accordance with the partners’ interests in the partnership as provided in Reg. § 1.704-2(e). ▫ Partnership agreement must comply with capital account maintenance rules. ▫ Partnership agreement allocates nonrecourse deductions “in a manner that is reasonably consistent” with allocations that have substantial economic effect of some other significant item attributable to the property securing the nonrecourse liabilities. ▫ Partnership agreement must contain a “minimum gain chargeback” provision.
Recommend
More recommend
