Presenting a live 110-minute teleconference with interactive Q&A Recourse and Non-Recourse Liability in Partnerships Minimizing the Tax Impact of Partner Liability and Debt Allocations Under Sections 752 and 704 WEDNESDAY, OCTOBER 17, 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 For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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Recourse And Non-Recourse Liability In Partnerships Seminar Oct. 17, 2012 Andrew W. Ratts, Winston & Strawn Jon R. Stefanik, Buckingham Doolittle & Burroughs aratts@winston.com jstefanik@bdblaw.com
Today’s Program Overview Of Sect. 752 Liabilities And Interplay Slide 8 – Slide 26 With Sect. 704 Allocations [Andrew W. Ratts] Distinguishing Recourse And Non-Recourse Liabilities Slide 27 – Slide 38 [Jon R. Stefanik] Recent Transactions And Cases Interpreting Sect. 752 Slide 39 – Slide 63 Allocations [Andrew W. Ratts] Planning Strategies And Techniques Slide 64 – Slide 72 [Jon R. Stefanik]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7
Andrew W. Ratts, Winston & Strawn OVERVIEW OF SECT. 752 LIABILITIES AND INTERPLAY WITH SECT. 704 ALLOCATIONS
Allocation Of Partnership Income: Introduction In determining its income tax, each partner must take into account separately its “distributive share” (whether 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). 9 9
Allocation Of Income: Sect.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. 10
Allocation Of Taxable Income: Sect. 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. 11
Allocation Of Taxable Income: Sect. 704(c), Cont. Traditional method Tax allocations to the non-contributing 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. 12
Allocation Of Taxable Income: Sect. 704(c), Cont. Example: Traditional method 13
Allocation Of Taxable Income: Sect. 704(c), Cont. Traditional method with curative allocations If the ceiling rule applies, then 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. 14
Allocation Of Taxable Income: Sect. 704(c), Cont. 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. 15
Allocation Of Taxable Income: Sect. 704(c), Cont. Example: Remedial allocation method 16
Outline Of Sect. 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 17
Outline Of Sect. 752 (Cont.) 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. 18
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. 19
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