Presenting a live 110-minute teleconference with interactive Q&A Pass-Through Liabilities and Federal Tax Treatment: Resolving Complex Issues Reporting Liabilities for General or Limited Partnerships and LLCs Given Tax Code Inconsistencies WEDNESDAY, AUGUST 28, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Carolyn Turnbull, CPA, MST , Consultant, Orlando, Fla. Belan Wagner, Managing Partner, Wagner Kirkman Blaine Klomparens & Youmans , Mather, Calif. 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 at 1-800-926-7926 ext. 10 .
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Pass-Through Liabilities and Federal Tax Treatment: Resolving Complex Issues Seminar Aug. 28, 2013 Belan Wagner, Wagner Kirkman Blaine Carolyn Turnbull, CPA, MST , CGMA Komparens & Youmans Independent Tax Consultant bwagner@wkblaw.com turnbullcarolyn@aol.com
Today’s Program Liability Characterization Under IRC Sect. 1001 Slide 8 – Slide 10 [Belan Wagner] Treatment Of Partnership Liabilities Under IRC Sect. 752 Slide 11 – Slide 32 [Carolyn Turnbull, Belan Wagner] Examples Of Taxpayer Situations Slide 33 – Slide 70 [Belan Wagner, Carolyn Turnbull] At-Risk Rules Under IRC Sect. 465 Slide 71 – Slide 79 [Carolyn Turnbull] Concluding Remarks Slide 80 [Carolyn Turnbull, Belan Wagner]
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.
Belan Wagner, Wagner Kirkman Blaine Komparens & Youmans LIABILITY CHARACTERIZATION UNDER IRC SECT. 1001
Liability Characterization Under IRC §1001 I. Background A. Determination of whether a liability is recourse or nonrecourse is generally made according to state law. B. Characterization of partnership liability is made at the partnership level (e.g., see Gershkowitz , TC, 1987) II. Nonrecourse liability A. Defined in Black’s Law Dictionary as a “secured loan that allows the lender to attach only the collateral, not the borrower’s personal assets, if the loan is not repaid.” B. A transfer of property that secures a nonrecourse loan to the creditor in satisfaction of the loan results in gain or loss from a sale or exchange to the debtor under 1001, equal to the difference between the debtor’s adjusted basis in the property and the adjusted issue price of the debt. 9
Liability Characterization Under IRC §1001 (Cont.) I. Recourse liability A. Defined in Black’s Law Dictionary as a “loan that allows the lender, if the borrower defaults, not only to attach the collateral but also to seek judgment against the borrower’s (or guarantor’s) personal assets.” B. A transfer of property to the creditor in satisfaction of a recourse loan is bifurcated into: 1. Sale or exchange income from the property under 1001, to the extent of the difference between the property’s FMV and the taxpayer’s adjusted basis in the property at the time of the transfer; and 2. COD income, to the extent the adjusted issue price of the debt exceeds the FMV of the property. 10
Carolyn Turnbull, CPA, MST, CGMA, Independent Tax Consultant Belan Wagner, Wagner Kirkman Blaine Komparens & Youmans TREATMENT OF PARTNERSHIP LIABILITIES UNDER IRC SECT. 752
Background I. A partner’s basis in a partnership interest includes the partner’s share of the partnership liabilities. II. 752(a) – Assumption by the partner of partnership debt, or increase in partner’s share of partnership debt treated as contribution of money to partnership III. 752(b) – Assumption by the partnership of partner debt, or decrease in partner’s share of partnership debt treated as distribution of money by partnership to partner 12
Background (Cont.) I. 752(c) – A liability to which property is subject is, to the extent of the FMV of the property, considered a liability of the owner of the property II. 752(d) – In the case of a sale or exchange of a partnership interest, liabilities are treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships. 13
Allocation Of Partnership Liabilities Under §752 • Understand how liabilities affect the calculation of a partner/member’s basis and at -risk amount in her partnership interest • Determine the effect of liabilities on the basis in the investor’s hands of property received as a distribution from a partnership • Distinguish between recourse and nonrecourse liabilities of a partnership • Measure a partner’s or member’s share of recourse liabilities of a partnership 14
Allocation Of Partnership Liabilities Under §752 (Cont.) • Measure a partner’s share of nonrecourse liabilities of a partnership • Analyze the impact of a partner guarantee of a recourse or non- recourse liability of the entity • Understand the provisions governing allocation of nonrecourse deductions of a partnership 15
Contribution Of Encumbered Property I. Net relief of liabilities treated as a distribution of cash II. Will result in gain to contributing partner at partnership formation, if net relief of liabilities is greater than basis of property contributed 16
Distribution Of Encumbered Property I. Net assumption of debt is treated as a contribution of cash to partnership. II. Net relief of debt is treated as a distribution of cash. 17
Allocation Of Partnership Liabilities Under §752 I. Recourse liabilities allocated as if partnership lost everything and then liquidated (i.e., partnership constructively liquidated) – what partners would have to repay creditors or other partners II. Same rules do not apply to nonrecourse liabilities, because no one would have to repay those liabilities. 18
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Recourse Liabilities I. If any partner or related person bears risk of loss for debt, it is a recourse debt. A. Determined without regard for how the liability is characterized under state law II. Partner’s share of partnership recourse debt equals the amount for which the partner or related person bears the economic risk of loss. III. Nonrecourse loans recharacterized if: A. Loan or interest thereon is guaranteed by one or more partners B. Collateralized by property owned by a partner C. Loan obtained from a partner 20
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